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The Easy Road to Buying a Business

THERE IS NONE, FRIENDS!!!

We are sorry, but you should not, cannot go into the purchase of businesses like you stop at your local convenience store and buy a quick bottle of soda.  Not if you want to succeed, or at least avoid losing your shirt, in making a faulty investment.

Buying a business could be the biggest purchase you have ever made in your life.  It could be the answer to your long-term financial security and the key to your retirement.

But if you choose poorly, if you select erroneously, if you do not research and plan carefully, it could doom you to years of financial ruin and tremendous work to try to recover from a mistake you might have been able to avoid, if you had only take your time and worked yourself through that initial phase of making intelligent decisions.

We are Business Brokers; we only make our own money, if you buy a business!  So, we WANT you to buy a business.  But we do not want you to do that foolishly; we do not want to earn our money by watching you lose yours!

You will always hear about one guy who says, “I bought a company for $1.25, and ended up with a $10 million business!”  Great!  Super!  More power to you!

And it can happen.  But we also just read about a guy that won the Lottery for $320 million.  His odds were about 70 million to 1, but he won.  Of course, it only costs $1 to buy a Lottery ticket.  How much will it cost you to set up a new business, or buy one?  And what are your odds of succeeding, in that business?

A large majority of startup businesses fail in 18 months to 3 years.  The chances of succeeding by purchasing a mature business are far greater – if you choose the correct business.  (In 14 years of brokering businesses, only one (1) business we sold failed.  And that business failed because the Buyer decided he would rather buy jet skis, new cars and a new house, rather than making loan payments and payments to the IRS for his Employees’ Tax Withholdings…  He had the money; he just used it for selfish, foolish reasons, rather than first taking care of his business obligations.)

Asking us to choose the best business for your is not rational.  (See our blog: https://combrokerbusiness.wordpress.com/2012/01/06/what-kind-of-business-should-i-buy-or-start/)  We would need to know about your background, both your education and work experience; we would need to know your interests and things you want to avoid; we would need to understand your marital status, how your spouse feels about what you want to do, how much support you might get from the family, what your family culture is like…lots of personal information.  And how much money you have to invest, is always important.

Then, we need to know all about your local geography.  We need to know what the competition is like; what the traffic patterns are; what are the demographics; what is going on legally, in your area and in your industry?  What is happening to the commercial trends, in the area?

Some people think that Gas Stations are easy to buy and run, and in some areas that is true.  But these are businesses that are changing, very quickly in some areas!  (See our blog concerning Gas Stations: https://combrokerbusiness.wordpress.com/2012/08/08/should-i-buy-a-gas-station/)  There are areas of the Country where Gas Dealers have been financially ruined by the current nature of competition.  In some areas, the same is happening to Liquor Store Owners.

Buying or starting a business is not without tremendous risks, in most areas of endeavor.  It is not like turning on a light switch.  Take your time!  Do your homework.  Ask questions.  Be critical, at all times.

When you find a good opportunity, be ready to act aggressively – but that does not mean short cutting the decision making process, or acting without doing the research to make certain it is all it seems to be.  It means working hard to ensure your investment is as safe as you can possibly make it.  Because only you are in position to safeguard your own interests.

(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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Getting Advice on the Internet, in Buying a Business

Frankly, a lot of the advice you get is virtually worthless! (Not ours, of course…)

What you should look for from Electronic Bulletin Boards (EBB) and other sources of information is, who is rendering the advice? If you look at the source, you will find that the majority of such advice is from people who have extremely limited experience and knowledge, and sometimes have none, what-so-ever! MANY of the answers to questions posed on an EBB are simply bored people with nothing better to do at 2AM, so they cruise the Net.

Some are people with their own agendas. They are skewing information to their own ends. They may be Brokers who tell you there is no other way to go, except through Business Brokers. (We are Business Brokers, but try to take a balanced look at even our own limitations, as you will hopefully note if you have read our other blog posts.) They may be Lenders, promising the World which, if you understand lending at all, you will realize are cheap come-ons that cannot be fulfilled. They may be Attorneys and Accountants (and others) who provide decisive answers that should never be addressed on an EBB, because there is not enough information provided to allow definitive answers to be rendered.
The Internet is essentially free. If something is free, it is without cost; if it is without cost, it is sometimes without value… Understand where we are going?

That is not to say ALL people on the Net are worthless, or that all of the free information you can get is without value. Far from it. But you need to be a very discriminating reader. Again, understand the source of the information you are getting. Think about the writer’s motivation. And use the Net to be more inquisitive about the subject at hand. Double-check the information from a multitude of responsible sources. Do not necessarily adopt an answer from an unknown resource as gospel.

In particular, we routinely see people asking for very specific legal advice, on a number of EBBs. They also frequently ask us to supply them with templates for Contracts of Sale.

People, we know Attorneys are not cheap, and many are pains in the neck! (My apologies to our Attorney-friends, Alex and Andy…and they are just some of the ones beginning with the letter, “a”.) But the advice with which they can provide you, as a business Buyer, can save you immense amounts of money.

We sold a Motel, several years ago, and the Buyers decided they did not need to pay an Attorney, particularly since they were buying the business and associated Real Estate from an honorable Seller: A Bank! We pleaded with them to get an Attorney, both verbally and in writing, on a number of difference occasions, but they refused. Doing so cost them about $200,000 in cost overruns they would not have had to pay, if they had hired an Attorney to look after their legal interests, as we suggested. The costs for such an attorney would have been a minor fraction of what they eventually paid.

We will never supply a Buyer (or a Seller) with a Contract of Sale, under any circumstances. We are Business Brokers – not Attorneys. Attorneys undoubtedly get their Contracts as templates; but it is understanding the specifics of the individual transaction and how a template needs to be altered to meet the terms and conditions of the deal, as well as the industry in general, the structure of the Selling Company and the Buying unit, contingencies and restrictions applicable to both parties…there are too many issues that need to be covered in most deals, to trust them to individuals without legal educations and experience! (Attorneys are not their faults; see our blog on that subject: https://combrokerbusiness.wordpress.com/2013/04/06/business-buyers-who-is-advising-you/)

Another group that concerns us are the writers who answer posts anonymously, in the most cavalier manner, boasting that they have invested $10 in a business, and have made BIG money with their investment. We followed up with several of these people and found that the BIG money for those who responded to us was about $18 per year! Okay, that was an exaggeration. But they seriously did not earn much more than what would put them just above the poverty line. We guess it depends on your definition of BIG money.

Can you make really BIG money with almost no investment? Yes, of course! But so can hitting the Jackpot in the Lottery! That makes a lot of money, with only a $1.00 investment. But what are the odds of that happening?

There are also people who buy businesses that are losing money, and they turn them around profitably. Sometimes, very profitably. But that takes an enormous amount of knowledge and experience, on the part of the Buyer; it can take deep pockets, in order to support the business out of your own pocket and get it to profitability; it includes an incredible amount of risk, if you do not know the process. It is not for the beginner and anyone who tells you differently on the Net, is providing you with irresponsible advice.

