Opportunity to Buy B&M Biz for $575k

[CPisHere]

Hey guys,

I have an opportunity to buy a local B&M business. It's a concept that has a TON of potential for franchising as well as other growth. It would probably require me to quit my job and do this full-time (so I need at least $4k/mo from it to live on)

I haven't reviewed detailed financials yet (and have a call with the bank scheduled), but here's what I know.

Current annual revenue = $850k with pre-tax owner compensation =< $150k.
Assets = $200k, and debt will be paid off by purchase price.
Asking price = $575k for the business based on a valuation they had done a few years ago.

I started running the numbers and can't seem to make it work. A $500k loan for 5 years would mean ~$110k/yr in debt repayment - leaving $40k pre-tax.

I have someone with more money interested in possibly partnering on it, or could potentially get seller-financing and/or only buy a majority share in the business.

What do you guys think???? How could I make this deal work?

 

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[Rickson9]

Get the financial statements for the last 3-5 years. The more years the better. You're putting the cart before the horse right now.

 

[biophase]

Hey guys,

I have an opportunity to buy a local B&M business. It's a concept that has a TON of potential for franchising as well as other growth. It would probably require me to quit my job and do this full-time (so I need at least $4k/mo from it to live on)

I haven't reviewed detailed financials yet (and have a call with the bank scheduled), but here's what I know.

Current annual revenue = $850k with pre-tax owner compensation =< $150k.
Assets = $200k, and debt will be paid off by purchase price.
Asking price = $575k for the business based on a valuation they had done a few years ago.

I started running the numbers and can't seem to make it work. A $500k loan for 5 years would mean ~$110k/yr in debt repayment - leaving $40k pre-tax.

I have someone with more money interested in possibly partnering on it, or could potentially get seller-financing and/or only buy a majority share in the business.

What do you guys think???? How could I make this deal work?

I think the important question is "how are you going to improve the revenues of the business once you buy it?"

 

[socaldude]

This opportunity could be one of the best decisions in your life and at the same time it could be one of the worst decisions in your life.

What kind of business is it? How long has it been in business?

 

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[CPisHere]

I am meeting with the owner next week and will be able to get a copy of the past 3 years financials.

I also have plenty of ideas to improve revenue/operating profit. The employees are subpar, the product assortment can be expanded, very little advertising has been done, and they are missing a lot of potential business by not opening an hour earlier. Plus, they already have a franchise agreement put together to offer, so selling franchises will be an immediate improvement to revenue.

I know I'm putting the cart before the horse, but I need to be thinking about whether I could make the numbers work to pursue further. Surely you guys are familiar with some clever ways to get this done!?

 

[CPisHere]

It's been in business 14 years and fits well with my retail experience. The owner is also willing to stay on and transition it.

 

[Get Right]

That's a 4.3 multiplier which is pretty strong. See if that is industry standard for this business type.

 

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[dknise]

After 14 years they didn't break a million in revenue.

ie. Sounds like a lot of WORK.

 

[Rickson9]

I know I'm putting the cart before the horse, but I need to be thinking about whether I could make the numbers work to pursue further. Surely you guys are familiar with some clever ways to get this done!?

At this moment, that is the wrong question. It doesn't matter if there are some clever ways to get this deal done, but whether getting this deal done is clever.

 

[biophase]

It would probably require me to quit my job and do this full-time (so I need at least $4k/mo from it to live on)

I started running the numbers and can't seem to make it work. A $500k loan for 5 years would mean ~$110k/yr in debt repayment - leaving $40k pre-tax.

I may be wrong here, but if you have to ask these questions I don't think you should be looking at buying this business. It feels like it's like having someone ask me if they think they can afford a Ferrari. If you have to ask yourself that question, the answer is no.

If I were to buy a business, I'm not thinking if I can afford it. I'm thinking how I can increase its revenue from day one. If you do this, you will be cash poor and may not be able to make any moves that you want.

 

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[DennisD]

I may be wrong here, but if you have to ask these questions I don't think you should be looking at buying this business. It feels like it's like having someone ask me if they think they can afford a Ferrari. If you have to ask yourself that question, the answer is no.

If I were to buy a business, I'm not thinking if I can afford it. I'm thinking how I can increase its revenue from day one. If you do this, you will be cash poor and may not be able to make any moves that you want.

This is a great statement.
That's also the way I see it.

If making the business work will be tough for you financially, you'll be limiting yourself. You may make poor short-term decisions that hurt the business.

