Is the opportunity I have one worth investing in, and if so, what would be the smartest way to go about it? (loan, percentage)

[joflo916]

EDIT: I realize this is in the wrong forum, and am moving it to INVESTING

I'm 24, and have just left a job in pharmaceutical sales to work for a friend of mine who has taken over a dry cleaning business. He's a young entrepreneur who knew the original owners, and when they said they were going to sell (to focus on their other businesses), he offered to take it from them.

That was half a year ago. Since then he's begun expanding. It was originally two stores, but he's opening a third that he will pay me to manage, and is planning on a fourth soon enough.

Everything is accounted for, but when I told him that I would prefer to be a partial owner if I'm going to be working there 55+ hours a week. He said he understood, and that while he had no need for it, he would offer me 20% equity of the shop I will be working at, for 30k.

A few more facts:

-I have absolutely no debt, and have 5k saved up currently.

-I don't however make a lot of money. Around 30k a year, living in southern California. With every bill and cost accounted for, I usually have around 400 dollars left over at the month for saving (assuming none goes to entertainment).

-His two stores currently gross 25k each, with nets of 10k each. This new store will hopefully gross more, as it is in a more expensive area, and he got a very good location. Other dry cleaners in the area gross around 30-45k a month

-His costs will also be lower for the first year, as the lease he negotiated was for the first 6 months free, and the next 6 months at half price. The only cost would be setting up the store to look pretty (he owns a centralized warehouse where the clothes are cleaned) and my salary, which is 2,800 a month.

-The original owners are still deeply involved in helping him run the stores, as they a personal friends, and also own some equity I think. Essentially he's taking over the business under their guidance, and they are still reaping a bit of the profit.

-Edit: He also might flip some of the stores he builds in the future, potentially this one, after a year or two. If so, I would then get 20% percentage of THAT, and he's told me they normally sell for around 400k

All in all he'd immediately be pulling in solid money. Each store is a DBA under his LLC, and this store could be after a couple months easily pulling 10-20k in profit. Now he owns 50% equity of that DBA, but will, as I said, give me 20% of HIS shares if I invest in.

Again, I want to stress he has at no point begged me for the money, or pressured me to do so. I told him I felt like I was taking a step back in my career to help him with this endeavor, and that having my name on paper as an owner with the potential of making more money, would help justify that decision in my mind.

The main issue is-

I'm not a business man, and have no knowledge in that realm. I'm responsible in that I'm boring. I don't party, nor do I buy nice things. I have stuck it safe and simple, saving slowly. My credit is just under 700, only because I've never had a credit card (outside of a khols card that I used once), and I have rented a room from other people since high school.

What steps should I take to ensure this opportunity is a smart one? He could show me EVERY document he has on his llc, his bills, and his dba's, and I still wouldn't know a problem if I saw it. Is there someone I need to hire to look at that?

If it was a sound investment, what steps would I need to take in order to get the money for the loan. I can't get a micro business loan, as it's not MY business. I also don't have anything to put up as collateral, as my car was recently totaled and I'm saving up to buy a new one while I borrow my parents' old Kia (which there's no deadline on as long as I pay it's bills).

[oldtrader]

Fist thing is to find out if he is telling you the truth about everything. Have a good accountant go over the books and give you an opinion of the business and if it is really making the money he says, or if he is blowing smoke. If he won't let you have an accountant go over the books, run like h*** away from the business. Only after you have a true picture of what he is really doing, can you make any kind of decision. I spent decades as a investment real estate broker, and have handled businesses (I spent all my life in the business world). I have found that what you are being told by the owner, and what the truth is, are often on opposite ends of the spectrum.

Was hired to do an evaluation of a business in a major high end ski area. It was the best restaurant in town. Found out it was losing money not the highly profitable one it was portrayed to be.

Another time I was to evaluate a tourist town pharmacy. I did, and the books did not show it was making a profit. The owner did as he did with the prospective buyers that had hired me, showed me thousands of dollars in a safe, and said it was all his under the table business. When I asked what they were, it was from indian moccasins, and magazines and he did not report the huge income from them. Looked at a small rack of magazines, and some dusty moccasins which showed they were not selling. Advised my clients not to buy, which advice they followed. Two weeks later a big article hit the Denver Post about this man being arrested as he was selling drugs all right, but not legal ones through the pharmacy. He was using it as a front for hard drugs selling to dealers, and that is where the money was coming from.

Even if he is a friend, get an accountant to verify his income before you make any decision to invest any money into the business. Follow the maxim of, "Trust but first verify". First learn the truth, and then you can make an intelligent decision. Too often business owners lie through their teeth about what their business is doing. Never buy into any business without the advice of an experienced CPA.

[jrkliny]

There seems to be a big piece of the puzzle missing. Where are you going to get the $30,000 to invest in this business?

[MacInTx]

I think $30k for 20% of $10k net annually is steep. Even ignoring compounding, this represents a 15 year break-even payout.

However, I like your thought process. I definitely feel that life as a business owner will be more beneficial than life as a worker, particularly if you are involved in the daily business operation.