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Old 02-10-2009, 01:40 PM
 
Location: Look out your window.......
320 posts, read 827,294 times
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I'm looking into purchasing an existing Merle Norman cosmetics franchise. I currently work a 3/4 time job remotely from home, as well as a part time health-wellness consultant. I'd like to buy the Merle Norman business and marry it with the health-wellness work I do now. Business is being sold for $38k that includes all inventory and existing business setup. This franchise has only been in business for 3 years - sales have gradually increased and they have a steady customer base - as is typical the business lost $ in the first 3 years with each year improving - last year they lost only about $5k. Owner is selling because her daughter (partner) is marrying and moving away and she can't do the business herself for health reasons. I can maintain my current 3/4 time job while working this business thus keeping cash flow for my personal debt with $ leftover. My husband also has a full time job so our expenses are fully covered. I would need to finance the full amount of $38k+/- - for this small amount is it best to just go straight to my local bank? How does that work? I have a strong business background in all aspects (accounting, marketing, pr) so I'm comfortable with running this business - really a question of $$ to buy and general analysis of this business venture from anyone. Any thoughts?
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Old 02-11-2009, 03:06 AM
 
10,869 posts, read 41,139,178 times
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I don't want to "rain on your parade", but this "deal" fails on many points:

1) No bank will loan you 100% of the investment capital to "buy" the franchise, inventory, and current "goodwill or blue sky" of an existing ... money losing ... business.

2) You're already telling us that two people working this business for three years were still having negative cash flow, and you're going to take it over to work it "part time" as an adjunct to your current "part time" business. You may see "value added" in this mix, but a banker is looking for your capital at risk and a path to a positive cash flow. And a bank is also looking at the fact that your motivation is low here because you don't need the money to survive in your current living situation.

3) Absent your "track record" in this business, I'd bet a bank would want to see you invest well over $25,000 into this before considering any amount of loan money. That "loan money" would have to be secured by something more than a small percentage of the wholesale cost/value of the inventory (hard asset saleable by auction to raise capital in distress, if needed, to pay off the loan); most likely, your personal guaranty and secured by your home equity or other hard asset. Is this what you want to put at risk? If you default on this loan, you could be losing your house ... if that's your pledged asset.

4) Don't forget that the purchase price doesn't include your needed operating capital for this business. What overhead and expenses must you have the funds or cash flow to support to be able to generate cash flow? Do you have that money, especially for a business that's demonstrated that it has negative cash flow at this time? Is there a storefront operation? Any leases/deposits, utility costs, property insurance costs, business insurance costs, or any other fees or expenses to keep the doors open? Are you going to do all the sales and inventory/merchandising yourself (part-time) or will you be needing employees to operate, which opens up a whole 'nother dimension of operating expenses/taxes/management/reporting & accounting time/effort/energy/costs? Or, is this a "home-based" product distribution/sales based business? Do you have the space to do so at home, can you receive customers at home, and does the zoning at your home allow such a retail business operation? Do you have appropriate insurance to do so? your homeowner's policy won't cover you for a "client" that comes on your property and is hurt, you need to have a business policy ... nor will it cover you for the day a "client" alleges damages from your product sale (allergic reaction, etc.), no matter how good your products are, personal care products always have the potential to be misused or be defective in a batch run.

5) What are you "buying" for your $38,000? "blue sky"? the wholesale "cost" of the products on hand? In this type of distress business sale, I'd value the products on hand at no more than 15% of their current replacement wholesale cost; ie, $10,000 wholesale cost of the product should be purchased for no more than $1,500.00, perhaps even less if there's issues with "shelf life" or "turnover" of slower moving items. If you're not doing 3 or 4 inventory turns per year of an item in this business, you may be "stuck" with stale merchandise which may have an effective value of ZERO to your client base and to your cash flow.

6) Your observations that you have "a strong business background" and you're not aware of financing, capital, cash flow/ROI, and not presenting much "value" in your business purchase leads me to infer that you really don't have much "business" expertise or experience. Sorry, I don't mean to make this personal or offend you, but the nature of your questions indicates a substantial naviete about the business of business. Perhaps your real strengths are in showing products and relationship sales ... but that's not the "business" that you need to know to buy this money loser with no personal equity risk. If you've got more to offer in this situation, then you need to post it.

Bottom line: Unless you're willing to invest your time, significant hard cash capital, and are buying real value to generate ROI and income for your time and effort ... as opposed to all borrowed money, no operating capital, no personal risk, and "blue sky" on a money losing business .... I'd be running away from this deal as fast as I could. You really need to examine very closely what it is you're buying for that $38,000, and you really need to examine your business motivation to turn that into a profitable operation.