That is the key. Most of the Net is anonymous, and a lot of the advice is irresponsible, either by the writers’ ignorance or due to their ulterior motivation. Scams abound on the business-oriented EBBs, particularly those offering loans or investment opportunities. Postings from outside of the US are the most dangerous – but you frequently never know the location of the writer, anyway. We spoke with one scam artist who passed himself off as being headquartered in Manchester, England; we kept at our research and ultimately found he was calling from Nigeria.
(https://combrokerbusiness.wordpress.com/2012/06/12/scams-in-buying-and-selling-businesses/)

Use the net for research. Do not use it as the final word on anything, without exhaustive research and reinforcement of what you initially find. Our blogs, as well.

(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.)

Business Buyers: Who is advising you?

We are Business Brokers! The reader needs to know that in reading this, from the start.

That being said, we do not believe all business Buyers need a Broker to represent them. And keep in mind that, unless you are clearly told otherwise, THE BROKER REPRESENTS SELLER – NOT YOU! So, in the majority of cases, the Broker with whom you may be working is representing that Seller. In a very few states, the Broker is required to tell you that in writing, and to ask you to sign a disclosure form that verifies you understand that point. If you are uncertain, ask! If you are still uncertain, assume he works for the Seller, which means he does not necessarily work in your best interests.

Regardless, he is obligated to tell you what he absolutely knows about the business, even if there are negative things that might lower the price or cause you to walk away. But that is a key issue: He must tell you things he ABSOLUTELY KNOWS!

For example, suppose you were buying a Gas Station, and a new Interstate Highway has been legally approved and known to be coming close by. Moreover, suppose the new Highway is designed so that the road on which the Gas Station is located is going to end up being dead-ended, reducing traffic that passes by the Station to almost nothing. He should tell you that. He should tell you that the Highway will cause a tremendous reduction in traffic, which is the basis for the Gas Station’s business.

But, if the Highway is not already approved, he may not owe you that kind of explanation. Because he does not know FOR A FACT that the Highway is going to adversely affect the Gas Station. It may be that the Highway will ultimately have an exit that will dump traffic right at the door of that Gas Station, and such an event would actually benefit the Station.

The key is what is known AS A FACT. The Broker does not have to tell you something negative that is not engraved in stone.

Just as importantly, he should be making it clear that the Cash Flow for a given business is based on historical financial information, and that if you replicated all aspects of the Seller’s Income and Expenses, that Cash Flow is what you might experience. He should NOT be telling you or even hinting to you that those earnings are what you will, in fact earn. He cannot promise or guarantee specific earnings. If the market changes, if technology changes, if you (as the new Owner) screw up, earnings could be far lower. If you are a better promoter or manager, if market conditions improve, the earnings may go up. The Broker cannot foresee any of those variables.

We deal in a certain number of Health Care-oriented businesses, and the topic of discussion is always the impact “Obamacare” will have on the business. Frankly, it is a “crap shoot”; no one knows, for certain. We discuss both the PROS and CONS with Buyers, all the time. But we point out variables and openly tell the Buyers, it is up to them to make the ultimate decisions about the risks or opportunities involved in the future of Health Care.

As we frequently say, there are good Auto Mechanics and bad Auto Mechanics; there are good Doctors and bad Doctors; there are good Business Brokers and bad Business Brokers. Some of the most important people in your purchase (or startup) of a business are Attorneys and Accountants. And there are good Attorneys and bad Attorneys; good Accountants and bad Accountants. Beware!
On the whole, our relationship with Attorneys is exceptionally good – we get a lot of our business as referrals from Attorneys. But we have generally had Attorneys tell us that, as a class, they do no wrong. Uh-huh…

We also know that in more than 14 years of being in this business, we have only seen two (2) Buyers lose their deposits on deals from which they wanted to withdraw. In both cases, it was unquestionably their own Attorneys that caused the loss of the deposit money. In another situation, a Buyer’s Attorney sat reading the newspaper while the settlement was going on. There were several changes made to the Contract of Sale at the table, and the Attorney called us back, two days later to ask what had happened. (Keep in mind, he was still charging his Client the normal, hourly rate, all the while the Attorney was reading the newspaper and not even paying attention to the settlement!)

In still another situation, we were working for a Seller, brought her a bona fide Buyer and – at OUR suggestion – she took the Contract of Sale to her long-time Attorney, to have him look it over and offer changes, where necessary. His immediate reaction was to arbitrarily write to us in an attempt to invalidate our Listing Agreement, which would have then invalidated the offer. The business was an extremely difficult one to sell, and it would have put the Seller in a position of holding on to the business for perhaps another year, until an alternative Buyer surfaced. Fortunately, she terminated the services of the Attorney and the deal went smoothly, with another Lawyer.

What were that Attorney’s motivations? He refused to say, other than the offer was not satisfactory. He never offered any detailed explanation – even to his own Client – and though he attempted to invalidate our own Agreement, he never said why he felt that to be necessary, either.

The only thing we could imagine was that he wanted to represent the Seller himself, in brokering the deal. Not that he had any experience in that area! Moreover, Brokers are NORMALLY paid a commission, predicated on a successful sale. Attorneys in these situations are normally paid BY THE HOUR. They really do not have any motivation for seeing a deal through quickly and efficiently; if it is done too quickly, their billable hours are reduced. That is a cynical view, but we have worked with that Attorney before, and there is abundant, though circumstantial evidence that this is his game: To extend the number of hours he can bill, to the detriment of his own Clients.

To be fair, there are unscrupulous Brokers who will push their Seller to accept a low offer, simply so the Broker can get paid quickly. Sellers, beware! Have the Broker talk you through their rationale and make certain such an explanation makes sense.

We volunteer to justify pricing, to all parties. Some Sellers have a Price already in mind and sometimes that Price is unreasonable, for the amount of business they are doing. We will sit and go over the Cash Flow we have determined, we provide them with spreadsheets that illustrate our methods, and we show the Seller how the Buyer’s financial expectations would look, if he replicates the Seller’s own Revenue and general Expenses. Usually that last part of our presentation shows the Seller whether or not we are correct. If, after paying a note, there is insufficient Profit remaining for the Buyer, the Price is too high. No Buyer is going to purchase a business unless he or she has an expectation of a reasonable Profit. But the Sellers – and the Buyers – have a right to know this information, and properly done, it keeps Brokers honest, in relating that information to all parties! We also provide that information to each party’s Accountant, so our numbers can be checked.

Accountants are people with whom we also, normally have very good relations. Again, we obtain a number of referrals from this group, and we rely on them and their advice to their Clients, in order to provide for the best possible transaction, whether we represent a Buyer or a Seller. But they are also not people that are above reproach! Most of our negative dealings have been with Sellers’ Accountants, not their Attorneys. Some seem to deliberately sabotage a deal. As we write this, we are dealing with one such CPA, who seems to delay the most simple requests, for outrageously long periods of time. This has caused tremendous irritation with a particular Buyer, who is ready, willing and able to make the purchase.

