1- The first business I looked at buying was a franchise restaurant that was a local favorite. The SBA loved the franchise because it had a minisicule failure rate. I met with the owner and broker, and he told me about the business. It was a place that specialized in budget gourmet recipes. The business was netting 139K and they were asking 350K for it. The seller's reason for selling was that he had a bigger restaurant in the franchise that he owed $2 million on. And he needed the cash, because when it was making money, it made alot, but when it lost money, it lost alot. There was alot of overhead. I never understood the strategy of selling the profitable part of your business to prop up the part that is losing, but yet you hear of corporations that do this all the time.
We went into negotiations, and the seller refused to lower the price. At the time, it was the only restaurant of this type of franchise for sale in the country. I couldn't find another of this type even if I were willing to move. Furthermore, the franchisor wouldn't allow a new start-up franchise of its type anywhere in the state. The only way to get this was franchise was to buy one. We really liked it, and we ended up giving him every penny he wanted in negotiations. He pretty much broke us after three weeks of negotiations and we really loved the franchise concept.
We took the deal to the bank, and they loved that it had been in business for 11 years, and the low fail rate of the franchise. Franchisees almost never went under. We spoke with the franchisor, and we were confident we would get approval. We needed to get landlord approval, and this is where the problem was.
We were living in Atlanta at the time, and rent for businesses could easily be 10-12K a month. That is pretty high when you are only making 139K. Since rent is so high, landlords have really high net worth requirements. You do the math - a few bad months and you could be teetering at the edge of bankruptcy. The landlord kept asking us for more information from us, and strung us along, all the while acting like he would approve the deal. Two months into trying to get approved by the landlord, he comes out and says NO. We tried to get him to list out his requirements, but he refused. He finally did come out and say that we needed $500K in cash before he would rent to us. Hey, jackass, if I had a half a million dollars, I would buy my own land and not rent, OK? Never go full retard.
As the broker (who is now a friend of ours said), a landlord blocking a business purchase rarely happens. And in this economy, with all of the open store fronts, you would think that landlords would take just about anybody. She said that landlords sometimes have ulterior motives, like they want to kick everyone out so they can tear down a building and put up a newer one to get better rents. Sometimes, they might have a grocery store wanting to move in, and the only way to clear up space is to kick out the existing tenants, which isn't easy.
So after all this time of trying to get the landlord to commit, and the threats to sue him for breaking the state law of blocking the resale of a business, the seller refused to follow through and take him to court.
I lost five months of time, and all those hours of me conducting due diligence. Ouch.
2- The second business I looked at was a pair of health clubs. Together, they were netting $500K a year, and the seller and broker wanted 1.2 million. It seemed that one could make a decent living off of this! I was able to negotiate them down to 990K. Both clubs had managers and staff, and they sold me on the fact that owner spent very little time running them.
The owner was actually a franchisor who started up locations, and then sold them off to potential franchisees. So they stressed that they were going to be open and honest, and that since it would be a franchisor/franchisee relationship, I was very important to them bla bla bla. We had several meetings, and they told me that sales were up, in year to year sales, because the strength of their business model allowed them to do better in recession, etc. They looked me dead in the eye when they said this, without flinching.
So we enter into due diligence (the process where you look over the books). I have an undergrad degree in accounting, so it helped. But the biggest thing to remember is that businesses of this size don't have audited statements. So you better be super careful. Its not like looking at a corporation's books, even though the financial statements might look similar. Throw out FASB standards when looking at small businesses. I asked for a ton of info to be sent me, with the rationale being that if you ask for something ten different ways, most people aren't smart enough to falsify everything.
Five minutes after they sent me the due diligence packet, I knew something was wrong. Having already been through due diligence on the first deal, and talking with CPA's specializing in due diligence, it wasn't the first time I had been here. On the previous deal, I talked with a CPA and asked him what he would be doing. He basically said he'd look at the tax returns, and also bank statements. And that the cash flow on the bank statements should be close to what they were reporting in sales. I didn't want to pay this guy $500 an hour when I had the same coursework that he did, but not the three letters after my name.
On this deal, based on the sales they were reporting, $80-90K a month in sales dollars should have been hitting. In reality, only 35K in sales a month was hitting. Given that the combined rent was almost 20K, adding in employee salaries and then the debt service to the bank, there was barely enough money to pay the light bill!
They abolutely didn't care that if they sold these location for one million and had a franchisee go under, that future franchisees would see it as a negative. All they could see was the cash. When I confronted them with it, they finally admitted that they had lost 452 members.
So I wasted a month on this one, and I had now gone six months with nothing to show for all the long hours.
3- My wife and I toyed with the idea of moving back home to a small rural town. Her family was there, and my karate studio was there. We had alot of friends there. Also, the rent there might be 1k a month compared to 10k for Atlanta.
We looked at buying a business that dealt with livestock. The claimed net cash flow was $330K a year, and the price tag was 900K. We negotiated them down to 800K. Given that this is a rural area, any business that nets 100K usually sells within a week of going on the market. In a small town, demand is much higher than supply, and for every good business, there are 100 buyers clamoring to grab them. So we moved fast to take it off the market.
The same day the seller accepted the offer, I looked throught the financials a little closer. Sales were declining from year to year. I already knew that. But I looked at the percentage of profit to sales from year to year. And the scary thing was that while sales had declined 30% from the previous year, the net profit margin increased from 33% to almost 50%. I asked the broker about this, and he did more digging. It wasn't his listing, it was a fellow broker's. The bottom line is that this sweet old couple who was getting ready to retire (they were of retirement age) was flat out lying. The net wasn't 330K, the broker figured that it was close to 50K. 50K wouldn't even pay the debt to the bank. The broker said that it was a good thing because it showed that due diligence actually works, but for me, it was another 45 days I wasted on sellers that were lying.
So now I am getting really frustrated, and thinking I should just stick with Corporate America, and that it just wasn't time to buy my own business. I tell my wife that we'll look at one other business, and this will be the final one we look at.
4- The fourth business is a bland type of business that specialized in a specialized type of landscaping. It claimed that it had a net of 300K, and the seller was asking 800K. The broker gave away too much background info. You learn in negotiations class in b-school to use every piece of advice you can get. Bring overly friendly is a negotiations technique i learned best in my class. Make the other party your friend and they will give info that will weaken their bargaining position later. Most people try to be aggressive and ruthless in negotiations, and no one expects you to be a super-nice guy. They don't realize that you are just gathering info. The broker said that the business had been on sale for too long, and he was really frustrated at the length of time he had spent trying to sell it. It was a decent commute, and none of the past sellers wanted to make the drive.
The business had several things that appealed to me. One, it had been around for over four decades, and it had stood the test of competition and multiple recessions. Businesses that make good money for multiple decades are worth way more than a business that has been around for a year or two and the latest tax return isn't even filed (get ready to get ripped off in this case). Two, I really thought I could get it for a great price, based on the broker giving me too much info. Three, I was doing my research and everything I had read about this business was that it wasn't really affected by recession. Finally, the owner was past the age of 60, and was able to only work two days a week. He also went overseas for months at a time on vacation, and his managers and crews did a great job.