Advice for a first-timer looking to buy a pre-existing business

Discussion in 'Growing and Managing a Business' started by Beaujac, Feb 6, 2012.

  1. Beaujac

    Beaujac
    uix_expand uix_collapse
    New Member

    Joined:
    Feb 5, 2012
    Messages:
    2
    Likes Received:
    1
    After spending the better half of the last decade working in politics I find myself burnt out. I started doing consulting with a friend of mine and I like it well enough, but the grind of a campaign cycle has lost all appeal. I found myself, after the 2010 cycle, not sure what I wanted to do.

    It took all of 2011 for me to find my muse again and for the past three months I have been kicking around the same thought: “I want to run a hobby shop.” You know, stuff for the nerd market—games of all types (cards, pen and paper rpgs, miniatures). An area hobby shop has more or less been a clubhouse for my friends and I for the last decade. I know the owner well and hang out with him outside of the shop. I want to buy his shop from him, and I don’t know how to broach the topic to see if he is even interested.

    What I do know:

    -The owner carries a lot of debt, both in school loans and consumer debt (none of which is tied to his shop), so the shop hasn’t been particularly profitable to him because he is always paying down that debt.

    -His attitude about the shop changes week to week. Sometimes he talks about never selling the shop, other times he talks about closing up and calling it a day.

    -The shop has a mixed reputation (even among it’s regulars) that could be turned around very easily with “New ownership” slapped on it, especially if that new ownership (me) is willing to do the work necessary to make the space successful; i.e. clean it regularly, keep a good stock, be more responsive to the customer base.

    -Despite the mixed reputation, it enjoys a steady, dedicated customer base, enough to keep it open for this long.

    -It is the only shop of it’s type in the town and county that it is in, meaning that it’s 45 minutes any other direction to get somewhere else similar in nature.

    -It is in a college town, meaning that part of the customer base, while transient, is regularly renewing itself.

    What I need to know…

    • How do I broach the subject with the owner?
    • What do I need to have nailed down before I talk to him about it?
    • I know about writing business plans for start-ups. How does writing a business plan for a pre-existing business I want to buy differ?

    Thanks folks!

    B
     
  2. jackflaming

    jackflaming
    uix_expand uix_collapse
    New Member

    Joined:
    Feb 3, 2012
    Messages:
    26
    Likes Received:
    1
    If you are really interested in the business and want to buy his shop, you will have to talk with him. As you are saying that he himself want to sell the business, so you can talk to him. Offer a good price so that he can not refuse for the proposal. And for writing a business plan, you can consult with a broker, he can help you properly in the case.
     
  3. ArcSine

    ArcSine
    uix_expand uix_collapse
    Member

    Joined:
    Jun 2, 2010
    Messages:
    233
    Likes Received:
    187
    Since this owner hasn't put the biz on the block, and no brokers or birddogs (paid finders / introducing agents) are involved, you don't need to worry about formalities and protocol in your approach. Just two friends talking, not unlike you asking him about maybe buying his riding lawnmower. The diplomatic skills as honed by a decade in politics ought to pay off here, no? ;)

    Key is finding out the reason for his ambivalence. Some folks just like to talk about selling, just to make conversation. On the one hand those types can be an expensive waste of a buyer's time, but on the other hand, your personal relationship with the guy means you can periodically discuss a buyout with him during your "hanging out" sessions, just as a matter of casual conversation. No real waste of time there.
    The answer might be here. Sounds like you're not saying the shop itself isn't profitable, but rather that its profits are nearly fully consumed servicing his personal debts. Hence his cold feet might stem from a notion he has that the cash flow from the shop is the one thing standing between him and serious trouble with his creditors. He'd like to sell, but the biz is his security blanket.

    If that's the case, then perhaps he'd be attracted to a deal that gets him some significant cash up front; cash he could use to pay down / off his personal debts. Of course that'd mean your having to finance a significant portion of the price from some source, which in turn means that you will be looking at some sort of debt repayment schedule yourself. That's where this point comes in...

    Just to make up easy numbers, suppose the shop currently generates 750 per month net cash flow, which is just sufficient for this guy to keep up payments on, say, 90,000 of debt. Suppose further you then borrow 90K with which you purchase the shop from him. He's happy 'cause he's able to pay off his debt burden (and thereby eliminate that "fear factor" that hangs over his head). You, on the other hand, have just stepped into his shoes. Now you've got 750 a month or so in debt payments, which is just being satisfied by the shop's profits, as is. But if, according your previous quote, you could significantly ratchet up the shop's cash flow (to 1,200 per month, just for an example), then you'd have a 450 per month net profit for yourself, after making your debt payments.