In another case, the Accountant told the Seller that the offer we had was too low, despite publicly available documentation that demonstrated that the price we were bringing to the table was, in fact above the norm, for that industry. His motivation? Who knows. But keep in mind that, if the business is sold, the Accountant loses a Client…

In the worst situation we encountered, an Accountant informed the Seller that the price we were suggesting was half of what he – the Accountant – could get for the business. Here was an undeniable case where he wanted the Client to allow him – the Accountant – to broker the deal. Obviously, the Seller knew the Accountant, she did not know us. So, she listened to the Accountant and the business sits with the same ownership, for four (4) years, now. We have gone back to the Seller and asked to represent the sale when her brokerage agreement with her Accountant ends, but he has put the thought of getting huge, unreasonable amounts for the sale, which makes our job incredibly more difficult. Once that thought is in the Seller’s mind, it is difficult to eradicate.

That is a key with any advisor: What is their motivation? The Attorney is trying to generate billable hours. If he represents you on an hourly basis, is his motivation skewed by that issue? We know of one Attorney that routinely turns away several offers, before “allowing” his Clients to accept one. Unquestionably, in one particular situation, the offer he approved was decidedly inferior to the first one that was offered. But he added to his billable hours…how does one explain that kind of rationale, in any other way?

In some circles, Accountants will flatly state that representing the Seller in a brokerage activity is unethical, because it brings into question whose interests the Accountant is actually representing, in such an activity. This is not us, making that kind of statement; that is what was told us by several Accountants with whom we have worked.

Business Brokers are the only people that – theoretically – have a pure interest in simply selling the business. They normally, only receive payment when the deal is actually finalized. But that can make their motives suspect as well, as stated above. There are undoubtedly some circumstances where a Broker has been known to shave the price, in order to get paid more quickly. (Our Broker friends will be all over us, for this!)

As a Buyer or a Seller, you need to understand the issue of motivation. You need to be knowledgable about the buying process, and you need to question all advisors, heavily.

On the whole, our relationships with Accountants and Attorneys are exceptionally good. Problems we have experienced have to do with difficulties with individuals, not with the nature of Accountants and Attorneys, as a whole. We will ALWAYS tell a Buyer to seek legal counsel, and we refuse to write Contracts of Sale ourselves, although we are frequently asked to do so. And we ALWAYS tell the Buyers that our numbers are provided by the Seller, and they should be validated by their own Accounting Professional. This is not the time for a Buyer to “cheap out”, on either of these activities!!!

There are also limitations on specialties Accountants and Attorneys may have. We dealt with one Attorney that specialized in divorces, who tried to write a Contract of Sale for the purchase of a Liquor Store. He knew nothing about Contracts of Sale, much less the issues involved in Liquor Store sales. An Accountant we dealt with was terrific dealing with day-to-day Income and Expenses; but he knew nothing about how to best assist in structuring a business sale, to permit his Client (the Seller) to reduce his Capital Gains Taxes, on the transaction.

With Attorneys, Accountants and Business Brokers, know who you are dealing with. Reference them. Research them. Understand their motivations, their capabilities and their limitations. Remember that YOU are the decision maker. If a Broker tells you he is giving you an opportunity at “below market” rates, tell him to prove that. If an Attorney tells you that a given term in a Contract is not in your best interest, think about why that is the case. What is the level of risk, and how would it affect the rest of the deal. Sometimes, the risk is negligible and does not need to be addressed in a costly manner, causing adverse relations with the Seller and harming other areas of the deal. Attorneys are obligated to tell you that there is a given risk; but they frequently do not tell you the odds of such a risk actually occurring.

They are ADVISING you, and you should listen to them. But YOU are the boss; YOU are the one making the ultimate decisions.

(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.)

Should You Buy a Business with Declining Revenue/Profit?


As always, it depends. It depends on the business; it depends on the reason for the decline; it depends on you…and a lot of other issues.

Initially, you have to look at the business itself: Why are sales declining? Is the current Owner simply tired and has given up? You see this sometimes with older people who are just physically, emotionally or intellectually tired. You also see it with people of any age who have decided to sell or get out of the business; sometimes, even though they are physically there, because they have decided to move on, their minds are no longer on the business and the business itself suffers.

Is the business well managed? Not only do attitudes like those above change, but the business or industry can change, and the Owner cannot or simply does not change with it. There are still people out there that do not use computers, or if they do, they do not take advantage of the tools needed to keep their businesses up-to-date with the trends of the market. The nature of Employees changes, over time. It is tough to keep some Employees motivated and positive. If the more mature Owner cannot cope with the culture of the younger people she/he manages, there is a problem brewing that can translate into poorer Customer Service and thus, lowered Revenue and Profit.

Technology can change, radically – particularly in today’s high tech world! Is the business you are considering suffering from functional or technological obsolescence? That means that a given device (or service) is no longer relevant; that it has been rendered less useful, because of newer technology or methods of working or living.

Perhaps no better example of this kind of trend can be found with the Mobile Phone, and how it has changed dozens of products and services, and the very way we live. Back before the Mobile Phone, we used CB Radios in the car, to communicate on a limited basis with other drivers and other CB owners who happened to be relatively close at hand. The Mobile Phone quickly trounced the CB Radio with so many superior characteristics: Clearer transmission; allowing for communications around the World rather than the limited coverage the Radio permitted; portability, both because of advances in batteries that were spawned by the Phone and the smaller size that Mobile Phones represented. (Early Mobile Phones consisted of “phones in a bag”, which were large, heavy devices, encased in a bag that was much like a purse, and which was required before the electronics and – in particular – batteries were miniaturized.) CB Radios are still around, but are a fraction of the market they once represented.

And they were not the only items that were replaced by the Mobile Phone. Coin-operated Public Phones once dotted the land, but are now largely outmoded and almost non-existent. Even the home, land-line Telephone is potentially becoming extinct; with the features that Mobile Phones offer, the standard land-line is often redundant and offers a far lesser value in the monthly fee that is normally paid to maintain it.

Technology is not the only reason that causes changes in Consumer purchases. Buying habits often change as a function of new fads or tastes, and sometimes because of new information that is available to the public. Donut shops were increasing in popularity, particularly with the Krispy Kreme brand. The brand itself became a fad and seemed to threaten the old standard in Donuts, Dunkin Donuts. Then, the no-carbohydrate diet came into play, and the Donut industry, in general went belly up – so to speak – for a while. Donuts have made a bit of a comeback, but the damage has been done, to many businesses.

Bagel Shops also became a huge part of the market, partially because of taste and partially because Bagels were thought to be healthier and less caloric than breads. Then, every Grocery Store that had space for another display brought in a line of Bagels. Bagel Shops around the Country took a nose dive, because the market suddenly became oversaturated.

Coffee Shops have always been a big part of many communities. Local operators, catering to the locals within those areas offered not only Coffee and a Donut or Bagel, but a sense of intimacy and community that seemed to add to the neighborhood culture. They were gathering places…

Then came Starbuck’s. In Washington (DC), it seemed like there was a Starbuck’s on every block, and sometimes, more than one. They drowned out the local Coffee Shops, in many areas. Landlords and Developers became enamored with Starbuck’s, feeling that the brand would bring shoppers into their Malls or Shopping Centers, and the traffic created by branded stores like Starbuck’s would contribute to the sales enjoyed by other stores. In doing so, the Landlords in many locations would refuse to extend or renew Leases for local Coffee Shops, and put in a Starbuck’s in their places. This is an all, too common experience, and not just with Coffee. We are aware of a number of successful, local Coffee Shop operators whose leases were not renewed because Starbuck’s brand.

