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Bad Advice for Business Buyers!

March 6, 2012

Have you ever heard the expression:  If it looks too good to be true, it probably is!

The Internet is full of that kind of garbage.  The problem is that people frequently believe anything that is written, is true.  And people look for advice on the Net because it is FREE.  But another good expression is, you frequently get what you pay for.  Which is to say, if you paid nothing, much of that advice is probably worth just that:  NOTHING!

(Not this one, of course.  But all others!)

Many self-appointed experts espouse a lot of misinformation that other, well meaning people act on, daily.  When looking at information about buying or starting a business is no exception, and the problem with that is that people can lose their shirts on following errant advice.

  • When someone tells you it is easy to get a loan, question it.
  • When someone tells you that you can start a business with no money down, question it.
  • When someone tells you that a business they are trying to sell is recession proof, question it.

When someone tells you that you can earn mammoth amounts of money each week with a given business, question it.

How do you question these claims?  By studying and researching the issue, from various directions and sources.

Let’s start with the last one on that list – about the ability to earn mammoth amounts of money from a given business.

Certainly, there are a lot of businesses out there that can be extremely profitable.  But the first thing to note is that FREQUENTLY – not always, but in the majority amount of instances, BIG money comes from BIG risk.  That means that the more money you put into a given business, the more you risk and the more the potential rewards you are bound to make.  It may also not mean a big risk in terms of money, but in terms of time.

By time, we are talking about personal risk, here.  That means that you may need to work for weeks/months/years, devoting enormous amounts of time each day/week/month/year, in order to make your business idea work out.  Is that real risk?  Sure!  The more time you have to devote to your business, the more you have to sacrifice your time and effort on other jobs where you earn the money to fuel your dream, your family, friends, free time, vacations…  Frequently, that’s what it takes.  In fact, personal risk or investment is common in any business you start or purchase.  But the bigger the returns – again, frequently – the more personal investment and the resulting risk is involved.

So, when someone offers you an easy way to invest in a low cost, minimal risk business with huge potential for profits, it is only natural to want to look into it.  And those kinds of things can happen.  But so can winning a Lotto ticket jackpot for a lousy $1 investment…at odds that are against you to the tune of 175,223,510 to 1, according to Powerball’s own Web Site.

When people offer to put you on easy street, you have to look at it in a very critical manner.  You have to ask a LOTof questions.

One such question is, what is in it for them?  How to they benefit?  Are they offering to do this out of the goodness of their hearts, or are they getting a Dollar out of your involvement?  And how do they get paid?  If it is up front, which is to say if they get money before you get anything, then you better look even more carefully.  We know a Broker that will not release information until he get a sizeable deposit – $25,000 to $50,000 up front – in advance!!!

You need to check on the people making the offers:  How reputable are they; how long have they been in the business; what kind of businesses do they represent, if they are Brokers?  We once talked to a woman who was offering a potential Buyer an incredible deal (she said,) that would allow the Buyer to earn hundreds of thousands of dollars per year, starting in the first year, with about $25,000 down.  When we did some checking on the “offices” of the woman making the offer, we found the address to be in a garage in a low-rent area ofHouston, and she was operating solely from a mobile phone.  Not exactly the mark of a successful Seller of such opportunities.

There are others that offer incredible opportunities to purchase businesses with no money down, again operating out of their car, or some other extravagant location.  (Sarcasm is intended, here.)  If the business they own is so darned good, why are those Sellers not doing it themselves, rather than selling the deal to you?

Frequently they use the Brokers’ curse word:  Potential!  Certainly, there is potential in every business that you might to own.  But it is with EXTREME rarity that you buy a business predicated solely on its potential.  If the Owner has had the business for five (5) years and has not earned a cent from it, do not let him/her try to sell you on the potential!

Many of these deals contain advertising wording like, “Have to sell quickly; father is terminally ill.”  Judging from the number of these kinds of statements, the Bubonic Plague must be back!  The idea is to instill a sense of urgency in you to act before you can sensibly think about the horrendous deal they are offering you.  They think that because you are concerned about the Seller’s poor father, you will move with emotion, rather than intellect.

