In the commercial tire business, the quest for profitability can sometimes feel like a struggle. Commercial tire dealers tirelessly serve their demanding customers, often operating on challenging margins. If you find yourself in this position, there are some smart strategies that can help you build wealth over time. In this column, I’ll be exploring real estate ownership and retirement planning, followed by the benefits of investing in index funds.
One of the smartest financial decisions any tire dealer can make is to own the real estate on which your business operates. While your business may be your primary source of income, the property your dealership sits on will become a valuable asset in its own right. Consider this scenario: after years of hard work and dedication, your tire business has grown, but its profit margins remain in the 3% to 4% range. We know that the formula for valuing high cash-flowing businesses is a multiple applied to profitability, but with lower-margin businesses, it’s likely to be an asset-based valuation comprised of the A/R, inventory and equipment — hopefully with a bump for goodwill. In contrast, the property your dealership is housed on has likely steadily appreciated. When the time comes to sell your tire business and retire, often the real estate is worth more than the business itself.
Investing in real estate not only provides upside in value, but it also offers tax benefits, such as deductions for rent, insurance, upkeep and property taxes. Additionally, you generate personal income by leasing the property to the business. Make sure that you are charging yourself fair market rent and raise the rent as needed to keep it at market rates. If you operate in a location that you don’t own, I’d recommend either trying to buy it or moving nearby to an equally good location that you can own. While running your business may be your current focus, securing your financial future is equally as important. Building wealth over time starts with smart, tax-efficient retirement planning. If your business is structured to allow it, set up a 401(k) plan for yourself and your employees.
Contributions to a 401(k) are made with pre-tax dollars, reducing your taxable income in the present while building a nest egg for the future. To maximize the benefits of a 401(k), contribute the maximum allowable amount each year. The limits can change, so stay updated with the current contribution limits set by the IRS. By consistently funding your 401(k), you'll harness the power of compounding tax-free, allowing your investments to grow substantially over time. In addition to a 401(k), open an Individual Retirement Account (IRA), which offers tax advantages similar to a 401(k), with the added benefit of flexibility. You can choose between a Traditional IRA, which provides immediate tax benefits, or a Roth IRA, where withdrawals in retirement are tax-free. By contributing the maximum allowable amount to both your 401(k) and IRA, you're creating a strong foundation for your financial future. The earlier you start saving for retirement, the more time your investments have time to grow.
Now that you've laid the groundwork through real estate ownership and retirement planning, it's time to make your money work for you. One of the most prudent investment strategies for long-term wealth building is to invest in index funds, specifically those tracking broad market benchmarks, like the Vanguard, Schwab or Fidelity S&P 500 index fund. Index funds are the only type of investment outside of Berkshire Hathaway stock that has the seal of approval of Warren Buffet. Index funds offer a passive investment approach that has consistently outperformed active stock picking over the long term. Rather than trying to beat the market by selecting individual stocks, index funds replicate the performance of a market index, like the S&P 500.
This approach has several advantages:
- Diversification. Index funds provide exposure to a broad range of stocks, spreading risk across the entire market.
- Lower costs. Index funds generally have much lower fees and expenses compared to actively managed funds, which can eat into your returns.
- Consistency. Over time, index funds tend to deliver consistent, market-matching returns, making them a reliable choice for building wealth steadily.
- Minimal effort. With index funds, you don't need to constantly monitor and adjust your portfolio. They require minimal management, allowing you to focus on other aspects of your life and business.
Investing in index funds is a long-term, low cost “buy-and-hold” strategy. While the stock market can experience fluctuations in the short term, history has shown that it tends to trend upward over extended periods. Stay committed to your long-term investment plan and resist the urge to make impulsive decisions based on short-term market volatility.
Michael McGregor is a Managing Director at FOCUS Investment Banking (focusbankers.com/tire-and-service) and advises and assists multi-location tire dealers on mergers and acquisitions in the automotive aftermarket. For more information, contact him at [email protected].
This article was previously published on Modern Tire Dealer.