I'm not dealing with anything on this level myself so I don't pretend to know.
But I CAN say that things started looking up for me when I stopped making short-term decisions and started making long-term decisions, no matter how painful it was and how many days I went without food. Customers started spending more money per transaction, I wasn't trying to squeeze the life out of my business for an extra few pennies.

 

[100k]

What is B & M?

Who cares about revenue ? It's all about gross/net income.

What is so unique about the shop, what's the competition like, what's the predicted future net profit (year 1,2,3)?

What is the cost per unit of your avg. product/service? i.e what you pay to the wholesalers
What is the price per unit of your avg. product/service? i.e what you sell it for
What is your profit margin and mark up ?

Personally, I'd recommend you start a little smaller and buy a $50k business - before you go balls deep into such a business that you know almost nothing about. Or better yet, buy a website that's making $4k-5k per month and improve it and double the rev. (but that's just my personal preference coz I prefer online businesses).

 

[Thriftypreneur]

I certainly don't have first-hand experience in this field, aside from online valuations and things of that nature, but I agree with what others have already mentioned. You seem fairly excited and all that, but without detailed financials (and looking at them with honest eyes), I wouldn't be getting my hopes up.

While they may have not realized the business's full potential in 14 years (???), the numbers don't lie. Only piece of advice I'd offer is don't look at the financials and make yourself see what you want to see, but really see if it's an investment you can afford, and afford to grow. What I noticed about most good investors, is they don't make the numbers work, they either work or they don't.

Also, the less experience you have with this business/field the riskier it will be. I can't count how many people I've seen buy website businesses (even though it's B&M I think it applies - more so, due to increased investment risk), thinking they'll do this and that, without really knowing the first thing about the niche/genre, only to fall flat on their faces due to inexperience/lack of capital.

 

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[jganz]

something doesn't sound right to me...

How much is the Rent.
How long is the lease.
What industry is this.
How much are the CAMS.
How much is insurance.
What are the REQUIRED hours of operation.


If this truly grosses ~850k and kicks off ~150k your at a profit margin after being all in of 18%

That is a possibility.. so once again.. why would the owner not hire someone at ~55k and pocket 100k for no work.

If you fall in love with this I would structure something with you working for 6-12 months at a salary to learn the business (he gets time off mostly) with an option to buy within a specified period.

You will learn all the warts and positives of the business and not sign yourself into a hole you can't recover from.

IMO

 

[dknise]

What is B & M?

Brick & Mortar meaning a physically located business.

 

[CPisHere]

Thanks for the input guys.

At the asking price, the #'s just don't work for me - I would be too cash poor to make any of the investments necessary to really grow the business, like biophase said.

I still really believe the business has a lot of potential (could crack $1M pretty quickly with the 1 location, could get to $2.5M with a second location in better area, and could crack $10M with franchising) so I'm going to approach the owner about a potential partnership with buy-out agreement after a certain amount of time.

 

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[TrendSettersInc]

I am meeting with the owner next week and will be able to get a copy of the past 3 years financials.

I also have plenty of ideas to improve revenue/operating profit. The employees are subpar, the product assortment can be expanded, very little advertising has been done, and they are missing a lot of potential business by not opening an hour earlier. Plus, they already have a franchise agreement put together to offer, so selling franchises will be an immediate improvement to revenue.

I know I'm putting the cart before the horse, but I need to be thinking about whether I could make the numbers work to pursue further. Surely you guys are familiar with some clever ways to get this done!?

I think you may be going about it the wrong way IMO.

If I were you id check the financial statements first for the past 3-5 like stated. IF financials show its a good deal, then I would go about working ON the business not IN the business, Read Michael E. Gerber "The E-Myth revisited" and set up systems and processes so you dont need great employees but you will HAVE a great system.

Also check out "33 Immutable Laws Of Marketing/Branding" Expanding product assortment isn't always going to bring more profits, sometimes its best to be known for a few things, then for having a bunch of different products. Find what products are hot now and how to market them better and get them out. Work on building relationships with your existing customers and they will be your advocates as well.

You have to really know who your customer is, know your numbers and find multiple channels to market and distribute your product.

 

[RHL]

Successful B&M businesses are available for a lot less than .6 million. It's great that their revenue is $800,000+, but I've seen businesses making a lot less get a lot more than $120K into the owner's pocket by running a tighter ship. Only do this if you really feel it's a phenomenal opportunity; and counter their valuation and offer lower too, that multiple seems high depending on the industry.

 

[WaystarRoyco]

Is 575k what their asking, or what you've negotiated? I would never pay full asking for a business. Negotiate! If you're not taking any seller financing (if possible), then go lower. If they want out, they'll take a lower price. If it is broker listed, don't be intimidated by it. Going to a broker is a last ditch effort for business owners and the price gets pumped up so the seller can pay the broker their 20% commission.

