Buying an existing Business (lease, fees, insurance, commission)

[crystalblue]

Anyone ever done it?

Thoughts?

Something like this - - - BizBuySell - The Internet's Largest Business for Sale & Franchise for Sale Marketplace

[sunsprit]

Yes.

You've got to be very careful about what it is you're buying ... how much is tangible assets, how much is blue sky, and how much you're paying for the pleasure of buying yourself a job.

Most "business brokers" I've visited with through the years had incredibly unrealistic pricing about the businesses they listed. There's no way that a new owner could have made the payments, the down payment, and had enough cash flow for years to even think about taking any money out of the business, if ever. By the time you realize that, the seller and the broker are long gone with their money and the sales commission. They're not the ones who have to live with the business afterwards, you, the buyer, are now "it".

The shop that I bought was listed for over two years with a broker for a price in low 6 figures. Typical razzle-dazzle from a broker, it was priced at a multiple of gross sales, or gross profit, or net profit of the business from years prior ... I never did get a clear explanation of where that price came from, but it must have sounded good to the seller. It was a one man shop, with his wife doing the bookeeping and office work ... and they would be leaving upon the sale of the business, forced by health issues to leave ASAP. We met and they offered me the place for a realistic price; the depreciated wholesale value of the inventory, the tooling at it's FMV, and the business furnishings. It was all less than 3% of the broker asked price ... but it was a fair deal.

When you buy an existing business, you need to look realistically at the asked price and determine if you couldn't go down the street and create a comparable business for less money, sometimes a lot less money. Unless their clientele is on a contracted basis to the other business, you've got to do a reasonable evaluation of how much that clientele's blue sky is worth to you. Depending upon circumstances, it may be worth almost nothing even though the current owner has spent years building it up and thinks it's worth a lot of money. For example, a one-man service business, when that owner leaves, is like starting all over again for your business relationships under most circumstances. And I'd say the same about any hospitality business ... when the owner leaves, it's a whole new operation as to how the clientele perceives the place ... you may do a lot worse, or you may do better, but it's up to you as the new owner to establish the place and it's reputation. Can't tell you how many restaurants I've seen go upside down when the original chef/owner left the place, even though his recipes were part of the sale.

I'd caution you to be very dubious about any business valuation formula that someone says is a "good deal" for pricing; ie, some multiple of earnings, net profits, take-home pay, etc., for the current ownership Unless you can pencil out the projected gross sales less costs of overhead, operations, fixed expenses, insurance, taxes, fees, cost of goods, inventory shrinkage, labor costs, and any other relevant expenses before you see a penny of profit and possible income ... no existing business is worth buying unless you need a hobby or a tax loss operation. Especially if the sales price is predicated on increased sales volume from what they've been doing so far, or that you're going to develop a new expanded sales volume from a product or patented item. It's a risk, and you have to be doing what you know to capitalize on those "opportunities".

[wanneroo]

Anytime a business is for sale certainly there has to be some reasons behind and probably some negative ones. I mean who wants to give up a cash cow?

I have always paid attention to business for sale listings just out of interest being an entrepreneur myself. In most cases I think the pricing is out of line and it appears they concoct some formula out of their head like sale price=5 years of gross revenues, when actually the profit involved is non existent or minimal.

One for sale that stood out in my little mountain town(not a high end town either) there was a run down 1950's motel with about 10 units the owner had on the market for $2 million. It has a nice scenic view of the sewage treatment plant across the street. Even maxed out with full vacancy every night, there is no way you'd ever make back that $2 million after expenses, nor is the real estate worth it.

[AlfredB1979]

I took over a small restaurant from a boss of mine. IF I had wanted to be a 23 year old with absolutely no life killing myself to basically volunteer for my living when the Iraq War started, which killed business oddly enough, then I could have done that.

I told myself before I opened up the doors myself that I was okay giving the land lord the keys back and taking my stuff with me. And I was.

The point above about the cash cow is legit. If the biz is a cash cow, then something ran the owner through a grinder and (s)he wanted none of it anymore.

So, I'm looking at Brazoria County, TX...where I know the pickings should be slim enough to decipher easily

Facilities: 653 sq ft of leased space in the food court. Rent $4,640/mth. Current lease expires 2019.


No thanks. Especially with a lease for a decade in a mall that isn't all that highly regarded in the first place. Oh, it's in the middle of nowhere, too.

[UpperPeninsulaRon]

Originally Posted by crystalblue

Anyone ever done it?

Thoughts?