Several years ago, when Starbuck’s closed 600 or so stores, the trend seemed to change a bit, but stores like Panera Bread and Cosi still hinder the local Coffee operator, in many areas. Not only do they offer the brand that Landlord’s prefer, but they provide for a much larger range of food offerings than the average, Coffee-only Shop can or routinely does.

Finally, Gas Stations and Convenience Stores (C-Store) are undergoing a radical change in business culture. Mammoth Gas Stations with 18 pumps or so, in combination with adjoining, 5000 square foot-plus C-Stores are becoming a huge part of the commercial scenery. This has already eliminated a huge number of both neighborhood Gas Stations, but C-Stores like older 7-11s, as well. High’s Stores closed the doors of many, if not most of its Stores, and it is now revamping its entire business approach. Neither the local Gas Operator, nor the average C-Store can compete against these behemoth operations with their ability to buy (and thus sell) at such discounted prices, which are based on their much larger purchasing power.

The point of these examples are: What of these can you turn around, to your benefit? Which of them are beyond your, or anyone’s control? Do you have the understanding, the skill and the funding that would enable you to do such a turn-around? If a business is suffering, you need to know how to dissect the problem, have the knowledge to find the solution and pockets that are deep enough to fund the solution. You also need to know and make a discriminating decision about whether that business can even be saved, at all.

Just because a business is cheap, does not mean it is a good buy! (Check out another of our blogs on this subject: https://combrokerbusiness.wordpress.com/2012/04/10/looking-for-a-cheap-business/) Sometimes, it is cheap because there is no solution to fixing the problem, or that it would cost too much to warrant trying!

Getting a loan for such a turn-around is next to impossible, from the SBA or another conventional funding source. You will either need to have your own money at risk, or try to get the Seller to finance the deal. If the business is going south, as they say, she/he may be very willing to hold a note.

Some people make a LOT of money, buying problematic businesses. But there can be a LOT of risk, in doing so. But to understand the opportunity and how it is balanced against that risk, you have to do a LOT of research and a LOT of homework. It is not for the amateur, in the vast majority of cases.

(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.)


Should I Buy a Liquor Store?

How the heck should we know? But we can tell you SOME of the issues you will want to research.

Liquor Stores can be extremely profitable. But they are not ALL so profitable. And they are not without concerns, when you think about buying one.

First, look at whether it makes sense for you to start one up from scratch, or buy one that is already operational. When a new Shopping Center is built, a Liquor Store is one of the first Leases that are signed, because they are in such demand. So you need to be quick in making a decision, if you want to start one, rather than buy one.

Ideally, you get one that is close to the local Grocery Store. People do not want to stop multiple times to finish their shopping, so if they can buy a bottle of wine to go with the dinner they just bought, they will do so. This is not ALWAYS the case, but it does make sense. On the other hand, if the local Grocery Store also has a Liquor License, you may want to avoid that area, at all costs. It is almost impossible to compete with a Costco or a Safeway!

Second, if you start one, how easily will you be able to get a Liquor License? In one area where we operate, getting a new License is impossible; the County is simply not allowing any new Liquor Licenses to be issued. And buying an existing one in that area can cost as much as $350,000, just for the License! This is one circumstance when buying a mature business can be the best course.
If you decide to buy an operational Store, take a look at the kind of sales they are doing. Are they selling mostly Beer? And if they are, what kind of Beer are they selling?

Beer takes up far more space in the Store, than either Wine or Liquor. If the Store is selling mostly Bud and Coor’s, the profit margins for these mass produced brews are terribly small, again compared to Liquor and Wine. So, if the Store is located in a decidedly beer-oriented area where most of the sales are mass produced Beer, you not only have low-margin sales, but your inventory takes up a huge amount of space, and even refrigeration. That means you are paying higher Rent and Utility costs for decidedly lower margin product. That equals to both less profit and higher costs.

On the other hand, if you are dealing with “Craft” Beers, the margins are almost as high as Wine sales, and Wine offers the highest of margins, in most stores. Do not guess; look at the Store’s point-of-sales records, which should tell you the Sales and Profit Margins of each segment of inventory sold.

Know your own limitations. We once were involved in a Liquor Store sale, where most of the sales were high-end Wines. One Buyer saw the profits and wanted to buy that store, in the worst way! Unfortunately, he did not drink and as a result, knew nothing about Wine. All he saw was the numbers. He did not get the Store we represented – another Buyer out-bid him – but he bought another, similar Store through another Broker, and within a year, he was forced to sell that Store at a loss. His Customers would routinely come to the Store and ask for advice about which Wine to buy, and because he knew nothing about Wine, and he had difficulty learning what to tell them because he did not drink, the Customers left him for stores where the workers could answer their questions.
Knowing your limitations is not only something to consider with Liquor Stores.

We routinely ask Buyers about their work experience and past employment, to try to help them understand whether the businesses they want to buy will have the chance of success, for them. Even a business with a rich history of long term, high profitability will go sour, if the new Owner is not able to understand that business and continue its record of success.

And you need to know what is going on in the general marketplace, rather than just what is happening inside the walls of the Liquor Store you want to buy. What is going on with competition?

In some States, Grocery Stores already sell Liquor, or at least Beer and Wine. In other States, that kind of licensing for Grocers is just starting. If you are considering buying one that has been around for years, and the local Grocery Stores have also been licensed for Liquor sales for years as well, you are probably safe: The impact of sales and traffic patterns has already occurred. Increasing sales in that kind of environment could be difficult, but the influence on your Store’s level of sales has already been experienced.
However, if Grocery Stores are only now being permitted to obtain Liquor Licenses, the impact on local Liquor Stores can be devastating. You need to know what is going on with legislation of that nature, in your area. Stores like Wegman’s in the Northeast US are pairing with huge Liquor Stores, and that can make an enormous difference in local Stores throughout the area.

The newest wrinkle is the effect of “big box” Liquor Stores. One such player is Total Wine, which has ninety (90) Stores across the Country at this writing, with another opening shortly; and you know, if one such company succeeds, you know others will follow. Total Wine are great Stores, with enormous inventories that offer far more varieties of product than just Wine. They buy in huge amounts, so they can get discounts the Stores can pass on to Customers. This makes it very, very tough for smaller Liquor Store operators to compete, in price. And, Total Wine offers Web Sites so Customers can place orders on the Net, then pick up their orders at the Stores. If you cannot compete on price, you have to be able to compete with tremendous Customer Service, so being aware of the competition in your area is vital!

Total Wine and similar Stores will not locate stores in every neighborhood. They do not threaten every Store. But you need to understand the market and be able to plan your purchase or startup, accordingly.

Should you still think about buying a Liquor Store? Absolutely! But you need to go into the process with your eyes open and understanding not only that particular location today, but what can happen over time. Your business should be a long term investment, in order to provide you with profits down the road, or a chance to sell at a profit, at a later date.

(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.)