If I'm paying full asking price, it's gonna be on my terms. I've told sellers that if they want full asking, then they're financing the deal 100%. That kicks off the negotiations.

And don't buy the "potential" they're selling. It's easy to get wrapped up in it, but why didn't they do it to help their business grow? Buy it for what it is now and what the financials show.

Once you've agreed on price that you both feel is fair, get creative with financing. Get a lender or supplier to finance inventory. Finance your receivables (if it applies). Finance the assets through an asset based lender (doesn't have to be a bank). Ask the seller to take 50%, and maybe they do 33%. Cobble together four or five sources to get the deal done. Just don't strap your cash flow doing it.

If you want it and can afford it from a cash flow perspective, you can find ways to do it.

CK

 

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[LibertyForMe]

FYI guys, this is a really old post from last August.

 

[WaystarRoyco]

FYI guys, this is a really old post from last August.

The principles still apply for anyone looking to buy an existing business.

 

[LibertyForMe]

The principles still apply for anyone looking to buy an existing business.

Yea, I wasn't telling you not to talk about it. I was just letting you know it was old... Trying to be a good neighbor

 

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[RHL]

I think the important question is "how are you going to improve the revenues of the business once you buy it?"

+1. Don't be fooled by the "tons of potential" nonsense. <$150,000/yr was every dime that the last owner could figure out how to extract from the biz. If you don't bring some X factor the last owner never dreamed of, expect to drop half a million to make a cool $40k

 

[HoneyBadger]

Simple question that will tell you a lot if you've done the math and think it is a deal - Why is it for sale? If you get a flaky answer I'd walk.

 

[#nowhere]

+1. Don't be fooled by the "tons of potential" nonsense. <$150,000/yr was every dime that the last owner could figure out how to extract from the biz. If you don't bring some X factor the last owner never dreamed of, expect to drop half a million to make a cool $40k

Hi RHL,

thank you and the others for the valuable advice to this point. What do you exactly mean by saying “drop half a million to make a cool 40k“?


I've another case in front of me. Scalable family Business. Managed sloppy. 1.2 millions revenue, making 350k. It can be repeated and expanded easily. At the moment it is local. Could be national within 5-6 years...
That's the reason for my question.

All the best

#n

 

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[CPisHere]

This thread is 3 years old.

They were asking way too high of a multiple, and though I could have made a low-ball offer I walked away. Someone else bought it, and it seems to be doing worse now than with the previous owner.

 

[JDx]

This thread is 3 years old.

They were asking way too high of a multiple, and though I could have made a low-ball offer I walked away. Someone else bought it, and it seems to be doing worse now than with the previous owner.

Appreciate you updating your "older" posts! Very helpful

 

[CPisHere]

Appreciate you updating your "older" posts! Very helpful

Somebody else dug this one up, but figured I would go ahead and give an update.

To provide more context, the asking price was high because the owner had gotten herself in a lot of debt by trying to keep a different failing location open. I wasn't in a position financially to take this headache on, even if I had gotten it much cheaper.

I don't know how much the new owner paid, but I actually just checked and they had re-branded it but is now closed.

 

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[Get Right]

Congrats for saving yourself a few mil!

This shows the importance of being able to read a PandL statement as well as understand pricing multiples in your specific industry.

 

[White8]

In my experience with buying someone else's business:

1. Books can be cooked. A valuation is based on data given to the person doing the valuation not hard data. Even a CPA will tell you that someone who is familiar with the company can bury data so deep that it would be hard to find. What about tax returns you ask? If someone really wants to sell something why not push the profitabiliy shown on the books up for a few years to make it look better? Pay a bit more in taxes but double the value of your business and it's completely "verifiable"

2. What if the previous owner IS the business? You can buy a business but if people walk in the door looking for old Bill and he isn't there they may go looking for him because he's the guy they know. The seller may very well open another business of the same type. But wait, I'll have him sign a non-compete and he will abide by it and if he doesn't I'll sue him. A non compete case if and only if it's emforceable in your area will take about 2.5 to 3 years and cost $50-$100k out of your pocket as you go. If you prevail, great! Hopefully he will actually pay the judgement. Let's say he does pay and you get a percentage of what you paid for the business back. Those customers will continue to go to him because he's still the guy they know. When the smoke clears you have some of the customers that you paid for who stuck around, a few new ones, and payments for a business that never showed the profit from the financials you were given when you bought the business and a fat legal bill.

I've been down that road and will never touch someone else's business again with a very long stick. It's much better to start your own or invest in real estate.