Advice/Help I think I Have a deal Now what ?

Discussion in 'Growing and Managing a Business' started by Macguyver, Jul 22, 2010.

  1. Macguyver

    Macguyver
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    Hi fellow investors. I have a deal virtually sitting right in front of me I just don't know what/how to stucture it. This is what I have. I have a good friend of mine and his wife who have a sucessfull dog grooming that they want to sell. They have a good client base, have been in business for nearly 10 years, have a great high visability location in a small commercial retail center on a major street in Denver. These two are EXTREEMLY motivated, (moving to Florida) soon and just want out (not the business, they want out of Colorado). They hadn't even considered selling the business till I suggested it. I was wondering, I think I could get them to sign a contract to purchase then flip the contract just like a wholesale real estate deal. I could get the business for a realy good price and wholsale or sell to retail buyer. Asking price at a guess for wholsale would be approx 40k at a guess. Gross anual receipts at a guess 100k plus, cash flow 50k plus. These #'s are purely guess work on my part, they're usually busy as hell down there with at least dozen dogs a day! I haven't taked to them yet regarding what the actual #'s are but they said they have them and they'd be happy to provide me with them. These two are going to try listing it and selling themselves, but I'd kind of like to lock it up myself first if this can be done.
     
    #1 Macguyver, Jul 22, 2010
    Last edited by a moderator: Jul 22, 2010
  2. Fergal

    Fergal
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    Welcome to our business forum Macguyver. Obviously you would need to see the accounts and the bank statements for the business before you could evaluate what the business might be worth. Do they own the property where the business is located, or are they renting it?

    You say that one of the business owners is a good friend of yours and you are considering buying the business and then flipping the contract. If he is a good friend would you not consider helping him to sell the business for the best price possible, without trying to profit from their situation yourself?
     
  3. Macguyver

    Macguyver
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    I agree, getting the #'s today and nope they don't own the property, but neither do many, many business' so not really not an issue so long as they have a good lease agreement which they do. Like many others they're selling the business, not the property it operates from.


    " If he is a good friend would you not consider helping him to sell the business for the best price possible, without trying to profit from their situation yourself?"


    As for making a profit off my good friend and their situation, that I take issue with. HE KNOWS I"M MAKING MONEY ON THIS and he's more than ok with it ! Perhaps you're not but that's your problem. He gave me a rough price, which by the way was ridiculously low and I told him I thought so, and he said you can keep the rest! Ya know, before I got involved with realestate/investing I had a successfull plumbing and heating company for nearly 7 years, and if a friend called me for a service call at their business guess what.... I BILLED THEM FOR IT ! Yes I might have given them a better rate but I was still running a business, not a charity. So your 'implied' insult is both uninformed and idiotic on it's face.
     
    #3 Macguyver, Jul 24, 2010
    Last edited: Jul 24, 2010
  4. RentalLease

    RentalLease
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    Why don't you just buy the real estate, and sel them the business but have them pay you rent? then, you could get some instant and long-term cash?
     
  5. Business Attorney

    Business Attorney
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    If you have no experience buying a business (or valuing a business), I'd urge you to get some professional advice on the pricing. A lot of small business owners I have dealt with thought they were getting a steal when they were really grossly overpaying for the business. There are several factors why that happens but the single biggest factor is that they either undervalue or completely ignore the value of the owner's labor.

    Here's an example. Let's say a business grosses $100,000 and nets $50,000. A typical multiple in today's market is 3 to 5 times earnings. Does that mean that the business is worth $150,000 to $250,000? Not in my example, because I forgot to mention that the wife worked full-time every day, including Saturdays and Sundays and evenings and put about 70 hours a week into the business. The husband had a full time job but helped in the evenings and on weekends and put in 20 hours a week himself. If you buy the business in my example and want to run it with employees, you'll need to hire two full time employees and hope that you can find someone to consistently work nights and weekends. After you pay them minimum wage and pay your share of social security taxes, unemployment and workers comp (all things that the current owners in my example don't need to do), let's say your cost is $10 an hour (probably low). Now after hiring employees to do the work, the $50,000 has shrunk to less than $10,000. For that $10,000, you don't have to work in the store, but you still need to oversee the business, hire employees, do the bookkeeping, plan the marketing, etc... Even if that only takes you 5 hours a week, that is 250 hours a year. What is your time worth. Let's say it is worth $30 an hour. So now you are getting just less than $10,000 for your investment but you are having to put in $7,500 worth of time to get money. You can hardly consider the entire sum a return on your investment. Your pure investment return is more like $2,000. At current multiples, that means the business is worth $6,000 to $10,000.

    So now say that the owner comes up and tells you that he has a business that grosses $100,000 and nets $50,000 and that he only wants $75,000 for the business. Is it a steal to be paying $75,000 that nets you $2,000 and requires you to spend 250 hours of your nights and weekends to "earn" $7,500/ I'd certainly say no.

    Study the financials, ask all the right due diligence questions and it is certainly possible to find a small business that is truly a bargain. Just be careful because in most cases the "bargains" often turn out to be a fairly expensive way to buy yourself a job that you may not even want.
     
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  6. marina001

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    Very impressive and knowledgeable post. Thanks for sharing. I would like to read more on the same topic
     

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