Keep in mind that the reason we buy "franchise" businesses (and pay them up-front franchise fees and continuing fees from our cash flow) is because the "franchise" is a proven and successful business model with product recognition and some exclusive territory to operate in. Essentially, the franchisor has done all the hard work for you to establish the brand and the profitable operating business model. Any franchise that's losing substantial money after three years is a loser; unlike "go it alone" from scratch business start-ups, this business should have been making a reasonable ROI and positive cash flow income for it's owners within the very first year. It really sounds like a "loser" to me in your area, regardless of the reasons/rationalizations for failure from the sellers ....

If nothing else, go visit your friendly local bankers and tell them what you've told us here ... "I want to buy a 3-year old money losing franchise business with no personal investment at risk, and I'm going to work it part time in with my other part time business, and it's only $38,000 to buy. Will you loan me the money for this opportunity? It won't cost you anything but a little of your time to do so, and I can tell you what will happen at most banks ... they'll send you over to the commercial loan department, and hand you a stack of forms to fill out which will take hours to complete while they will tell you their current loan rates. As you fill out the forms for the loan, it may dawn on you that they're asking hard questions about what the money will purchase, what possible income it will generate, and what you are willing to put at risk of your assets for this business. If that isn't daunting enough to quantify what you're attempting to do, when you go back to the loan officer with your request, they'll tell you how much they expect you to place at risk of your own assets against this business. You may ... or may not ... be shocked at what they'll want from you before they'll take your loan app to "the committee" for approval. But it won't cost you anything to make the inquiry, so you might just as well shop several banks in the area ... it's just your time that you'll be spending at this point. Good luck.

Last edited by sunsprit; 02-11-2009 at 04:00 AM..
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Old 02-11-2009, 09:05 AM
 
Location: Look out your window.......
320 posts, read 827,294 times
Reputation: 262
I appreciate the direct feedback sunsprit - lots of details left out on my side - see notes below yours:

1) No bank will loan you 100% of the investment capital to "buy" the franchise, inventory, and current "goodwill or blue sky" of an existing ... money losing ... business.

>>of course not - a down payment is in order along with plenty of documentation on this business - at this point I am considering owner financing - for this small of a $$ amount the headache of going to a bank is not worth it.

2) You're already telling us that two people working this business for three years were still having negative cash flow, and you're going to take it over to work it "part time" as an adjunct to your current "part time" business. You may see "value added" in this mix, but a banker is looking for your capital at risk and a path to a positive cash flow. And a bank is also looking at the fact that your motivation is low here because you don't need the money to survive in your current living situation.

>>This is a mother/daughter operation with only one person working it on a daily basis - therefore I would be the only person working - this would not be a part time venture but rather blending with the other business it would become a full time operation where both product sides/services would work together. This would become my sole business and operation - husband would maintain his full time position to keep a cash flow into the household. I would need to focus on this venture fully to increase the volume and improve our cash flow.

3) Absent your "track record" in this business, I'd bet a bank would want to see you invest well over $25,000 into this before considering any amount of loan money. That "loan money" would have to be secured by something more than a small percentage of the wholesale cost/value of the inventory (hard asset saleable by auction to raise capital in distress, if needed, to pay off the loan); most likely, your personal guaranty and secured by your home equity or other hard asset. Is this what you want to put at risk? If you default on this loan, you could be losing your house ... if that's your pledged asset.

>>I don't have a track record in this business per se (cosmetics) but have owned a successful electrical contracting business with my husband. Clearly a down payment investment is required of 10-20% of the purchase price - yes, my home would be the pledged asset.

4) Don't forget that the purchase price doesn't include your needed operating capital for this business. What overhead and expenses must you have the funds or cash flow to support to be able to generate cash flow? Do you have that money, especially for a business that's demonstrated that it has negative cash flow at this time? Is there a storefront operation? Any leases/deposits, utility costs, property insurance costs, business insurance costs, or any other fees or expenses to keep the doors open? Are you going to do all the sales and inventory/merchandising yourself (part-time) or will you be needing employees to operate, which opens up a whole 'nother dimension of operating expenses/taxes/management/reporting & accounting time/effort/energy/costs? Or, is this a "home-based" product distribution/sales based business? Do you have the space to do so at home, can you receive customers at home, and does the zoning at your home allow such a retail business operation? Do you have appropriate insurance to do so? your homeowner's policy won't cover you for a "client" that comes on your property and is hurt, you need to have a business policy ... nor will it cover you for the day a "client" alleges damages from your product sale (allergic reaction, etc.), no matter how good your products are, personal care products always have the potential to be misused or be defective in a batch run.

