In a recent episode of The Ramsey Show, financial experts Dave Ramsey and Ken Coleman discussed an interesting dilemma presented by Phillip, a caller from Pittsburgh.
Phillip works full-time in tax planning and consulting and has been growing a $30,000-a-year side hustle in the same field. Now, he's been offered the opportunity to buy a $225,000 tax preparation and consulting business from an older owner.
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The big question: Should he buy the established business or continue to grow his side hustle organically?
Phillip shared that his side hustle is relatively new, generating about $30,000 in revenue, of which he's kept around $5,000 after reinvesting in the business. His full-time job brings in a $90,000 salary, making his side hustle a supplementary income stream. He's intrigued by the prospect of taking over the established business, but he would need to finance the deal through the current owner, as he doesn't have the cash to purchase it outright.
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Dave Ramsey immediately got down to the numbers. Phillip stated that the existing business bills between $175,000 and $180,000 per year, with an estimated net profit of $75,000. That's a roughly 50% profit margin, which sounds appealing.
However, Ramsey pointed out that those numbers hinge heavily on Phillip's ability to retain clients, manage the workload or hire someone to take over the tax preparation work.
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Ramsey said, “You don't want to buy a job; you want to buy a business." If Phillip were to purchase the practice, he would likely need to hire someone to manage the tax preparation. Ramsey estimated that this would cost Phillip around $50,000 annually, leaving him with a net profit of only $25,000 from the purchased business – on a $225,000 investment.
"Not a chance it’s worth that," Ramsey said.
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Ramsey didn't think the math added up. The potential net income wasn't worth the investment, especially considering the risk that Phillip might lose clients due to the transition. Phillip also commented that many clients are loyal to the current owner and any price increases could further drive them away.
Ken Coleman echoed Ramsey's concerns and encouraged Phillip to focus on his growing side hustle instead. Coleman highlighted Phillip's progress so far, noting how impressive it was that he had built up a business while maintaining a full-time job. With a strong salary and a growing side hustle, Coleman suggested Phillip take the more cautious route and avoid taking on debt to buy the larger business.
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"I don't see a huge windfall to take on this financing," Coleman said. "I don’t think it’s enough of a benefit to take on the debt. It doesn't make sense to me."
Both Ramsey and Coleman explored other options that Phillip could consider. Ramsey floated the idea of structuring a deal with the current business owner where Phillip wouldn't purchase the practice outright but would instead share revenue for a set period.
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Another suggested option was a "finder's fee" arrangement, where Phillip could take over the clients and pay the original owner a referral commission. This would allow him to grow his client base without taking on a large debt upfront.
In the end, Ramsey and Coleman's advice was clear: buying the $225,000 business didn't make financial sense. Instead, Phillip should continue to build his side hustle organically, avoiding unnecessary debt and growing his business at his own pace.
For anyone considering a similar decision, Ramsey stresses the following take-away: don’t buy yourself a job. Instead, focus on creating a business that provides value and generates income without burdening you with overwhelming debt.
You may also contact a trusted financial advisor to help outline the benefits and drawbacks unique to your situation. They can help you better understand the financial pros and cons to make the most informed decision.
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