Inspired by Tuco"s thread, I thought I"d throw this out to maybe give info to those looking to start their own business, or start a discussion amongst those of us that are business owner wannabees. I am hoping the Finance forum could maybe branch out a little bit into the arena that is Enterpeneurialism. ------------------------------------------------------- OK, so I"ve bought stock for years, and worked for two Fortune 500 companies over 13 years after graduation from college. The first company I worked for, I absolutely loved, but the second one, not so much. I left the first one because I had five promotions in ten years and ended up with a direct responsiblity of about $200 million annually, but they were barely paying me 90K. I just didn"t think my pay was right for the amount of responsibility I was carrying, and no one was getting promoted as they were downsizing anyone in the Exec band above me. The second one was right after my MBA program, and I was working in a Junior Exec role (as a Regional CFO with a P&L responsibility of about $2 billion in revenues) that did analyses for the VP"s, President and CEO. It was the type of job you dream about in b-school. I rubbed elbows with VP"s, and was considered to be at their level in the organization. When people heard from me, they knew it was the same as hearing from the VP. But I ended up hating it - I kept Investment Banker"s hours. I got very little free time, and while it was my first true six figure paying job (after bonuses), I just flat out hated being owned. I worked seven days a week, and put in 12-14 hour days each day but Sunay. I think what I loved about the first job was that I had autonomy to make my own decisions, and my boss trusted me enough that he let me run the city I was responsible and only even visited once every six months. We were told we owned our part of the corporation, and that we were to act like entrepeneurs. The second job paid better, but I had no autonomy. If a VP called me at 4 AM or on the weekend, I was expected to stop what I was doing and run a financial analysis for them. I went from almost 100% autonomy to very little autonomy and I hated it. I have always toyed with the idea of owning my own business. I started doing research in my spare time, and I was trying to decide between starting my own business and buying one. As I did more research, I learned that while something like only 1 in 20 business survives after ten years, that you could mitigate your risk by buying an existing one that has already stood the test of time. Banks saw a business purchase as much less riskier than doing a start-up. I went to a local business broker"s website who explained that buying a business was like buying a job, and that if you had the money down, you could buy an income. A business with a net of $100K might cost 300K, and you could put down 60K, and makes 100K less the debt service to the bank. Most businesses sell for 1 to 3 times earnings. It all sounded so simple. It all sounded so easy, so I set on the path of being self-employed. Little did I know the pain I would face, or that the process would take up one year of my life. ---------------------------------------------------------------------------------------------------------------------- 1- The first business I looked at buying was a franchise restaurant that was a local favorite. The SBA loved the franchise because it had a minisicule failure rate. I met with the owner and broker, and he told me about the business. It was a place that specialized in budget gourmet recipes. The business was netting 139K and they were asking 350K for it. The seller"s reason for selling was that he had a bigger restaurant in the franchise that he owed $2 million on. And he needed the cash, because when it was making money, it made alot, but when it lost money, it lost alot. There was alot of overhead.I never understood the strategy of selling the profitable part of your business to prop up the part that is losing, but yet you hear of corporations that do this all the time. We went into negotiations, and the seller refused to lower the price. At the time, it was the only restaurant of this type of franchise for sale in the country. I couldn"t find another of this type even if I were willing to move. Furthermore, the franchisor wouldn"t allow a new start-up franchise of its type anywhere in the state. The only way to get this was franchise was to buy one. We really liked it, and we ended up giving him every penny he wanted in negotiations. He pretty much broke us after three weeks of negotiations and we really loved the franchise concept. We took the deal to the bank, and they loved that it had been in business for 11 years, and the low fail rate of the franchise. Franchisees almost never went under. We spoke with the franchisor, and we were confident we would get approval. We needed to get landlord approval, and this is where the problem was. We were living in Atlanta at the time, and rent for businesses could easily be 10-12K a month. That is pretty high when you are only making 139K. Since rent is so high, landlords have really high net worth requirements. You do the math - a few bad months and you could be teetering at the edge of bankruptcy. The landlord kept asking us for more information from us, and strung us along, all the while acting like he would approve the deal. Two months into trying to get approved by the landlord, he comes out and says NO. We tried to get him to list out his requirements, but he refused. He finally did come out and say that we needed $500K in cash before he would rent to us.Hey, jackass, if I had a half a million dollars, I would buy my own land and not rent, OK? Never go full retard. As the broker (who is now a friend of ours said), a landlord blocking a business purchase rarely happens. And in this economy, with all of the open store fronts, you would think that landlords would take just about anybody. She said that landlords sometimes have ulterior motives, like they want to kick everyone out so they can tear down a building and put up a newer one to get better rents. Sometimes, they might have a grocery store wanting to move in, and the only way to clear up space is to kick out the existing tenants, which isn"t easy. So after all this time of trying to get the landlord to commit, and the threats to sue him for breaking the state law of blocking the resale of a business, the seller refused to follow through and take him to court. I lost