And people do act out of emotionalism.  They will also, even more frequently act out of greed!  This is how the famous Nigerian scams work:  The greed offered by these ridiculous schemes motivate them to act, in spite of the commons sense they would ordinarily employ, in making such decisions.  Intelligent, educated people still fall for these kinds of scams, which involve putting up various amounts of money in advance, in order to obtain huge sums, down the road.

This is exactly the same kind of thing that many business purchase schemes or business startups do, in luring novice entrepreneurs.  As stated above, we know of one, particular Business Broker that demands a large deposit, in order to provide the Buyer with fundamental financial information on the business in question.  We know of Loan Brokers that demand retainers, before they even know whether either the Buyer or the business being purchased is eligible for financing.  And many of the Loan Brokers demanding retainers and such, do so by offering incredible deals that do not match anything you can find, anywhere else in the lending fields.  There is a reason you can’t find them elsewhere:  They don’t exist!!!

Other questions to ask are in that same vein:  What are other deals like, in comparative transactions?  Whether is it the profitability for a given business line, or a specific kind of loan, what makes this one special?  If the typical, comparative business yields a maximum of 20% Net Profit, why does the advertised one earn 40%?!?  We saw one that actually offered Financial Statements, attesting to the inflated earnings.  What we realized was that the Rent was not included in the Financial Statements.  When you inserted that detail into the Expenses, the normally amount of 20% Net was realized.  Was the Rent an oversight, or an overt attempt to mislead?  No idea; but it was a vital issue, regardless of the reasons.

You need to know about your intended business and whether the numbers make sense.  If a Restaurant, you should know what the national numbers are for Food Cost, Rent, Personnel Costs, etc.  If the Food Costs are high, why?  Is it because the Seller is not reporting all of his Revenue?  Is it because of Employee Theft?  Does the Seller use of Food for his/her own Personal Consumption?  It is because of waste, perhaps spawned by the type of food, the ordering strategy or cooking methods?

But on the other hand, if a given food type normally involves a 30% Cost of Goods, or Food Cost, and the Seller says he/she is experiencing only 20%, WHY???  You need to know WHY???  And you need to research the issue enough to know whether the Seller is telling you the truth, lying to you, or simply not in touch with his/her own numbers?  Is he/she dealing with some of the cheapest ingredients and charging high prices?  If that is the case, what is the quality of the food, and can the demand be retained, under these circumstances?

We are dealing with one (non-Restaurant) business where we asked, “What are your Personnel Costs?  The answer:  “I dunno…”

What were your Revenues for last year?  The answer:  “I dunno…”

What is your average Cost of Goods?  The answer:  “I dunno…”

What is your average amount outstanding for Receivables?  Well, if he did not know how much he billed, we were in no doubt that he had no idea how much his Clients owed him.  The answer:  “I dunno…”

Sometimes, the Seller is truly not aware of any of this.  Some Sellers make money in spite of their lack of knowledge.  Some even lose money, and do not necessarily even know it!

One, common statement by Sellers is:  We are losing money now, but if we just sell more volume, we can make it up!

MOST OF THE TIME, THIS IS ABSOLUTELY NOT TRUE!!!

If a Seller says this, the first thing to do is to look at their COG (Cost of Goods).  If Revenue minus the COG shows a loss, volume will simply bury the Owner even deeper.  If you manufacture a Widget such that your COG is $10.00, and you sell it at $9.00 (Revenue), then you lose $1.00 per Widget sold.  If you increase the volume by 20 times, you then lost 20 times $1.00, or $20.00!  This is not magic!!!

There are some cases where your COG can be reduced, with volume production.  But that is scary!  How long will it take you to get to that kind of volume, and how many Dollars do you have to lose, until you get to that point?

All of these are specifically the kinds of questions – and answers – that come up and can be resolved in a Business Plan.  YOU NEED A BUSINESS PLAN!   (See our other blogs for how we feel on that issue.)

But generally speaking, be suspicious.  Question everything!!!

(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .

The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Thank you for your interest.)

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