Something like this - - - BizBuySell - The Internet's Largest Business for Sale & Franchise for Sale Marketplace

Stay away from internet brokers, real estate folks trying to sell busineses who have never made a payroll, and the smooth talking wheeler dealers.

If seriously interested, once you have found a business that you know something about, are willng to devote a huge amount of time to, and realize that buying a business is not a get rich quick scheme, then spend serious time understanding the process in a reference like:

"Valuing Small Businesses and Professional Practices"
(McGraw-Hill Library of Investment and Finance) (Hardcover)
Shannon Pratt (Author), Jr.,Robert Reilly (Author), Robert Schweihs (Author)

It tells you how the pros do it. It is also something that you will not read and understand in an evening.

[wanneroo]

Originally Posted by AlfredB1979

I took over a small restaurant from a boss of mine. IF I had wanted to be a 23 year old with absolutely no life killing myself to basically volunteer for my living when the Iraq War started, which killed business oddly enough, then I could have done that.

I told myself before I opened up the doors myself that I was okay giving the land lord the keys back and taking my stuff with me. And I was.

The point above about the cash cow is legit. If the biz is a cash cow, then something ran the owner through a grinder and (s)he wanted none of it anymore.

So, I'm looking at Brazoria County, TX...where I know the pickings should be slim enough to decipher easily

Facilities: 653 sq ft of leased space in the food court. Rent $4,640/mth. Current lease expires 2019.

No thanks. Especially with a lease for a decade in a mall that isn't all that highly regarded in the first place. Oh, it's in the middle of nowhere, too.

It would be stupid to sign up for a 10 year lease now. I travel all over the USA for work and everywhere I go there is excess commercial space in shopping centers and malls all over. The worse I have seen is in Arizona and California, but in any state or city I go to I see the same.

And it still seems like some of the owners that lease think it's 2006 still, but it aint.

[wanneroo]

Originally Posted by UpperPeninsulaRon

Stay away from internet brokers, real estate folks trying to sell busineses who have never made a payroll, and the smooth talking wheeler dealers.

If seriously interested, once you have found a business that you know something about, are willng to devote a huge amount of time to, and realize that buying a business is not a get rich quick scheme, then spend serious time understanding the process in a reference like:

"Valuing Small Businesses and Professional Practices"
(McGraw-Hill Library of Investment and Finance) (Hardcover)
Shannon Pratt (Author), Jr.,Robert Reilly (Author), Robert Schweihs (Author)

It tells you how the pros do it. It is also something that you will not read and understand in an evening.

It has surprised me, during business school and after out in the world these past 10 years how many people I come across that radically underestimate what it takes to be in business.

One key piece of advice that I follow myself is stick with what you know and what you are good at.

For instance, it is bemusing to see someone buy a restaurant when they have never worked in the business before and know nothing about it.

[Steve Bagu]

It is very hard to take over any service business. Everyone knows old Joe and his reputation. When Joe leaves so does his reputation go with him.

I would NEVER buy an existing business.

In 36 yrs I owned all my operations...built my rep and clientile.

It may take a while...many hrs...paying the bills and low profit...but still the name you build for yourself will eventually pay off. I did this more then once over the yrs and my name was GOLD in the trade and respected.

I'm retired now...would I do it again if I could?...darn tootin I would.

Steve

[crystalblue]

What, if any, would be a good business to buy as an investment, when you have no time/interest in the day to day running (just checking the books monthly)?

[Steve Bagu]

Not sure if the question is a open question or being referred to me.

To start with I was in the Grocery/Liquor Inventory business for 23 yrs and as a owner for 15 of those yrs.

During that time saw many operations large and small change hands for different reasons.

One recent change I am aware of was a small Grocery chain that did a tremedous business that sold out to a larger corporation. As in most cases the new owners always have their own ideas on how to run a store or try to implement new? ideas. In this case they did something with the meat dept which was selling a large amount of ground beef and had a large area in the meat case. I noticed that the burger meat tasted a little different and had more FAT content and apparently sales had also dropped off as the space became very small quickly. They also raised many different prices in the store (above the normal increases of today).

Second is a bakery that had a busy clientile every time I was there or drove by. A good operation in my estimation. Well, they sold out to some new owners and the old lady(owner) was always at the cash register. Their variety and quality diminished to the point where the place was dead and she finally sold out. New owners were almost the same and to the point where the selection was down...very little choice in the soft drink case and had a appearance of going out of business...always empty of customers.

The MOTTO here is "if it ain't broke...don't fix it".

If your considering buying an existing business that is showing a profit...leave it alone...don't mess with a thriving operation unless you have prior experience in the business or trade and have a proven track record.

Steve