five months of time, and all those hours of me conducting due diligence. Ouch. ----------------------------------------------------------------- 2- The second business I looked at was a pair of health clubs. Together, they were netting $500K a year, and the seller and broker wanted 1.2 million. It seemed that one could make a decent living off of this! I was able to negotiate them down to 990K. Both clubs had managers and staff, and they sold me on the fact that owner spent very little time running them. The owner was actually a franchisor who started up locations, and then sold them off to potential franchisees. So they stressed that they were going to be open and honest, and that since it would be a franchisor/franchisee relationship, I was very important to them bla bla bla. We had several meetings, and they told me that sales were up, in year to year sales, because the strength of their business model allowed them to do better in recession, etc. They looked me dead in the eye when they said this, without flinching. So we enter into due diligence (the process where you look over the books). I have an undergrad degree in accounting, so it helped. But the biggest thing to remember is that businesses of this size don"t have audited statements. So you better be super careful. Its not like looking at a corporation"s books, even though the financial statements might look similar. Throw out FASB standards when looking at small businesses. I asked for a ton of info to be sent me, with the rationale being that if you ask for something ten different ways, most people aren"t smart enough to falsify everything. Five minutes after they sent me the due diligence packet, I knew something was wrong. Having already been through due diligence on the first deal, and talking with CPA"s specializing in due diligence, it wasn"t the first time I had been here. On the previous deal, I talked with a CPA and asked him what he would be doing. He basically said he"d look at the tax returns, and also bank statements. And that the cash flow on the bank statements should be close to what they were reporting in sales. I didn"t want to pay this guy $500 an hour when I had the same coursework that he did, but not the three letters after my name. On this deal, based on the sales they were reporting, $80-90K a month in sales dollars should have been hitting. In reality, only 35K in sales a month was hitting. Given that the combined rent was almost 20K, adding in employee salaries and then the debt service to the bank, there was barely enough money to pay the light bill! They abolutely didn"t care that if they sold these location for one million and had a franchisee go under, that future franchisees would see it as a negative. All they could see was the cash. When I confronted them with it, they finally admitted that they had lost 452 members. So I wasted a month on this one, and I had now gone six months with nothing to show for all the long hours. --------------------------------------------------------------------- 3- My wife and I toyed with the idea of moving back home to a small rural town. Her family was there, and my karate studio was there. We had alot of friends there. Also, the rent there might be 1k a month compared to 10k for Atlanta. We looked at buying a business that dealt with livestock. The claimed net cash flow was $330K a year, and the price tag was 900K. We negotiated them down to 800K. Given that this is a rural area, any business that nets 100K usually sells within a week of going on the market. In a small town, demand is much higher than supply, and for every good business, there are 100 buyers clamoring to grab them. So we moved fast to take it off the market. The same day the seller accepted the offer, I looked throught the financials a little closer. Sales were declining from year to year. I already knew that. But I looked at the percentage of profit to sales from year to year. And the scary thing was that while sales had declined 30% from the previous year, the net profit margin increased from 33% to almost 50%. I asked the broker about this, and he did more digging. It wasn"t his listing, it was a fellow broker"s. The bottom line is that this sweet old couple who was getting ready to retire (they were of retirement age) was flat out lying. The net wasn"t 330K, the broker figured that it was close to 50K. 50K wouldn"t even pay the debt to the bank. The broker said that it was a good thing because it showed that due diligence actually works, but for me, it was another 45 days I wasted on sellers that were lying. So now I am getting really frustrated, and thinking I should just stick with Corporate America, and that it just wasn"t time to buy my own business. I tell my wife that we"ll look at one other business, and this will be the final one we look at. -------------------------------------------------------------- 4- The fourth business is a bland type of business that specialized in a specialized type of landscaping. It claimed that it had a net of 300K, and the seller was asking 800K. The broker gave away too much background info. You learn in negotiations class in b-school to use every piece of advice you can get. Bring overly friendly is a negotiations technique i learned best in my class. Make the other party your friend and they will give info that will weaken their bargaining position later. Most people try to be aggressive and ruthless in negotiations, and no one expects you to be a super-nice guy. They don"t realize that you are just gathering info. The broker said that the business had been on sale for too long, and he was really frustrated at the length of time he had spent trying to sell it. It was a decent commute, and none of the past sellers wanted to make the drive. The business had several things that appealed to me. One, it had been around for over four decades, and it had stood the test of competition and multiple recessions. Businesses that make good money for multiple decades are worth way more than a business that has been around for a year or two and the latest tax return isn"t even filed (get ready to get ripped off in this case). Two, I really thought I could get it for a great price, based on the broker giving me too much info. Three, I was doing my research and everything I had read about this business was that it wasn"t really affected by recession. Finally, the owner was past the age of 60, and was able to only work two days a week. He also went overseas for months