    And contained therein is the real fundamental of buying a business: Buying it for a price that represents its current value in the hands of the seller, and then making improvements which cause its value to become significantly greater in your hands than what you paid for it.

    Having said that, though, it's also true that it'd be risky for you to buy it with an all-cash deal. Most small-biz deals involve some measure of seller financing. There are a number of specific reasons, but in general they all are driven by your need to have some bit of safety net until such time that the business has lived up to the seller's profit-potential promises. Thus, the final answer might be some deal in which this guy receives enough cash up front to allow him to knock a significant chunk off of his personal debt burden, but still involves a reasonable measure of seller financing in the total buyout price.

    As to the business plan that you bring to a bank and/or investor, your experience with start-up plans will be valuable. There will be a lot of similarities. The big diff, though, is that a start-up has a 15-foot-tall, 900-lb. question mark when it comes to "How much money will this thing make?" An established business has a history, a track record, an established clientele, etc., which really helps to shrink that question mark down to a manageable size. So in your plan, be sure to play up---in a big way---those positive points you've mentioned already (steady clientele; lack of competition; college town (which I imagine is big plus for a hobby shop)).

    Best of luck with it, B!
     
    • Like Like x 2
  4. Beaujac

    Beaujac
    uix_expand uix_collapse
    New Member

    Joined:
    Feb 5, 2012
    Messages:
    2
    Likes Received:
    1
    Wow. Thanks for the great advice, ArcSine. I wish 90,000 was all that was being carried around in debt, but his student loans are dinging in at six figures and he's probably got another five figures in consumer debt. It's not hyperbole when I say that he will die before he gets out from under this. I think the trick is to give him enough where he can manage a debt repayment plan while continuing his career as a part time educator at an area community college.

    It may be that part of my pitch is about him having a cushion like that so he can focus on career in education and his research/writing. Also, reassuring him that the shop would be in the hands of someone that loves it.

    Also, that there is more than one party that is interested in buying the shop is another hurdle. I have to come at him with a figure that other potential buyers would be hesitant to match that wouldn't put me too far in the hole. To that extent, do I ask the owner to give me his number on what he would want? Or should I come to him with a rough value already figured out?

    In terms of the business plan, taking the elephant out of the room really makes it easier. My assumption in that regard is that I then have to get him to agree to sell it first so I can take a look at his books and crunch those numbers to figure overhead/distributor costs/etc, for the plan.

    Thanks again!
     
    • Like Like x 1
  5. ArcSine

    ArcSine
    uix_expand uix_collapse
    Member

    Joined:
    Jun 2, 2010
    Messages:
    233
    Likes Received:
    187
    Yeah, 90K was just a simple number pulled out of the air to illustrate a point.

    The winner of the "bidding war" isn't necessarily the one offering the largest number, in absolute terms. It's frequently the one offering the deal which pushes more of the seller's hot buttons. A guy deep in debt, for example, might see a sales price of 100, with 50 up front, as more appealing that a buyer offering 115 but who insists on the seller accepting 25 up front and 90 over time. As a spin on that theme, a price of 100 in combination with a deal structure that has him getting his money in 3 years at an annual pace of 40, 40, and then 20, might beat an offer of 120 but which wants him to be patient and get his money in the form of 20 per year x 6 years.

    And, if the seller is going to be taking back any paper (which he should), such that he retains a vested interest in the continued success of the shop, he'd likely prefer the buyer who has a real passion for the business---as this increases the likelihood of ongoing success.

    Point is, it ain't just the price number that clinches it, but the combination of price, deal structure, and the perceived probability that the biz will at least survive until he's gotten his final payment.

    It's premature to talk specific price numbers. Until you've seen the books you can't even guess at a rough value estimate. If he's interested, the next step is for you to sign a confidentiality agreement. When that's in his hands, he should then give you access to the books, so that you can begin your investigation. Google around and you'll find some nondisclosure agreement examples which you could draw from to work up one that suits your particular situation.
     
    • Like Like x 2
  6. moveon

    moveon
    uix_expand uix_collapse
    New Member

    Joined:
    Jan 28, 2012
    Messages:
    5
    Likes Received:
    2
    Agreed with Arcsine. Prices should always be negotiated. There is no fixed price in busness. If the owner is amenable to selling, you should then go into other details.
    The way I read this it seems that the owner should be willing to sell at a good price (for you). No one likes a business that doesn't generate income. And this applies to the OP as well.
     

Share This Page