Adventures with Lyrical: Buying a Business (REPOST)

My wife found out the other day that her Crossfit gym is either closing or being taken over by some of the other members, due to the current owners not having sufficient time for it anymore (at least, that's what they say). I'm currently in the information gathering phase, since this is so recent. She went to a meeting they held tonight to discuss the implications and to see if anyone was interested in taking it over.

I told her we could consider becoming minority owners (maybe 10%) if there is someone interested in buying a majority stake. I have a business degree (finance), but no experience running a business (I work in contracts right now). I'm wondering if anyone has any advice on what I should be on the lookout for. I'm also curious if it's even worthwhile to own such a small stake in a small business.

On the plus side, there were 2 Crossfit gyms in town, and one of them had to move about 10 minutes outside of town due to not being able to afford their rent. I think that has bolstered their membership in the last few months. I'd have to look at their books to know for sure, but I don't really know what all I should be on the lookout for. If there's something I should read, or just advice someone has, that'd be quite helpful.

My initial thought is, unless you know the majority owners very well and feel they will do a great job (sounds highly unlikely) then why would you bother? You'll (likely) have little to zero say in what goes on, so if you're just looking to randomly invest money... /shrug Unlikely, but are they willing to share the last 3 years tax returns without an offer on the table? While you can game the returns, it would be a very simple first check to see just what kind of income they are claiming. Any business that's *actually* making respectable money isn't one I can see the owners selling for not having "sufficient time" for.

It really depends on how things are set up, and if the majority shareholders are going to be assholes about things. Our family has had a long term minority partner in the business for 20+ years, and it's been pretty damn good for him. He gets a bonus based upon his percentage ownership, no different than the majority owners. When/if he sells he's going to walk away with a fair value for his shares, whether he sells back to us or to a new partner.

That being said, I just don't see how a Crossfit business is worth much of anything outside of the money it can make. You have what, maybe a few tens of thousands of dollars of equipment? What else does the company have as a hard asset? If you're interested in owning this type of business, what's stopping you from starting your own? Seems like the barriers to entry are about zero.

I know zero about gym-type businesses, but I think you vastly undervalue the worth of clients (goodwill). We have two locations for our tax prep business and we bought both of them from retiring owners. Yes it'd have been substantially cheaper to just start from scratch, but having that built in client base is where the REAL value was in what we bought. (2nd place we bought, physical assets were valued at about $15k but we paid over $100k for the business - and it was a bargain) People are like homing pigeons and will return to where they are used to going. That may be different in your type of business, I don't know.

That's all good advice. I was thinking it'd be decent to invest in, but after thinking about what you've said, it really makes little sense compared to other investment vehicles. Especially as a minority owner and not really having any say in the business decisions. I didn't realize that I wouldn't be able to touch any of the profits though, and that it'd essentially only be anything on a future sale of the business.

You could even get stuck with the entire liability of the business as a minority owner, depending on how it is set up of course.

Elurin_sl said:

That's all good advice. I was thinking it'd be decent to invest in, but after thinking about what you've said, it really makes little sense compared to other investment vehicles. Especially as a minority owner and not really having any say in the business decisions. I didn't realize that I wouldn't be able to touch any of the profits though, and that it'd essentially only be anything on a future sale of the business.

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How much of the profits get paid out, if any, is entirely up to the majority shareholders. Hell, depending on how things are set up even if they decide to pay out some or all of the profits, unless it's actually in the corporate bylaws (which you'd have no control over) there's no requirement for them to distribute those profits as per the share structure. Again, you'd hope that whoever you're going in to business with would deal with you on the level, but there's no guarantees there.

That's pretty fucking skeezy. It irks me how so many people are so untrustyworthy, when we go out of our way to always be honest and fair (and it pays dividends, but still).

The first location that was bought (before I joined) the previous owner tried to pull some shady shit but luckily his fuckery was discovered in time to issue a last minute ultimatum/take it or leave it offer. Owner had 2 EA's working in his office, "employees" that were 1099'd. Turns out each of the 3 of them had their own client lists, and the 2 EA's simply paid a % of their take in exchange for office space/secretary usage. Because they all used a single database and shared the software the owner paid for, everything looked legit. You might think the fact they were 1099'd would tip my father off, but the reality is in this line of work you see this *all* the time - even otherwise honest business people do it. This all matters because the offer for the business was obviously based on the total income, not 1/3. The books, tax records, and banking info all looked good, because all the income went through the owner before he "paid" his "employees".

Fortunately one of the dumbfuck EA's sent his "change of business location" letter to all his clients too soon, as we started getting calls from confused people, BEFORE the sale was final. From there the rest unraveled. They ended up taking a good chunk of the whales unfortunately, but word of mouth (our bread and butter of advertising) of how great we are filtered back to a lot of them, and we've recovered the bulk of them so far. It's all worked out fine in the end (last year's gross was just over 2.5x what the previous owner pulled in in his final year) but man, people are fuckers.

I've got a couple of guys trying to convince me to buy their pizza place next town over. They are pulling a move that I see a lot in the restaurant business- "Our business sucks, but ifYOUtook it over it would make tons of money because we don't know the restaurant business, you do." They try to claim that employees are stealing but they aren't experienced enough to catch it, they aren't good at managing food and labor costs, etc. Not that they don't have operational problems, but usually when you sit in the parking lot and count heads walking through the door and check out the demographics is when you find out the real problems with their business.

As far as the Crossfit, on top of everything else that has been said about the idea, Crossfit will probably just be a fad that is overtaken by the next fad 5 years from now. For that reason alone I'd stay away.

I owned a minority stake in a business since college, almost 20 years. A friend had the idea and another had the connections needed. I simply put up the money and also consulted early on since I had a degree in that field. It worked out very well and we remain friends. They both went on to make it a very profitable business. I got paid a nice dividend from the 3rd year on and last year I finally sold my share to the guy who had the idea to begin with.

Most of them probably don't work out that way however. It was fun to show up at the office or the field at times to talk to my 2 friends and have people act like I was trespassing when I walked into the private office of the "owner" without notice. It was all very friendly between us, but then again they were making money not losing it.