>>This is a storefront operation, lease would be assumed, and no other employees. Overhead expenses (rent,electric,water, etc) are minimal and can be covered by monthly revenue taken in - in speaking with the owner her '08 financials do show a profit on the business. Insurance costs are minimal due to large policy discount from franchise brand name - about $300 per year. This covers the inventory and liability. Customer base has increased by 50% each year and location is good - no competition in town or within 30 mile radius. Customer base is from teen to elderly - women are extremely loyal to their cosmetic/skin care line - of the 50+ age group that buy all have been using this cosmetic line for 20+ years - some much longer. Advertising needs are minimal although probably would need a boost with transfer of ownership - franchise does offer 60% coop - otherwise this particular brand is strong word of mouth.

5) What are you "buying" for your $38,000? "blue sky"? the wholesale "cost" of the products on hand? In this type of distress business sale, I'd value the products on hand at no more than 15% of their current replacement wholesale cost; ie, $10,000 wholesale cost of the product should be purchased for no more than $1,500.00, perhaps even less if there's issues with "shelf life" or "turnover" of slower moving items. If you're not doing 3 or 4 inventory turns per year of an item in this business, you may be "stuck" with stale merchandise which may have an effective value of ZERO to your client base and to your cash flow.

>>$38k is her asking price and certainly not what I would pay - inventory value is $20k and that's cost - a depreciation factor needs to be calculated on this - cosmetics have about a 1 yr shelf life and skin care 3-5 yrs - I would depreciate the inventory by 25%, maybe more. If she doesn't sell this business then she will return the inventory and take a 10% restock fee + the cost of shipping and time to pack up. She also has other inventory items that are not part of the Merle Norman line (handbags, sunglasses) which I would not assume unless she tossed them in. She does have a minimal amount of discontinued product which is not included in the inventory cost. Rest of the purchase price includes furniture, computer, phone/alarm system and fixtures in the store - the business would be ready to go if purchased. It was also recently remodeled. I'm fine with giving her back a percentage of her investment with the remodel but not full value which is what she's asking. 25-30% depreciation on the inventory and 50% of the balance - offer her perhaps $23k?

6) Your observations that you have "a strong business background" and you're not aware of financing, capital, cash flow/ROI, and not presenting much "value" in your business purchase leads me to infer that you really don't have much "business" expertise or experience. Sorry, I don't mean to make this personal or offend you, but the nature of your questions indicates a substantial naviete about the business of business. Perhaps your real strengths are in showing products and relationship sales ... but that's not the "business" that you need to know to buy this money loser with no personal equity risk. If you've got more to offer in this situation, then you need to post it.

>>My business background is broad - I'm the Director of Operations for the US operation of a sporting goods business. I have many years of experience with cash flow, return on investment (primarily inventory or advertising investment), inventory depreciation and obsolescence, marketing, looking at financials, budgeting, etc. I've never purchased a business before and delved into the financing of a small loan. I've also owned a business before but that was a start up with cash in hand. As recently learned this franchise did turn a profit in '08 and sales for '09 (although it's early on) are strong already. There are many opportunities to expand this business with both marketing efforts and additional services offered.

Bottom line: Unless you're willing to invest your time, significant hard cash capital, and are buying real value to generate ROI and income for your time and effort ... as opposed to all borrowed money, no operating capital, no personal risk, and "blue sky" on a money losing business .... I'd be running away from this deal as fast as I could. You really need to examine very closely what it is you're buying for that $38,000, and you really need to examine your business motivation to turn that into a profitable operation.

>>my business motivation in continuing this on to be a more profitable operation is to get out of the "business world" and making the other guy rich - I'd rather be investing my time, money in something that's turning a profit for me and my family. I'm a successful businesperson who can trim expenses, maintain a budget and improve profits - I'd just like to be doing it for myself rather than someone else.

Keep in mind that the reason we buy "franchise" businesses (and pay them up-front franchise fees and continuing fees from our cash flow) is because the "franchise" is a proven and successful business model with product recognition and some exclusive territory to operate in. Essentially, the franchisor has done all the hard work for you to establish the brand and the profitable operating business model. Any franchise that's losing substantial money after three years is a loser; unlike "go it alone" from scratch business start-ups, this business should have been making a reasonable ROI and positive cash flow income for it's owners within the very first year. It really sounds like a "loser" to me in your area, regardless of the reasons/rationalizations for failure from the sellers ....

