Buying a Business for Passive Income
Buying a passive income business can provide a steady stream of income without the heavy lifting usually associated with business ownership. But just because your absentee run business doesn’t require the same time commitment as a 9-5 doesn’t mean you won’t have to work to get the returns you’re seeking.
What Is a Passive Income Business?
Just like it sounds, a passive income business earns you money without actively participating in day-to-day operations.
Also referred to as "absentee run", many business ideas can be a source of passive income. You can generate passive income by buying a business and hiring managers and employees. Investments in the stock market or real estate property can also be passive income sources.
Passive income streams don’t actually mean you’ll be able to earn income doing nothing at all. According to the IRS, “Passive activities include trade or business activities in which you don't materially participate. “You’ll often have to create or buy products, market your small business, and develop systems and procedures that allow it to operate without your direct involvement.
While some passive income businesses require little involvement, others require hiring employees and checking in on them, reviewing the books, and handling other tasks. Still, other passive income businesses require considerable upfront effort to get started.
For example, if you acquire an established business for passive income, you’ll need to make an initial investment of time to understand its operations and potentially implement improvements. However, once you have the business running smoothly and have hired staff to oversee onsite operations, you can start generating income with minimal additional effort.
For some, a passive income business is a side hustle in addition to their full-time job or business. For others, it’s their main source of income. The amount of active participation required for a passive income business depends on your business model and financial goals.
Types of Passive Income Businesses
Passive income ideas can come from your interests, resources, or market opportunities. Whether you’re looking to make passive income through investments or starting or buying a business, there are a variety of types of passive income businesses:
- Buying an established business.
- Financial investments.
- Digital business opportunities.
Passive income businesses can be old or new economy businesses. However, old economy businesses are increasingly employing new economy techniques for accepting money online and other functions that make them passive income opportunities.
(To browse listings of passive business opportunities, see Absentee Run Businesses for Sale.)
Buy a Self-Service Business for Passive Income
Many old economy businesses generate passive income because they’re self-service. Although they might require someone onsite to handle payments or other tasks, business owners can hire workers or managers.
Some examples include:
Rental Businesses for Passive Income
You can buy an existing business or use property or equipment you own to establish a rental business. Some of the ways to generate passive income from rentals include:
- Billboard rentals. Buying a billboard and selling the space to advertisers can generate a steady stream of passive income.
- Parking lot rentals. You can operate a parking lot rental by buying a small parking lot or simply renting out your own private parking space if you don’t use it.
- Real estate property rentals. If you have a basement or garage you don’t use, consider renting it as storage space. You can also turn a spare room or a summer house into an Airbnb.
- Vehicle rentals. If you don’t use your personal vehicle regularly, you can rent it to other people or as a ride-sharing vehicle. You can also buy a vehicle for the express purpose of renting it out.
- Short-term equipment rentals. You probably aren’t using equipment such as lawnmowers, power tools, or camping tents all the time, so you can generate rental income by renting these types of items to others who only need them occasionally.
Digital Businesses for Passive Income
Digital businesses like digital product sales and digital marketing usually require more hands-on involvement than other businesses. Even though the growth of artificial intelligence (AI) can reduce the time you spend working, it still requires a considerable upfront investment in technology, time, or education to succeed.
Some examples of digital businesses that generate passive income include:
E-Commerce Drop-Shipping Store
There are many ways to operate an e-commerce store, but one way that requires less day-to-day involvement is to use drop shipping for the products you sell.
A drop-shipping store is where the owner sells products made and delivered by a third party. Outsourcing logistics and manufacturing will cut down on much, but not all, of the work involved in e-commerce. You’ll still have to hire employees to handle customer service, ordering inventory, and site maintenance.
Like any e-commerce endeavor, marketing is key to a successful site, so you’ll have to handle the marketing yourself or hire staff to do it.
Services such as Amazon FBA (Fulfillment by Amazon) will handle even more of the tasks required to run an online business. In addition to fulfillment and logistics, Amazon’s huge customer base provides organic traffic that can reduce the time and money you spend on marketing.