at a time on vacation, and his managers and crews did a great job. We got into negotations, and I was able to get them down to 650K. I used what the broker had told me against them. One thing about brokers is that if they think they have spent too much time and money on a deal, they fold like accordians if they think they can close a deal. I got through due diligence, and I couldn"t find anything wrong at all. I was shocked. I had never seen a business with such clean books. The problem was that this was the week of the financial meltdown, and you couldn"t turn on the news without hearing about how banks weren"t going to lend. In a normal time, this deal would have been considered a slam dunk, because the financials were clean, it had stood the test of time, and sales were actually up this year by 20% (and that is in a recession). It should have been a 45 day close, but it was closer to 75 days. The bank took its sweet time, and our close date kept getting delayed every day. This is unheard of. You would go to close, and the bank would delay another day. This happened for 2.5 weeks. I yelled and screamed at the broker enough that he yelled and screamed at the banker. The broker did have a little leverage in that he"d sent the banker alot of business in the past. We finally closed three weeks ago. ----------------------------------------------------------- My first day owning the business, I was nervous. After all, no matter how closely you look at the books, if someone is clever enough, they can falsify anything. We go on our first job, and I watch the crews work. I shoot the breeze with the owner, but the whole time, I was wondering if I got ripped off. He goes into his house, and presents me a check for $5k. This is a service business, and typically the net is 50% of sales. I was at the job a total of two hours, and I was handed a check where the profit was $2500! I felt vindicated for putting a year into buying a business. I have now owned the business for three weeks, and have netted $29,300 in this timeframe!This is about what I made in my first year out of college at the first corporation I worked at. Also, in terms of my post MBA job, I have been making more in one day in the business than I did in a regular, non-bonus check coming out of a tier one b-school. The banker who closed my deal was getting his MBA at a t1 school, and he commented that the business would pay much more than what you would make at a t1 school upon graduation. In terms of my family, we live the same way we did before. This time of year is typically the slow time of year for the type of landscaping we do. And in December and January, in the past, the business has lost 40K in those two months, and then made money the rest of the year (in the Summer months, it makes $50K a month easy). We have equipment that runs 50K-100K apiece, and the maintenance on them can be 5K a month. Finally, the competition tries to steal our employees, so we pay them really well, and try to make sure they are getting 40 to 60 hours. The way the economy is right now, we can live off of 4K a month, and plow back the rest for a rainy day. I have to say that earning a two week check in a day is a bit disconcerting. I could go out and increase my standard of living, but there are alot of business owners right now that wish they didn"t spend everything coming in. And there is alot of stress in making decisions that affects the workers" families. We pay double the going rate for laborers in the local, and the laborers are the main breadwinners for the families. They have kids. The business is their sole income, so this has freaked me out a little bit. I put the money I made from buying beaten down stocks in recession, and put down about 80K on the business. The seller put in some financing. We bought it for 650K. It has netted 300K+ for the last three years, and is on track to do 350K this year. If anything, I see a ton of opportunity to increase this business past 350K, because the seller has done almost no advertising, isn"t on the Internet, and he subsidizes his other business at least 30K+ a year from ths one. The seller also doesn"t negotiate with his customers. He charges them $225 an hour, but he could still make money at $150 an hour. He"d rather have an open spot on the schedule than charge less. His attitude with customers is that this is the hourly rate, take it or leave it. The business hasn"t slowed down with me at the helm. The prior business had such a great reputation, that the past customers don"t care the owner has changed. 80% of the time his managers ran it for him anyway, as he would go on vacation four months out of the year, and when he was in town, only work two days a week. I wonder why I worked for Corporate America so long. This is so much more rewarding. But I wasn"t born wealthy, and the money that I was so frugal with that I made in Corporate America and invested has now alowed me a new way of life. I have been able to go from dirt-ass poor to making what the wealthiest 1% of Americans do. I thrive on challenge and thrive that no one else believes in my dreams. In another few months, I should have the cash to buy another business this size. I love a challenge (like running a business unit of $2B in revenues, getting my black belt, going to a t1 b-school) etc. Life is boring with challenge and struggle. One day I will own two other businesses this size, and donate 80% of it to charity. I guess you could say I am a bleeding heart, but my non-profit activities are at the end of the day and on the weekends. I just don"t think we should try to get change by taxing the hell out of people and redistributing it. I"d rather make money and give it to the charities of my choice. We"ve already given $1500 away in three weeks, and we plan to give away more when the busy time of the year gets in full swing. ----------------------------------------------------------------------------------------------- UPDATE: ---------------------------------------------------------------------------------------------- I know that some of us are business owners, so what are some of you guys doing? What types of businesses do you own? What kind of crazy-ass aspirations do you guys strive for? I know that having a business this size is just one of many goals I am aiming for in life. The whole time, I had naysayers that said I shouldn"t expect to make upwards of 250K in a business, and some said I wouldn"t even reach my goal of owning a business.