>>>>there are no franchise fees or other continuing fees with this franchise. Losses for the first two years were minimal - $6k and $3k with a small profit in '08. Before going any further I would ask to examine the financials in detail. I don't believe the business is selling due to failure but rather because the primary can't do it anymore - she would like to continue on but because of a health issue can't. Her daughter who was working the business when she couldn't is getting married and moving away. We're talking about a small town deal here - and after further examination it sounds like Mom bought the business for daughter - daughter is now leaving and Mom wants out because she can't do the business properly alone with her health issue.

If nothing else, go visit your friendly local bankers and tell them what you've told us here ... "I want to buy a 3-year old money losing franchise business with no personal investment at risk, and I'm going to work it part time in with my other part time business, and it's only $38,000 to buy. Will you loan me the money for this opportunity? It won't cost you anything but a little of your time to do so, and I can tell you what will happen at most banks ... they'll send you over to the commercial loan department, and hand you a stack of forms to fill out which will take hours to complete while they will tell you their current loan rates. As you fill out the forms for the loan, it may dawn on you that they're asking hard questions about what the money will purchase, what possible income it will generate, and what you are willing to put at risk of your assets for this business. If that isn't daunting enough to quantify what you're attempting to do, when you go back to the loan officer with your request, they'll tell you how much they expect you to place at risk of your own assets against this business. You may ... or may not ... be shocked at what they'll want from you before they'll take your loan app to "the committee" for approval. But it won't cost you anything to make the inquiry, so you might just as well shop several banks in the area ... it's just your time that you'll be spending at this point. Good luck.
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Old 02-11-2009, 09:23 AM
 
25,339 posts, read 37,471,570 times
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Check out how many more of the same franchise are for sale and have been sold in the past years....all sellers claim illness, retirement, etc...when they sell!
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Old 02-11-2009, 09:39 AM
 
Location: Look out your window.......
320 posts, read 827,294 times
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Originally Posted by bentlebee View Post
Check out how many more of the same franchise are for sale and have been sold in the past years....all sellers claim illness, retirement, etc...when they sell!
Good suggestion on checking other franchises for sale - I tend to believe this seller and her reason for selling - this is a fairly small town where people know people. It's a case of Mom bought daughter the business, now daughter is getting married to a military man and moving away - Mom is 60 yrs old and if she could would continue the business but has developed a condition that won't allow her to properly run the business. I am proceeding with extreme caution here and will certainly shake this one upside down and side to side before saying yes. I think my next step will be to study the existing franchises in this region.
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Old 02-11-2009, 10:06 AM
 
25,339 posts, read 37,471,570 times
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Originally Posted by wktully View Post
Good suggestion on checking other franchises for sale - I tend to believe this seller and her reason for selling - this is a fairly small town where people know people. It's a case of Mom bought daughter the business, now daughter is getting married to a military man and moving away - Mom is 60 yrs old and if she could would continue the business but has developed a condition that won't allow her to properly run the business. I am proceeding with extreme caution here and will certainly shake this one upside down and side to side before saying yes. I think my next step will be to study the existing franchises in this region.
Do you have to pay a franchise fee when you buy it...some franchise have like $ 25K when you buy or start your first franchise and some have dropped this first fee due to the economy so it can save you some money. I was in the process of buying one but we were told we had to open 3 within 3 years and had to pay full fees even to take over existing. We backed out and now they are on the market as asset sales...the franchise i mentioned wanted to full franchise fee but is selling even corporate owned stores...we are glad we backed out.
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Old 02-11-2009, 10:22 AM
 
Location: Look out your window.......
320 posts, read 827,294 times
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Originally Posted by bentlebee View Post
Do you have to pay a franchise fee when you buy it...some franchise have like $ 25K when you buy or start your first franchise and some have dropped this first fee due to the economy so it can save you some money. I was in the process of buying one but we were told we had to open 3 within 3 years and had to pay full fees even to take over existing. We backed out and now they are on the market as asset sales...the franchise i mentioned wanted to full franchise fee but is selling even corporate owned stores...we are glad we backed out.
I'm glad you were able to get out of the deal! There are no franchise fees or royalties with this franchise. They have various marketing programs you can choose to participate in and those you pay for, but your given the option of taking any given marketing program for a test run before paying for it - if it doesn't work in your market you don't pay for it. Advertising is offered with 60% coop reimbursement.
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Old 02-11-2009, 01:45 PM
 