Guaranteeing a Specific Return on Investment, When Buying a Business

We recently saw a notice from an individual attempting to obtain funding for starting up his own business, which stated:  “…need an investment of 100k i will guarantee a 150k return within 18 months…”

Aside from this person’s lack of proper English in his post, (see our comments about the quality of your presentation at https://combrokerbusiness.wordpress.com/2012/04/18/do-you-come-off-like-an-amateur/) the fact that he is GUARANTEEING a dramatic return in a short period of time is the kiss of death in business, for two reasons.

First, with that kind of offer, the only thing that would be guaranteed is that only scam artists and other people who do not really have the ability to help, will respond.  No responsible person will take this kind of invitation seriously, because it is not a routinely, reasonable Return on Investment (ROI).  Note, we do not say that is can NEVER happen:  There are situations where a responsible person might respond; and there are some cases where that kind of ROI have been realized.  But they are about as routine as hitting the Powerball for $320 million – which happened, just days before writing this post – with the odds against success at roughly 175 million to 1.

People that are willing to offer assistance of $100k, are normally going to want to know things like, what the heck is the business in question?  Is there a Business Plan?  Does the writer of that post have Experience?  Investors, believe it or not, are not stupid!  They do not shell out money to people who do not know what they are doing, and they do not routinely answer anonymous posts on the Internet to people who apparently cannot communicate effectively.  This is how those people got the money they would normally lend:  They are careful, discriminating in their business judgments and do not contact people that would seem to have no idea about how to properly and professionally attract their attention.

Second – and this relates directly to the theme of acting responsibly – using a blanket “guarantee” is one of the most irresponsible things that writer can do!  An Investor is going to want to know that his/her investment is handled by a responsible person.  To offer a general guarantee is absurd.  Certainly, the individual making the offer can limit his guarantee before actually taking any funds from an Investor, but the damage has already been done.  The Investor could well, potentially try to hold that writer to his original claim of a guarantee; or, the writer could be accused of misrepresenting the offer from the beginning, and alienating the Investor.  From the Investor’s perspective, if the writer has lied about the guarantee, what else has he lied about?  When is he telling the truth, versus when he is simply “exaggerating” everything else he says.

You only get one chance to make a good, first impression.

Is that writer a legitimate business person, sincerely attempting to start his own business?  Who knows?  Any time someone offers outrageous claims for a huge ROI in a short period of time, most investors smell a scam.  (See our post on this issue: https://combrokerbusiness.wordpress.com/2012/06/12/scams-in-buying-and-selling-businesses/)   Our bet is that no one will get close enough to that writer to find out.

Moreover, if that individual is serious about his guarantee, if he truly believes he can deliver, he is one, dangerous guy with which to do business!  To offer a guarantee without limitations is to create a further opening for incredible liability, if the terms of the offer cannot be met.   If it is such a lock, why is there no bank involved?  If it is so certain, why is it that the writer’s family and friends would not back him?  Why go on the Net?  No Investor wants his money put in jeopardy with a person who cannot understand accountability, and therefore put the investment funds at risk in silly, fundamentally flawed ways.

And how would he guarantee the investment?  Exactly what is he pledging to support that guarantee?  Suppose a tornado hits and destroys the business plans?  Suppose he took sick and was not able to meet the short timeframe he specified?  How many variables can play into either the amount promised, or the amount of time he designated for the payout?

Investors understand the absurdity of that kind of claim, and they avoid them like the plague!  Responsible Investors want to work with other responsible business people.  Making claims that are outrageously boastful, exaggerated or unreasonable are not the mark of a responsible business person.

(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.)


Buy a Business with Rational Goals

Recently, we was that a fellow searching for a business to purchase, had posted on a bulletin board:  “Can invest $50k-$100k, potentially more. I need to get into something that will generate $20k a month salary.”

Let’s think about this…  He has a maximum of $100,000 to invest.  We did some fast figuring and determined that he is probably looking for a minimum of about a 40% Capitalization Rate (Cash Flow divided by Price).

With $100,000, he is probably looking to purchase a business that Nets a minimum Cash Flow about of $325,000, or more.  With that kind of money, he would get his $20,000 per month, plus Debt Service on what would probably mean a Price of about $825,000.

Tough business to find, with that Cap Rate requirement!  And how do you get an $825,000 business with $100,000 down? $100,000 is just over 12% down, for a purchase of $825,000.  It is possible, but not easy.

Did that guy know what he was doing, or was he just lucky in setting goals that were high, but not completely out of the park?  Who knows?  But the key here is that YOU need to do those kinds of calculations for yourself; YOU need to know what you are asking and whether you are being reasonable, if you want others to take you seriously and if you want to succeed.

Another person on the same blog wants someone to work with him on purchasing an aggregation of resort properties, totaling in the BILLIONS of Dollars, with no money of his own to be invested.  Obviously, he has no money of his own to invest.  Moreover, he apparently has no industry experience!  So, how many people are going to ante up and offer this individual several BILLIONS of Dollars, on that basis?  (Don’t everyone raise your hands at the same time…)

Moreover, when we offered a criticism of his effort, suggesting that he was simply wasting everyone’s time, he wrote a long dissertation about how skilled he was in communications and how he possessed an excellent eye for detail.  His comments were long and rambling, contained no capital letters and little to no punctuation.  Exactly where that eye for detail was when he wrote that, is not completely understood.  The total lack of professionalism was however, extremely apparent!   (See our blog entitled, Do You Come Off Like an Amateur:  https://combrokerbusiness.wordpress.com/2012/04/18/do-you-come-off-like-an-amateur/)

Knowing your financial abilities and whether your interests are in line with your experience and personal capabilities, are vital to working with Brokers, Sellers and Bankers.   Lenders have become much more critical of a lack of experience, when they consider a loan application.  If you do not have Food experience, unless you are buying a Franchise that will teach and support you technically, it may be extremely difficult to get a loan to purchase a Restaurant.

Be reasonable; do not set yourself up for frustration, heartache and possible failure!

(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.)

Is a Franchise for you?

We were contacted by a news organization the other day, to ask our opinion on several issues regarding Franchises.  One of the fundamental questions that came up is whether franchising is really worth it?

The answer is – as in many questions – it depends…  In the case of franchising, it depends on you, the Buyer; and it depends highly on the Franchise, itself.

As far as you are concerned, what are your skills?  If, for example you are contemplating a Fast Food Franchise, do you know cooking?  Do you know Food Costs?  How adept are you in Estimating Food Supply questions?  How much Waste do you need to estimate?

How many Employees do you need at any one time?  Do they all need to be there at once, or can you bring in some people early and the majority of them at other times?  And what kinds of skills do they need?  (A Food Prep person does not have the same skills as a Server, who in turn is not the same as a Bartender, and so on.)

Designing the Restaurant is key.  We consulted with an Architectural Firm that was designing spaces for an intended, multi-location Restaurant chain.  The Architect put together a wonderful design for the seating area, but the Kitchen area was a mess!  He had placed equipment in such a manner that the Prep Area was at one end of the Kitchen, but when his/her foods were finished, the Prep Cook had to take physically transport the products to the Main Cooking area, which was almost at the opposite end of the Kitchen.  Then, the finished plates had to be moved to another area of the Kitchen for delivery to servers, so that people were constantly crossing each other with hot platters and knives at a rapid pace, potentially on wet and sometimes even greasy floors…if you charted it, the traffic pattern looked like a plate of linguini!

