Recently, I was on vacation in Columbus OH. I’ve been going there every October for more than a decade and I always stop at my favorite restaurants when I’m in town. I admit, I’m a creature of habit. When I find someplace I really like, you can expect to see me there on a recurring basis. There is comfort in the familiar. I also tend to eat the same favorite menu items. Being a vegetarian, my choices are usually limited to begin with. I was a little shocked when I made my annual stop at this great Indian restaurant AMUL INDIA, only to discovered that my favorite dish, a vegetarian thali, was no longer on the menu. I had an awesome waiter who went above and beyond and was able to finagle the meal from the chief for me anyway, even though it was NOT ON THE MENU. Evidently, the long established business had changed hands, and the new owner felt the sampler dish was not as profitable despite being popular. Fortunately my waiter had remained during the business transition and he remembered me from prior years. It pays to know people.
Nothing lasts forever, and if you live long enough you’ll have more tales of places that used to be in business than you have hair on your head. Every year hundreds of thousands of business come and go, or change hands. Some are new start-ups built from scratch, some are franchised businesses, and some just change hands. Buying an existing business is not without its risks, but a savvy investor can reduce or possibly eliminate those risks entirely IF they are diligent and gather enough information about WHY the business is for sale.
Before you do anything, sign anything, or agree to anything make certain that you have a certified public accountant and a lawyer of your own. They, along with someone from your financial institution like a loan expert, or business rep. will be key to forming a business acquisition team. These experts will be able to prevent you from making a costly mistake by examining the books, reading the fine print etc.
What’s in the back?
As a customer, you are limited to the places intended for customers. It is rare for non-employees to glimpse much of anything locked behind the doors marked EMPLOYEES ONLY. As an interested potential buyer, it is essential to visually inspect ALL AREAS of the business you are considering buying. It’s my dream to open a coffee shop. There are several key pieces of equipment that every successful coffee shop MUST HAVE. You can’t make espresso if you don’t have an espresso machine. There is a very big difference between residential and commercial kitchen equipment. A cheap home kitchen espresso machine costs $50 and will make one shot of espresso in about 3-5 minutes. A NUOVA SIMONELLI group two commercial espresso machine can make four shots of espresso in ONE minute, and retails for $8999.99
It is imperative to have a firm knowledge of what is the proper equipment needed for the business you want. The wrong machinery will put out of business faster than you can say “double flat white, extra sweet”.
Obtain a list of all business equipment, inventory, and assets. Be sure to note condition, age, make, model, and shelf life. Were those coffee beans roasted last week, or last year? Is that ancient espresso machine on its last legs? Does the ice machine make ice?
You Owe Who What?
Make sure that the business you are considering buying has all its financials fully disclosed. You’ll need to have your CPA go over their books. If they are not turning a profit after being in business for so time, there could be a serious problem and your accountant should be able to help you pinpoint it. Make absolutely certain that all outstanding debts and liabilities that the current business owner has and been settled BEFORE you buy the shop, or you might be facing a slew of past due bills for unpaid stock or other bills that will bankrupt you. A former acquaintance of mine whom I once considered to be a friend had this happen to him. Actually he made EVERY mistake listed above and below. He ultimately lost his Shoe Repair Shop and ended up owing tens of thousands of dollars to at least three other individuals besides myself, and it ended our friendship.
Make certain you have money, LOTS OF MONEY.
Buying a business is not cheap. You’re going to need to have several months of working capital in the bank to cover operating expenses such as employee salaries. If some of the businesses’ assets or equipment need to be repaired or replaced, you’ll need to be able to cover the cost. Merchants who supply you with stock will probably expect you to be in operation for some time before they extend credit and will expect payment at the time of delivery especially during your first year of operation. Make certain that all licenses, permits, and if (you’re dealing with food services) health code inspections, and zoning codes are up to date and paid. Lapsed permits, operating a business in a residential zone, or having heath code violations will force you to shut down. Plus in dealing with the public, you may have to modify the building to comply with ADA standards.
But I just moved in…
I you are leasing the property for a business, make sure that it’s a lease you can afford and have your lawyer read it BEFORE you sign it. Triple Net Leases are quite common and will require you among other things, to pay for building maintenance, landscaping, property taxes, parking lot maintenance, etc IN ADDITION TO your monthly rent. Snow removal in a large parking lot after a blizzard is expensive. As a result you could find that suddenly your rent was a lot higher than your initial agreement. Also make sure to sign a decent multi-year lease. You don’t want to be making a killing in the perfect location and end up having to move or pay double because the landlord realized he can get a lot more for his property then you are paying him and decides to price you out.
Does she come with the place?
Will the staff stay on during the transition, or will you be suddenly be all by yourself running the shop with no help, and no clue. Understand that many of the staff may not be happy being under new ownership, with new rules. They may be used to doing things ‘the old’ way and you could encounter friction. Also remember that these employees and the former owner were the face of the business, and certain customers may be upset with the change in ownership and staff. You may find that you don’t have as many customers all of a sudden.
Do they still sell those?
Times change, tastes change. Remember my former friend and his shoe repair shop that I mentioned a few paragraphs back? In addition to all the rookie new business mistakes, perhaps the most serious one that he made was buying an antiquated, niche business with a rapidly declining customer base. Shoe repair is a dying art. Scott was an employee of the first shoe repair chain at the mall. They were acquired by another chain, which franchised its stores. The guy who brought the franchise decided to cut bait and tried to recover his losses by selling it to Scott, who still worked there and enjoyed his job, so he jumped at the chance. He was very quickly in over his head, and for a while was able to use ponzi schemes to keep the wolves at bay. Ultimately he was evicted, his assets seized, and after a civil suit showed that he had nothing of value, he kept a very low profile and faded away leaving his backers with substantial loses. If you’re not a role model, you’re a cautionary tale.
I’ll do it differently!
What has been will be again, what has been done will be done again; there is nothing new under the sun. – Ecclesiastes 1:9 New International Version (NIV)
No one who ever started a business did so with the intention of bankruptcy and failure. Yet not a day goes by without some business shutting its doors. The best ways to avoid mistakes are to learn from the mistakes of others and do it differently. Knowledge is power and if you do your homework, and lay down the proper foundation for your business from the beginning you’ll be off to a good start. A great location, with fantastic customer service, superior products, and competitive (but still low) prices, along with a friendly and knowledgeable staff should be able to provide everything else you need to succeed! As always, I wish you success and happiness!