10,869 posts, read 41,139,178 times
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Originally Posted by wktully View Post
I'm looking into purchasing an existing Merle Norman cosmetics franchise. I currently work a 3/4 time job remotely from home, as well as a part time health-wellness consultant. I'd like to buy the Merle Norman business and marry it with the health-wellness work I do now. Business is being sold for $38k that includes all inventory and existing business setup. This franchise has only been in business for 3 years - sales have gradually increased and they have a steady customer base - as is typical the business lost $ in the first 3 years with each year improving - last year they lost only about $5k. Owner is selling because her daughter (partner) is marrying and moving away and she can't do the business herself for health reasons. I can maintain my current 3/4 time job while working this business thus keeping cash flow for my personal debt with $ leftover. My husband also has a full time job so our expenses are fully covered. I would need to finance the full amount of $38k+/- - for this small amount is it best to just go straight to my local bank? How does that work? I have a strong business background in all aspects (accounting, marketing, pr) so I'm comfortable with running this business - really a question of $$ to buy and general analysis of this business venture from anyone. Any thoughts?
Compare and contrast the initial statements you made with your detailed responses that followed my comments.

For example, you initially stated that "I would need to finance the full amount of $38K", yet you later respond that you expect to have to make a 10-20% down payment to get a loan.

Your first statement would lead one to reasonably conclude that you have little or no operating capital, especially in light of your now revealed storefront O&E business needs. Which I still understand you'd operate yourself on a part-time basis in conjunction with your other business, and shutting your retail business out of a lot of potential sales.

But, significantly for this thread ... there's no 10% or 20% down money for a business purchase loan. You're still conflating home mortgage money with business/commercial loans. Most banks won't even talk to you about a line of credit or a business loan until you've been operating for at least two years. That's why I suggested that you'd need a much larger up-front financial committment to this business ... at least $25,000 ... and a very convincing business plan/story to a lender to convince them that you're motivated about running a business.

Again, you've convinced me that you're not serious about this retail business. I'll make an assumption again, that it's in a mall or similar retail location ... which is open 7 days per week for business, including evening hours. Unless you're open all the hours that the mall is open, you are missing out on traffic upon which you depend for your trade volume. You can't do this on a selective basis of what you perceive prime shopping hours per week to be, and in many cases ... a mall lease will require you to be open for business during the mall hours. Alternatively, if you're in a stand-alone location in a small town, limited business hours for a retail sales operation are the kiss of death by limiting your exposure and sales ... no matter how dedicated and loyal you perceive the personal care products customers to be.

What really takes the cake here is that you continue to profess superb business knowledge and expertise, but don't have a clue about actually running a retail business, where volume sales are king for the cash flow, nor have any mention of operating capital to open/operate the business ... which, at this point, we can't ascertain from your comments if it "lost $5,000 last year", or if it "made some money last year". And that's in light of your claim to be a business savvy accountant; if you can't determine what's going on from the books ... who can? Are they losing money or not?

Even if it made "some money last year", as a franchise business ... it's a loser, especially if it had a full-time equivalent sales staff between the two women that ran it in the past. And the seller is unrealistic about the value of her inventory for a new buyer ... if she can get most of her money back with returning the product and a modest resocking charge, she'd be better off ... and so would you.

I'll put a final thought on this ... If I was the seller of this operation, and had all the business facts before me and your responses so far ... I wouldn't "owner carry" you. There's too much variability in what you're saying along the way here as to what and how and how much you'd do for this business, and how much capital you need to borrow to operate .... and then you're not going to operate this as a full time business even though you've got full time overhead and expenses associated with it.

Again, I don't mean to be rude or insulting about this thread ... but I've seen way too many businesses fail that were underfunded, under utilized, and expected too much return from minimal effort ... which is all you appear to be willing to give to this business. Save yourself the heartache and headache by walking away from this "opportunity".
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Old 02-14-2009, 05:59 AM
 
Location: St. Croix
737 posts, read 2,160,084 times
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Why is she offering this special opportunity to you? Why not someone else? Has she already been turned down by others? In a small town, you can probably obtain this information. Good luck to you!
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Old 02-15-2009, 08:41 AM
 
Location: Look out your window.......
320 posts, read 827,294 times
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Originally Posted by SunsetBeachFL View Post
Why is she offering this special opportunity to you? Why not someone else? Has she already been turned down by others? In a small town, you can probably obtain this information. Good luck to you!
She's not just offering to me - it is advertised in the local newspaper. She's had one offer already of $15k and she turned it down.
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