Even food presentation systems sometimes need to be thought out carefully, in terms of need and progression.  We recently saw a buffet, where the Diners were directed to one end of a food line.  The rolls and butter were at the beginning of that line, then silverware, then a huge salad bowl, THEN plates.  A diner was left either to cross in front of people who putting salad on their plates in order to get a clean dish, or stuffing rolls and butter into his/her pockets in order to free his/her hands to fill them with salad, and finally arriving at the available plates.

These sound like simple, common sense issues, but unless you have been in the business, they can escape your notice until you actually become operational, in your own Restaurant.  And then, it can be too late:  You have already designed your Restaurant, spent a lot of money on equipment and space build-out, and to change it can be cost prohibitive.  Moreover, every space you lease can be different; so even if you have owned a place before, the next one can have its own challenges, due to the amount of square footage and shape of the location.

Most Franchises can help you with all of those decisions and provide the training and support that helps you through these decisions.  They can guide you with Cost of Goods, Pricing suggestions and Expense planning and containment.  They normally even have the kind of Software and certain customized Equipment, specific to your business that can save you thousands of dollars, compared to researching, designing and buying such equipment and services on your own.  If you do not need that kind of support, then maybe franchising is not for you.

Not all Franchise Companies are created equally.  Some profess to have great training and ongoing support, when in fact they do not.  In Food, some require the Franchisee to order specific brands and ingredients, which may be far higher than the norm.

(In some cases of that kind, the Franchise Company gets a percentage of the purchases you make, from the Manufacturer or Distributor; that’s one of the reasons your Food Costs can be so high.  The same can be said for your Furniture, Fixtures and Equipment – known collectively as FF&E. The Franchise Company may demand specific equipment that is the Rolls Royce of such equipment, when you only need a Hyundai to get you where you want to go.  And the demand may be because the Franchise Company, again gets a slice of your pie.)

Many Franchises would seem to offer innovative products and services that would appear to offer incredible earning opportunities for the Franchisee, but those earnings never seem to bear fruit.  And to be fair, sometimes the failures are the fault of the Franchisee.  The Franchisee can take a great idea and screw it up, if he/she thinks you do not have to do anything at all, in order to make it successful.  Or, the Franchisee can decide he/she knows more than the Franchisor, and ignore the Franchise proven practices, thus destroying some of the very real advantages the concept offers.  The fact that is it a Franchise does not guarantee success.  Just as with any other business, you need to critically analyze the Business Plan offered by the Franchisor, and then adapt your own to the local area you plan to serve.  Even McDonald’s has had periodic failures, due to location.

A lot of what you pay for, as a Franchisee, is the BRAND.  Brands like McDonald’s are worth an incredible amount, to a new Franchisee.  Compare the opening of a McDonald’s, where kids start screaming at their parents for a Happy Meal immediately upon seeing the Golden Arches from at least a block away, to something (as an example, we will call) Buford’s Burgers, with a poster-board sign, (because Buford did not understand how long it takes to order and install electric signage,) in the window of a small shop at the back corner of some shopping center – and those same kids are too young to read.  Make a difference?

Brands can hurt, as well.  We know of one Franchise that suffered a scandal in one area of the Country, and it hurt all of the remaining Franchises, as a result.  The Law requires full disclosure of any legal action against a Franchise Company, and it is found in the publication the Franchisor is required by Law to provide you, in advance of any discussions you have with them.  READ THAT CAREFULLY!

And read not only that part of the disclosure, but all of it.  Know what you are agreeing to.

There is one, very successful Franchise Company that does not really sell one (1) unit.  When you sign up, you are contractually agreeing to develop one (1) location, then another three (3) over the next five (5) years.  One person we know bought into that Franchise in 2007; he could not get funding for additional locations when the recession hit and had to forfeit his Franchise to the parent Company, for defaulting on his expansion requirements.  Another chose poor locations, which then did not do well; she also had to close shop then the poor performance of the two (2) original locations did not allow her to launch the required third, which was to be located in an area that may have actually saved the others.

In another, extremely prominent and successful Franchise, the Franchisees’ territory protection was threatened by the demands of the parent Company, and eventually led to costly damages to the Franchisees.

The Franchisor decided that a cooperative venture with another organization was a great idea, and the new venture operations would be located within a number of current Franchise territories.  The affected Franchisees were told they HAD to open these new locations, or the Franchisor had the right to put someone else in place, legally destroying the territorial protection – not only in those specific locations, but completely.  The Franchisees felt they had no choice, despite attempts in court.

The problem is that the expansion was a terrible idea!  The Franchisees knew that, going into it.  But the Franchisor insisted…then four (4) years later said, “Maybe that was not such a great concept…”  But it was not the Franchisor that lost its shirt; it was the Franchisees that were coerced into the expansion that never should have been!

The moral of that story is that you need to retain an Attorney that specializes in Franchise Law, BEFORE you sign anything!  Franchisors literally have teams of Attorneys on their side.  You need at least one.  You may not be able to change the Franchise Agreement, but you at least need to know exactly what you are signing.

The Franchise Company does not have all of the offers, and is not infallible.  We know of several Franchising Companies, and one, superlative Franchisor that bought Franchises back from their Franchisees, when the Franchisees decided to retire and voluntarily sell.  In these cases, the Franchisor bought the operations back because they were particularly profitable, and the Franchise Company felt it could run the sites itself, getting far more than the 6% it had been receiving from the Franchisee, in return.

“Crash and burn”, is the best way to define the Franchise Companies management of these terrific sites.  It was so bad, they could not even re-sell the locations to another Franchisee, in order to salvage them.  They had to drag the previous Franchisee back from retirement, sell these locations back to his at a radical discount, and give him the opportunity to turn them around and then, finally sell them to another Franchisee.  The work ethic of the individual location Owner is sometimes just as important as the Brand, itself.

Moreover, in many Franchise Companies, new innovations and improvements in service are derived not by the Corporate or Franchisor Offices, but by individual Franchisee, themselves.  That does not mean the value of the Franchisor is diminished; the Franchise Company can serve as a critical link to other Franchisees, telling them of these improved methods of operation.  Or, helping the Franchisee in improving such operational techniques and perfecting new methodologies.

Finally, there are some Franchises that are simply, terrible!  There are some we refuse to list or recommend.  Invariably, these are companies where the Franchisee is never going to build any value that he/she can later sell for much of a profit.  The Franchise, in these cases, legally demands that the vast majority of the re-sale value belongs to it, and at the time of sale, the Franchisee finds that he/she is turning over the majority of the sales proceeds to the parent Company.  In buying that kind of operations, all the prospective Franchisee can hope for is to spend a lot of money in buying him/herself a job.  Nothing more.

Our perspective is that, if you took the risk going into the deal and put your own sweat and blood into the operation, you should damn well get the lion’s share of the benefit coming out of it!  Otherwise, why bother?

So again, is franchising a good thing?  Generally, we believe in franchising.  But it really depends on a lot of variables.  It can provide you with a proven product or service which CAN, but does not necessarily guarantee a much better chance for success.  The Franchise can offer training, support, advertising, branding, product/service enhancements over time…lots of advantages.