Online Courses and E-Books
Those with expertise in a field can create an online course or an e-book to educate others. An accountant might develop a course on how to value inventory. A social media expert might write an e-book on how to run a social media campaign or advertise on social media.
Creating the course or e-book, putting it online, and marketing it to a target audience requires a high level of involvement. But once you’ve done the upfront work, you can sell an online course or e-book without having to do much day-to-day management.
Passive Income Opportunities for Owners Selling a Business
Business owners can use the proceeds from a business sale to create a passive income stream by investing their extra cash in dividend stocks, high-yield savings accounts, mutual funds, or other investments. But even if you’re not expecting a lump sum payment from the sale of your business, you can structure the sale to create passive business opportunities.
Earning Passive Income With Seller Financing
When you structure a business sale using seller financing, you won’t just be spreading out the purchase price over a long period of time to produce an income stream. The interest rate you charge for the business loan will generate additional passive income from the sale.
Using Real Estate to Create Passive Income
Buyers usually want to keep the business they purchase in the same location where it has operated. If you own the real estate, you can structure the sale to exclude the property and rent it to the buyer, giving them the opportunity to continue at the same location. Even though you’re selling your business, you create ongoing cash flow by becoming the landlord.
Renting Your Business Equipment for Passive Income
Like renting your facility, you can create a passive income stream by renting out equipment rather than including it in the sale.
Remember that leasing equipment back to the buyer means you’ll be responsible for repairs and maintenance. While buyers are often not interested in the real estate connected with a business sale, they might not be willing to forego the tax advantages of depreciating equipment by leasing it.
Investing in Real Estate
Among the many ways you can invest in real estate are buying REIT stocks, as discussed above, or buying crowdfunded real estate. To invest in crowdfunded real estate, you pay a management fee to an investment platform like Fundrise or Yieldstreet, and their investment team picks the real estate investments for you.
Peer to Peer Lending
You can also use your extra money to make personal loans to third parties and charge interest. A number of platforms are available for peer-to-peer lending (also called marketplace, social, and crowd lending).
These platforms will match you with borrowers, set rates and terms, and handle the transfer of money and the monthly payments. Like other lenders, peer-to-peer lending websites base interest rates on the creditworthiness of borrowers.
What to Look for When Exploring Passive Income Opportunities
When looking for a business to buy, you might come across an ad that says the owner is absentee or semi-absentee. Though the description might indicate that you’ve found a passive income business, it’s best to examine the business more closely.
Assess the Owner’s Workload
Ask about the amount of time the owner spends working and what tasks they perform. If an owner spends several hours a week working, but those hours are devoted to putting out fires sparked by employees, you’ll need to spend a lot of time restructuring the business.
How an owner is involved in the business can also be a red flag for a new owner. Suppose you buy a content website where the owner hosts every podcast, or the business’s brand is the owner’s name? You’ll spend considerable time and effort rebranding a business linked so directly to its owner.
Evaluate Operational Efficiency
The best passive income businesses are simple and can be distilled into easy, procedural steps. You might come across a business where the owner works 40 hours a week, but you can reduce the time you spend by streamlining procedures.
Look for opportunities to establish standard operating procedures or automate processes. Can you use software for tasks like inventory management or bookkeeping? If the business lends itself to these modifications, it might meet your passive income strategy.
Consider the Business’s Human Resources
The opportunity to rely on a business for passive income might hinge on its employees. If it does, make sure the employees will stay after the business sale.
How to Find Passive Income Opportunities
You can find passive income opportunities using the same resources for active income opportunities.
In general, you can:
- Hire a business broker
- Canvas your network of colleagues, service providers, and suppliers
- Use an online marketplace like BizBuySell
Visit BizBuySell’s Business Broker Directory to find a broker who can be helpful in evaluating whether the business is truly passive. Likewise, your network might be positioned to know the scoop about a passive income business. The sheer number of opportunities available on an online marketplace will educate you on what’s passive or active and help you zero in on the businesses that will best meet your needs.