Adventures with Lyrical: Buying a Business (REPOST)
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Shonuff
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So, comparing Q1 2014 and 2013, sales are up almost double through the end of April. Last year, we did 160k in service fees over those months, this year was 300. Mind you, that's the slowest quarter of the year for us.
Four years ago, in FOH, I posted that the goal was to do $1 million in service fees, and we should do that this year. Sales have doubled since I put my first billboard (of course I've done other things).
Growth costs cash, so we aren't making any trips to Vegas anytime soon.
Four years ago, in FOH, I posted that the goal was to do $1 million in service fees, and we should do that this year. Sales have doubled since I put my first billboard (of course I've done other things).
Growth costs cash, so we aren't making any trips to Vegas anytime soon.
Gravel
Mr. Poopybutthole
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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.
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.
OneofOne
Silver Baronet of the Realm
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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.
Shonuff
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BrutulTM
Good, bad, I'm the guy with the gun.
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Owning a minority stake in a small business is a lousy investment. You will have no say in how things are run, you may or may not ever get a dividend if the place turns profitable, and the only way you ever get your money back is if they sell the place for more than you bought it for and they haven't run up a bunch of debt in the mean time. I don't know if buying the whole business would be a good investment or not, but I'm pretty sure owning 10% of it is a waste of money.
Eomer
Trakanon Raider
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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.
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.
OneofOne
Silver Baronet of the Realm
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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.
Gravel
Mr. Poopybutthole
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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.
Eomer
Trakanon Raider
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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.
Shonuff
Mr. Poopybutthole
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I looked at buying a chain of gyms in Atlanta a few years back. We were attempting to buy three, and eventually all five from the owner. When we were doing our due diligence, where we had 30 days to go over the books, we found something astonishing. Their tax records supported that it was going to be about 300-400k in profits a year. But when we looked at the bank accounts, the cash flow was 1/3 what it should have been, based on the revenues.
The motherfuckers "cashed out" their clientele. They told them they could pay for two years right now, and then get a lifetime membership. So, when you went to the gyms, they looked busy. But the customers weren't paying customers, they'd all received their lifetime memberships. I was going to have to honor their lifetime memberships. I was going to have to provide services for free. None of the money from the "cash outs" was ever going to make it to me. Apparently, this is a common thing in that business. The previous owners cash out everyone, then you pay them on the expected cash flow, and you go under, as you can't pay your bills. Newsflash: if you take out debt to support a million dollar loan on a business, your cash flow needs to be what it would be for a million dollar business.
The gym business sucks.
My first advice when buying a business. Watch the bank account activity. If they say they are averaging 100k in sales a month, and only 50k hits it, you have a problem. Make sure you have the bank certify that the bank statements are valid first, and adjust for receivables.
BrutulTM
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And even if you decide you want out, they have no obligation to buy you out. You can try to find some other sucker to buy your share, but there's not much chance that anyone would. You are pretty much totally powerless as a minority owner.
OneofOne
Silver Baronet of the Realm
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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.
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.
Shonuff
Mr. Poopybutthole
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There's a saying when buying a business, is that something is going to be misrepresented, but which way? Either the business sucks, and they are trying to hide it, or the business is so profitable, that the seller is not paying taxes. Make sure you get the latter. I've heard of instances where people bought a business, and found out that actual sales were 400% higher. That's like Christmas every day! The buyer only paid for the valuation based on claimed taxes.
Outside of the gym situation, I've seen sellers play games with their inventories. It was somewhere along the lines of the seller selling off a ton of inventory, and inflating sales. All I know is that I got in good with some local brokers, and the brokers would say things like "they are playing games with their inventory, avoid that one."
opiate82
Bronze Squire
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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.
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.
Shonuff
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The thing I avoided when I looked at businesses were ones where they were normalized for having a competent owner, or when they take labor out of expenses to get a higher net earnings. For the latter, they do that because the plan is for you to replace the labor your employees did. Anytime I saw the wordnormalized, I threw the due diligence packet in the trash bin. In a few of those cases, I checked back with the broker a year later and no one had met those projections. A lot of those projections are "pie in the sky." I'd never buy a business based off of projections, or even how much the owner confides he's stealing from the IRS (which can be BS also). You have to have a rational basis to buy a business. The bank isn't going to finance pie in the sky, and it disregards statements from the seller on how much they are hiding. So if the rational price based on cash flows is 250k, and they are asking 500k, expect to have to come up with 250k more out of pocket.
Shonuff
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A combination of desperation and greed will make good people do anything. I've seen people claiming to be good Christian folk trying to defraud the buyers for a half a million. One time, we were going to buy a business that did a lot of work for the government (like 90%). The seller failed to disclose that the government was pulling out. I got this weird vibe and backed out during due diligence. When I common sized the statements, the percentages were showing ridiculous swings in the year it was put on the market. I used that for a reason to get out of the deal.
Four months later, they shut the doors. Mind you, this is with 300k in net profit on the books in each of the three previous years. The first rule of business: have more than one customer (or a just a few). There's a reason why the Big Three automakers would tell their suppliers that they could only produce for one maker. It's all well and good, until Ford tells you that you are going to lower component costs by 20% in the coming year, or you are in breach.
Buying a business made me lose faith in humanity. It took me 1.5 years to find a good one, and I spent 30 hours a week on it. If you do enough analysis, you find just about anything on the books. Most sellers don't actually look at what you are requesting, they just send it. They might only falsify one thing, but if you ask for 20, they don't falsify others. It's also pretty hard for them to falsify a certified bank statement.
Borzak
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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.
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.