But some disadvantages also exist.  Research, research, research – that is the only way to either validate such an opportunity, or determine it does not meet your fundamental need.

The real question for each individual is whether the cost is worth the benefit.  Those of you who have read our other blogs know:  This comes back to the Business Plan!!!

(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.)

Business Buyers: Lenders Are Tough!

The days of the good ol’, friendly banker are gone!  They do not exist.  There are very RARE exceptions, and if you find one, hold them close to you in a warm and loving embrace!.

Historically, banks were locally owned and operated, with close links to the communities they served.  In fact, they had such links because they had a stake in those communities.  They invested in the local neighborhoods, knew the people within that area and the issues that were important to the survival and growth of the community.

This is no longer the case.  With (again) RARE examples, the banks have no real link to the neighborhoods they serve, because the vast majority are huge, national institutions, impersonal and operating not on the basis of local interests, but often, purely predicated on actuarial checklists, which sometimes have no relevance to the local community.  Decisions about lending are frequently made by people hundreds or thousands of miles from the Borrower’s location, with no knowledge of the local conditions, needs or local trends.

We had a recent example, in the sale of a $2.5 million Liquor Store that had experienced 20% increases in sales and profits for each of the past five (5) years – and this year’s year-to-date income suggested an even more aggressive growth pattern.  The agreed price was extremely moderate, given the tremendous profitability that was being generated by the store.   A major bank was approached, and even gave an initial approval and set of terms that were tough, but acceptable to the Borrower.  The proposed loan was predicated upon SBA support.

(As the Reader probably knows, the SBA does not lend money, itself; its purpose is to guarantee or insure the majority of loan amounts made by the banks.)

It took reams of paper and five (5) months for the bank to formally change its mind and finally decline the loan.

Why?

In this case, it was not a checklist that doomed the deal, but the decision of one person, acting in a unilateral way, with no direct access to the Borrower and never having seen the store or the area.  Because one decision maker – a faceless person, hundreds of miles from the business location – decided she did not like Liquor Stores!

There is no appeal to that person by the Borrower, no ability to better  understand her objections and no discussion.  Borrowers are not allowed to meet with the ultimate decision maker, so that they cannot apply any undue influence on the decision maker.  No meetings; no phone calls.  Nothing.

The Borrower is a relatively large depositor with the bank.  The deal finally got done with another Lender, with no more than about a 45-day processing time.  The bank lost the depositor, taking with him the money in his accounts and more than $5 million in Revenue that could and should have been processed through the bank from the business, on an annual basis.

One of the most fundamental questions is:  Why did it take five (5) months to deny the loan, when the denial had absolutely nothing to do with the qualifications of the numbers?  The bank took months to study and verify the earnings and profitability, demanding report after report, verifications and detail from the Seller and the Borrower, each of which was immediately and completely provided.  Ultimately, the bank ignored all of that data and denied the application for the most fundamental of reasons, which was that the bias of the decision maker suggested that she would not consider such an application, apparently regardless of the viability of the (very legal) business.

But remember that banks are, at their most basic, businesses themselves.  The issues that resulted in this particular deal are not uncommon.  Frequently, loan officers in the local branches will provide a Borrower with incredibly positive comments that suggest the attractiveness of the application, the assurance that the bank can and would love to do the deal, only to find that the bank later reneges on such promises.   Local Loan Officers are sometimes simply the bank’s sales force; they tell you anything you want to hear, in order to generate a loan application.  Most are very sincere and well meaning, but may have no real authority or even knowledge of what is entailed with the decision making process.

Frequently when a loan denial is rendered, the bank will blame the SBA; it was only by aggressively questioning the loan officer in this case that we discovered that the loan application had never made it to the SBA: It was stuck in the bank’s own dark and dank back passages, with the denial coming from its own, internal decision making authority.

The lack of borrowing capability was exaggerated for several years by political considerations throughout the USA, since the economic turn-down of 2007.  The vast majority of financial aid programs had been directed toward massive business enterprises, such as GM and AIG, with small businesses being largely ignored.  Yet, virtually every Economist you can find will agree that when the recession of the 1980s occurred, it was the growth of small businesses that pulled the Country out of its financial doldrums.  It is small business that creates the highest volume of jobs, rather than big business that largely involves paper transactions, and do not appreciably increase jobs and decrease unemployment numbers.  (This is not taking shots specifically at GM; while jobs at the carmaker are vital to save, increasing numbers of its jobs are replaced by a combination of robotics and overseas component manufacture.  It is always interesting to hear pleas to “buy American”, when the majority of auto parts are actually made in Asia, and are simply assembled here in the good ol’ USA!)

So, how does the Borrower overcome this kind of banking difficulty?  One way is to be extremely careful about lending scams that have increased, as credit tightened.  Many of these appear to be coming out of Britain or Canada; however, several we uncovered had postal information in England, but the perpetrators were located in Nigeria.  It is truly an international problem, and the US is not exempt.

Many such scams offer unrealistic terms.  Most say there are no fees up front, but they stick you with a required cash fee after they provide you with an “approval”, but before settlement.  Then, you never see them again!  If the fee is $5,000, keep in mind that the con artist can live fairly well on $5,000 in Nigeria, for a number of months.  (We are not picking on Nigeria, either; we have visited Nigeria for business reasons, and have a number of professional links in that area.  But it is also an area that seems to be the source of an inordinate number of scams, nonetheless.)

So, how do you overcome the difficulty in getting a business loan?

One way is to use a legitimate Loan Broker.  Many of these people deal with regional and the few remaining local banks that still exist.  They can find you a lender that is willing to do a loan for the type of purpose you need, almost from the beginning.  (One Broker with which we deal was getting Motel loans at the worst part of the recession, when no one else was capable of doing so!)  They can compare loan alternatives to try to get you the best terms available.

Many times, this means going outside of the area.  There are unquestionably, regional differences in lending strategies, among lenders.  These are normally, only understood by people that deal with a variety of loan sources, in a variety of geographic locations.

DO NOT pay fees up front.  It is not necessary.  You will be charged by a Loan Broker, without question.  But these should be paid at settlement.  Any appraisal charges or application fees should only be paid directly to the bank he/she locates for you.  Those are sometimes required and you would have no choice – but that comes well after the loan process is in place.

Depending upon your requirement, banks and the SBA may not fit your need.  A Loan Broker can potentially find investors or other, non-traditional lenders for you.

A Loan Broker cannot help you with an unrealistic transaction.  If it is a bad deal, no one will want it.  If you have atrocious credit, you need to repair that before looking for loans from any source.  If you have no money to put down, if you have no relevant experience, you need to rethink your own game plan.

Can you get a difficult loan by yourself?  Sure!  You can also repair your car yourself, build an addition onto your house all alone and brew your own beer.

The questions are:  What is your level of expertise?  How much do you need, for what exact purpose, and in what time element?  Do you have the contacts or the time to develop those contacts?  Is it worth it for you to contract with a more qualified person, to obtain the best potential results in the most efficient manner?

Though rare, the “friendly” banker still exists.  Ask for people who have had good lending/banking experiences and try to find those rare birds…they are worth their weight in gold!

(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.)

Should I Buy a Gas Station?

