When purchasing a small business, the area worth investigating in a potential purchase is the nature of the sales/profit stream.
I know of a case where the purchaser of a dry cleaning outlet did not realize that the manager of a large hotel (representing twenty per cent of the volume), was a personal friend of the vendor. The hotel's cleaning business went elsewhere when the original owner departed.
In another instance, a restaurant owner/chef had a faithful clientele who did not take to the new management.
Finally, there was the purchaser of an exclusive men's shop who, within a month of taking over, learned to his horror that two of the store's long time salesmen were leaving. How do you replace people who know each customer by name?
Still, if you are overly cautious you will never buy a business. Evaluate the pros and cons. You can be sure it will cost more to renovate than you are budgeting for. If you are overpaying a bit, it is not the end of the world—the vendor is entitled to something for goodwill.
Invariably, when a business is put on the market the vendor will offer terms to the purchaser. If you can live with them, go for the deal. For argument's sake, suppose you were to buy the business for two and a half times cash flow rather than net income.
In checking the vendor's calculations, see if there are expenses that you could do without such as expensive cars, anyone on the payroll who contributes little to the establishment (a spouse, son or daughter), vacations written off as business trips, entertaining “clients,” fancy accounting or legal services, etc. These should be put back into the equation on the plus side.
There may also be plenty of minuses such as rental costs (the vendor owns the building and does not pay a normal rent), or operating without a bank loan, the vendor paid no interest charges (as in your case). Since the equipment and fixtures are older, there would be higher maintenance or replacement costs.
The bank may want an appraiser's valuation of the equipment. At any rate, make sure that you know how much the equipment is actually worth and whether or not you can use it. Finally, make sure that there is no money owing on the equipment.
The life of an entrepreneur is full of difficult decisions.
One thing to remember is that whomever your advisor may be, eighty percent of the time you will be counseled not to buy. They feel it is their duty to say no. After all, it is less risky for them to do so.
You may be told that the type of business you are looking at is passé; you should be in electronics or such.
Well, maybe so—perhaps it's time to bring in an independent expert. An old adage tells us that if you think an expert is expensive, try hiring an amateur.
Manny Drukier has been in business, from manufacturing to publishing, retail to real estate, stocks to stockpots for the past 60 years. He is the author of two books and resides in Toronto, Canada.
