Thread: Purchasing an existing business, Finding true cost beyond price?

Ok, I'm still going to tell you that it's a stupid idea. With that said. What kind of returns are you expecting on $20k and hours of work?

My father-in-law is a (now retired) business banker. The only business ventures he typically refused to investigate for investment was restaurants due to their extremely high mortality rates.

I'd be happy to break even, and I don't care if I lose the money altogether. I'm putting nowhere close to $20k into it, and my time input is negligible. I'm not running it, just investing and helping out at the beginning. I'll be focusing on other things.

Regardless if we end up buying a restaurant or a retail store (or anything or nothing at all), I'm just curious as to how someone would calculate the true cost of any business (other than just the 'sticker' price)

To give you an idea of how much I'd be putting in, I spent more money on hockey tickets these past two days than what my total investment would be in this venture.

Seems like an even stupider idea now that it's 'on screen' to read.

So forget that. But I'm still curious as to how one should/would value a business. (even though I'm probably not investing in one.)

I think you shouldn't bother with something you know nothing about. Doesnt sound like restaurants is your thing. I personally love cooking, and serving people. i ran a hot dog cart that I built for a very short while and even with my love of cooking, I would never want to do anything like that as a business.

I say stick to what you know and start small and get some customers first.

What do you do anyway besides the hustle?

Okay, yes, forget this idea. But still no one has answered my actual question -_-.

And I set up trade shows (logistics, making sure people are where they need to be, helping with setup, etc)

And part time I sell fine art. (lol)

Originally Posted by RyanDrake

My friend(s) and I are looking into buying an existing business by the end of next year (NOT in a week, next-next year). A restaurant more specifically.

Now, there are plenty of small family/mom&pop type establishments for between $20,000-$50,000 around the area we are looking.

If it's closer to $20K, we can cover it completely. (if not maybe we'll need a $5k loan at most).

They really must not be doing well if that's the price??? Are these hotdog stand type businesses? Do they include equipment? Bankrupt restaurants? Maybe it's just my area but I don't think any around here would go for less than 200k (and that's the failed ones), where as some successful ones go well over 1 mil.

But there must be other expenses to consider.

Should we have a few months worth of operating expenses to cover rent/stock, etc or would a line of credit cover that?

There are always more expenses to consider. I'm assuming you're not considering salary, and unless your boys have a lot of money saved up and this is "their dream" otherwise they will quit soon after starting because they aren't making anything. My expenses are pretty high up there but I always have at LEAST 6 mos. expenses in the bank.

IMPORTANT NOTE: Please please please don't back a large loan for this because you feel like you can recover quickly. Yes the business will need to be able to cover expenses especially if it can't float itself the first couple months - but that doesn't mean that is your responsibility (unless you have more control of the business)

After a transition period, my role will be almost exclusively 'investor' status, so I won't actively be participating in the business.

This transition period is ALWAYS longer than you expect.

tell me this is a stupid idea

It's a stupid idea.. hehe - actually I don't see what's the problem with throwing 2k towards an investment knowing it's going to be a huge learning experience.

So again, the question is, when evaluating whether or not you can afford an existing business (any type of business) should you make sure you have at least a few months worth (if not an entire year) of cash to cover all expenses? (Even if the business is/has been profitable for years).

I've never bought a business but I have stayed at a holiday inn express and I think you should cover yourself first. Make sure your expenses are covered. You will work a LOT more than you expect, you will make a LOT less then you expect, and it will be a BIGGER headache than you expect.

I know a lot of people want out of the restaurant business but man... that sounds cheap... really cheap... if they are claiming they are profitable - how profitable?

I guess my bottom line answer to your question is that I have found 6 months expenses has worked well for me.

For a business to sell for $20k, it must be doing very poorly. That means it is likely losing money, and will require on-going expenses out of your pocked (or a line of credit) until it is profitable - ASSUMING YOU CAN TURN IT AROUND.

You need to look at up to date financials for the restaurant to determine how much money they are losing (or barely making) to see what the on-going costs could be. Then you'll have to come up with a marketing plan for how to turn it around.

Example: Business for sale at $20k is losing $1k/month, but you think you can turn it around to be making $1k/month in 6 months. You need $20k + $6k to cover losses, PLUS additional expenses you expect to need to turn it around.

You will have to see about the individual restaraunt, but I'm going to assume that at $20k these restaurants do not have a Management team, which means you or your friend will have to manage the restaurant full-time or hire someone to - so add that additional cost. If you need $40k/yr to live on, you'll need that accessible so that you can pay your bills while running a business that's losing money.

I would also be VERY careful about going into business with friend(s). I know many people that have been burned by this...