Perhaps the most frequently asked question is:  Should I buy a Gas Station?  Keep in mind that historically, we have sold a LOT of Gas Stations.  We know that market extremely well.  But we have also moved away from dealing with them in volume, because of our concern over the future of the market.

First, we do not TELL you what you should or should not buy!  What we are willing to do is to give you some of the positives and negatives about the businesses with which we have dealt, so that you have more information and can make up your own mind about what is best FOR YOU.  (See our blog on determining what kind of business to operate:  https://combrokerbusiness.wordpress.com/2012/01/06/what-kind-of-business-should-i-buy-or-start/)

Whether buying a Gas Station is a correct move depends on a LOT of things: The location; the Brand; the location; the Cash Flow; the location; the Competition – both now and foreseeable Competition in the future; the location; the Supplier; the location; the Price; the location; whether it includes a C-Store or Repair Bays, and if it has Repair Bays, are you a Mechanic?

Did you pick up on any themes in that paragraph?

As Prices rise, the dealers lose, in many markets. The average Pool Margin in our market is about 10 to 12 cents per gallon.  (There are some that get as much as $.25 or so per gallon, but those are normally in highway access areas, with little or no competition.  They are not the norm.)   Most sales are through Credit Cards, and some Gas Companies charge as much as 3% on all sales. At that rate, when Gas is $2.00, if your Pool Margin was 10 Cents, you paid 6 cents of that in Credit Card charges, so your real Gross Profit on a gallon of Gas was 4 Cents. When Gas went to $4.00 per gallon, the margins were still in the 10-cent area, 3% of $4.00 is 12 cents, which means Gas Station Dealers with those circumstances lost 2 cents on the gallon! You could charge a larger Pool Margin, but competition made that difficult to impossible for some Dealers.  In general, you make money on the C-Store anyway; when Gas was $4.00, it was the lifeline.

So, the Pool Margin has to be understood in relation to the Credit Card charges.  Make certain you understand whether the Pool Margin being quoted is before or after those Credit Card charges, because Sellers will sometimes quote it differently.  And know what those Card charges are, in very exact terms.

In terms of Competition, there are three (3) killer-Competitors in our market area, (WaWa, Sheetz and Royal Farms,) which each have extremely large C-Stores that almost verge on being full-fledged Supermarkets.  Some people call them Superstations. They construct huge operations that may have 14 to 20 Gas Pumps associated with them. They make their big money on the C-Store and virtually give the Gas away, in order to lure people into the Store.  (The Safeway and Giant supermarkets, BJs, Costco, Sam’s Club and others are also jumping into the market.)

What this means is that the typical, local Exxon Tiger Marts and similar operations can’t compete with them. Their C-Stores are too small and because of the wholesale prices charged to them, they cannot offer Gas Prices that are low enough to compete. In one county where these huge operators are most popularly located, we have had Dealers with BP, Shell and other, traditionally branded Gas Station dealers call and ask us to sell their stations. After analyzing the locations and the impact on their books after the Superstations came into the area, we were forced to tell them they had nothing to sell! They went to a variety of other Brokers, complaining about what we said, only to be told the same thing. In almost every case, the small station owners ended up just throwing their keys in and walking away.

So, the question is, do you have competition in your area that is similar? And how are the zoning laws in your area, regarding the construction of new stations and the potential for a Superstation to come into your market area?

It would appear that some Oil Companies are doing away with smaller stations, in order to accomplish two (2) objectives.  First, by recruiting only huge Dealers and doing away with the small guys, the Oil Companies can deal with and manage far fewer Dealers.  If the Oil Companies can deal with larger Dealers, who have more managerial experience of their own, they can reduce the Oil Companies’ field supervision personnel, and all the costs they represent.  That means that Exxon and BP can become even more profitable!

(Oil Companies are also, increasingly ridding themselves of their own field supervision operations, and putting that responsibility on the shoulders of local or regional Distributors.  This means you would never speak to an Oil Company representative, but solely with the Distributor.  Depending upon the Distributor, this could be good or bad; but either way, it adds another several cents per gallon at the wholesale level, as the Distributor adds in its own costs and profit margin to the amount the Dealers pay.)

Second, the Dealers that are being recruited are developing on their own, or in cooperation with the Oil Companies, real competition to the Superstations.  The average Station in the markets where the Oil Companies have done this costs three (3) to four (4) times what a traditional, smaller station would.  (We worked on refinancing one such operation, and the average Superstation was valued at between $3 million and $4 million, per location.)  In addition, these Dealers are real money guys, not the typical neighborhood operator you would normally see in smaller stations, and they may own every Gas Station for that brand, in a given city!  This has already happened with some brands in Orlando, Phoenix and other cities, and is spreading.

A third – but unpublicized reason for doing this – is the fact that an Oil Company, working with one Dealer across an entire market such as a city, can jack up prices across that market, with far less muss and fuss.  It would represent a bit of a monopolistic situation, again allowing the Oil Company to increase its profit margin.

In many, if not all areas of the Country, Oil Companies only provide a three-year Dealer Agreement, at a maximum.  At the end of each three-year period, your Agreement comes up for review and, for no particular reason, your Agreement may not be renewed.  If the Oil Company wants to get rid of smaller Dealers, it has the ability and every right to dump you at the end of your Agreement, and you have no way of arguing your case.  The Oil Companies are not nice guys, and they play very rough!!!

They cannot necessarily, or will not necessarily do that if you own the Property.  You have a lot of protections when owning the Real Estate that you do not have if all you own is the Dealership, which is essentially providing you with the right to buy yourself a three-year job!

You need to be very aware of what is going on, in your market.  You need to look at who is opening what, where and with what size.  That is what would tell you whether your market is creating a situation that would eventually make you extinct, as a Dealer.

If we were looking to purchase a Gas Station ourselves, we would be extremely hesitant to buy a Station any more that did not have the Real Estate as part of the deal. One brand in this area in particular has become notorious for jacking up the Rent on stations it owns, making it virtually impossible to earn a livable buck.  Its system SEEMS TO BE to monitor the Gas Sales, Pool Margin and Volume of a given Gas Station, then charge Rent that just about equals the Gross Profit the Dealer earns in Gas Sales, in any given month.  The Dealer then gets nothing out of the Gas Sales, at all.  The C-Store earns any other money the Dealer needs to pay for all other Expenses, as well as his/her own Income.

In another situation, a Gas Station Dealer was renting from an Oil Company, and the Oil Company wanted him to change his Auto Repair Bays over to a C-Store.  After two years of hesitating, he finally spend about $75,000 out of HIS OWN POCKET to reconstruct the bays ON THE OIL COMPANY’S PROPERTY, into a  C-Store…then the Oil Company increased his Rent, because the Station was now an improved property.  The Dealer invested the money in the Oil Company’s property, then charged him more Rent because he – the Dealer had improved the property!!!

Get any deals in writing!

DO NOT review their contracts yourself!  Spend a dollar and have a competent attorney who knows Contracts to do that for you!  (The Oil Companies have more attorneys than there are flies in a cow pasture.)

There are still SOME good deals out there for Gas Stations.  There are SOME areas where the future can be bright.  But in many areas, particularly those with the densest populations, the glory days for the small Gas Station Owner may be over.

(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.)