Need Advice on some Numbers

[JavaJunkie]

John,

Do you have any opinions on buying a business from a broker? They are obviously representing the sellers and their commission is at stake. When I went to meet with the broker, he reminded me of a used car salesman (no offense to used car salesmen). He drew a warm fuzzy picture for me, made everything look perfect, and that's where I had to step back and remove my emotions from the whole thing. He discouraged me from bringing my own attorney into the process - he said sellers don't like things to get too complicated. I didn't get a good feeling from him, it was too much like watching a snakeoil salesman at work.

 

[John P]

Your instincts are becoming razor sharp! 8)
Brokers are good, if they are reputable. Always have a lawyer. This broker sounds like an ass.

Why the interest in buying a business rather than building your own. It's not less money, and it's not less work. What is your primary goal? Is it just to make money, or is it to build a business AND make money?

I really can't see any benefit unless your buying in to an established national brand, and it's just as an investment. I would never buy a business, but if the location was premium, I would give them $5K max and take over their lease. Beggars can't be choosers.

 

[JavaJunkie]

I'm not opposed to doing a start-up business, but in my mind, with an existing business at least I know what I'm getting. I think it's much easier to research an existing business, watch the traffic flow in and out of the place, delve into their records, etc. than it is to "predict" all of that information. I guess what it comes down to is I'm really afraid of the unknown and buying something that's already "known" calms my fears a little. You said it's not less expensive to buy an existing business - I don't know if I believe that. In doing my start-up costs for my business class, it seems as if there are a lot more expenses when starting from scratch.

My motive for buying a business is two-fold - obviously I want to make money, but it's also a dream I've had my whole life. I'm the type of person that researches things to death before I buy them (even the most mundane items) and I usually end up changing my mind a billion times before I make the purchase (call it a woman's perogative). It's the same with this business - I'm going back and forth between start-up and existing, coffee shop and drive-thru kiosk. It's frustrating because I'd like to settle my mind on one thing and run with it but every time I think I have it nailed, my mind starts to drift off again.

 

[John P]

ok... I see where you're coming from.
The problem is, the existing business is just as unknown. For any business consideration I would start with these basic questions outside of the financial questions.

This is purely a starting point, and is by no means approaching a complete list.

Questions for them and for yourself:

AA) Why are you selling?
1) Have you chosen the best product available? Show me? What testing did you go through to determine this?
2) If mulitiple suppliers carry any of these products, have you negotiated the best price? Who is your contact there?
3) Is your pricing structure created for proper market positioning? Please explain.
4) Is the design and layout of your shop efficient? (good design will save you 1-2 employees per day or 15-40K per year. Show me.
5) Would you adopt their methodology? How do you know its the best way?
6) Are any employees involved? If so, you must fire them all and re-interview--they may not be suitable employees.
7) Do customers come based on quality of product and service OR do they come based on gimmicks (coupons, discounts, low price crap)?
8)Is their equipment equipment you would have chosen?
9) Has your equipment been professionally maintained and serviced?
--Do you have records/ maintenace logs to show this?
10) Is the color and lighting in the space correct to create a proper mood?
Was the lighting/design chosen based on solid reasoning?
11) What is the lease? Is it renegotiable? Is it even assumable? (Only wording in the lease plus the landlord can confirm this.)


Financial Questions.

1) What is percentage of monthly, yearly growth? Show me.
2) Business tax returns for past three years. P&L statement.
3) How did you determine your pricing?
4) What are your COGS?
5) What percentage you pay employees, and self-- does this match with tax returns?
6) What types of external marketing have you done? Show me examples.
Has this been successful? Can you quantify?
7)What types of internal marketing have you done? Show me examples. Has this been succesful? Can you quantify?

Etc., ...

All of these questions should be answerable. If anything wasn't answered, I would kill the deal immediately. There are no grey areas for me. Either it is a good business, in which all of these are basics for any decent business owner OR it is a bad business, they are bad owners, and have a broker just out for a commission. Any corresponding answers from different questions should match. Answers will show 1) Honesty/Dishonesty. Dishonesty is any exaggeration of aspect of the business.
2) Understanding of business. This goes hand and hand with honesty. A poor understanding of business will reflect throughout. Numbers sometimes lie. Success isn't determined solely by a good tax return and balance sheet. Additionally, the broker for whatever business you look at is a reflection of both the owner and the business. Good broker, no b.s. just the facts... good sign. The opposite is even more true.

Always remember you are in the 'driver's seat'.