Adventures with lyrical - buying a business

Shonuff

Shonuff

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Heylel Teomim said:
I suppose this is the right thread, so I"ll post this here rather than starting a new one.

I"m thinking about starting a small, cottage online business just as something to do on the side. I"m not in a position to uproot myself from my current job (which I love), and I don"t have the capital to do what I really want, which is start a brewery. However, I"d like to find a way to fill some of my off-hours, and make a little more income on the side.

I have access to a very niche product out of Europe. While there are similar products available, the particular vendor I have a relationship with does very low US sales, and they make a very affordable and damn fine alternative to what"s available. It"s not something with a huge local market, though there"s some, and with the ability to sell online that market improves dramatically. There"s not a great deal of competition in this space, mainly one or two big sites and a whole bunch of extremely unprofessional mom-n-pop style sites dedicated to particular crafts.

I"m not really looking to answer the question of "is this a good idea". It"s extremely low overhead to run a drop ship online store, or even keep a small amount of international stock on hand to toe the waters. My financial commitment could (and would) start very low, and give me time to build. Mainly what I"m curious about is other folks" opinions on the most obvious pitfalls, or things that new businesses most often forget.

So far, I"ve started the process to get a business license, tax IDs and the usual groundwork done. I"ve also set up relationships with a couple of vendors, and am working on more. Oddly enough, it"s the US vendors that are being a huge pain, while the Euro ones have been a dream to work with. I"m also in the process of building a site, but that"s literally just begun. We"ll be doing some in-person sales, but I suspect an online presence is really where it"s going to be at.

I"m not looking for this to make me rich. In fact, I don"t really expect it to develop past a small, part time business. If it makes enough to net me some hobby money, or pay off my bike then I"d be satisfied with that.
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Insert witty Seinfeld reference to being an importer/exporter .

My first business was a drop ship business, and it ended losing me money. I lost about $1-2k, but hey, I learned some valuable business lessons. Namely, find something to differentiate yourself other than price. The problem I had, was while overhead was low, my competitors were just a click away. I definitely learned that I"d rather deal with a brick-and-mortar business, than deal with a business that had low costs to entry. Low cost to entry means anyone can enter.
 
Shonuff

Shonuff

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So as an update, we are still blowing and going in the business, with our backlog now pushing over 60k (and large bids going out). At this point, I have no idea what is going on, other than divine help. We"ve never had this large a backlog at this point in the year, and we are running eight guys.

I have increased our advertising budget to about 5k a month (the previous owner spent like $700 a month for just yellow pages). Its hard to trace each job to each source, but I do believe having two billboards and running radio spots on talk radio has helped. At this point, I"m not changing a thing.

I drive 220 miles round trip to the business, and I"m sick of it. There"s that thing that talk about in business school called SGR (sustainable growth rate), and we are pushing the max amount we can grow. Getting way too many customer complaints, but I"ve hired three guys that I barely know (all referred though).
 
Heylel

Heylel

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Lyrical said:
My first business was a drop ship business, and it ended losing me money. I lost about $1-2k, but hey, I learned some valuable business lessons. Namely, find something to differentiate yourself other than price. The problem I had, was while overhead was low, my competitors were just a click away. I definitely learned that I"d rather deal with a brick-and-mortar business, than deal with a business that had low costs to entry. Low cost to entry means anyone can enter.
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In this particular case, it"s an extremely niche product and I don"t think a brick and mortar store would have any hope staying alive just on local sales. I"m hoping to rely on the relative scarcity of retailers state-side. That, and the merchandise is different than what US distributors I"ve spoken to already have on hand.

If we were able to make a little money, I"d like to expand into doing some in-person sales at special events and such. That requires a significantly higher investment, however.
 
Heylel

Heylel

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Lyrical said:
I have increased our advertising budget to about 5k a month (the previous owner spent like $700 a month for just yellow pages). Its hard to trace each job to each source, but I do believe having two billboards and running radio spots on talk radio has helped. At this point, I"m not changing a thing.
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You actually can trace them. The online ones, at least. Put a slightly different web address on each advertisement, with a redirect to your main site. You can monitor the traffic to each redirect and see which ones are getting you the most hits. I suppose you could do the same thing with phone lines if you have multiple numbers, but that"s likely to complicate things a bit more.

It"s one way of tracking things like specials and coupons.
 
C

Candiarie_foh

shitlord
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If there"s one thing I"ve gotten out of undergrad it"s that it"s never a bad idea to do a really basic industry competitive analysis (usually porter"s 5 forces) before anything else. From what you said Heylel, your customers currently have relatively low bargaining power because they can"t get the product from anywhere else currently. This ties into the threat of new entrants though in that presumably anyone else can set up shop with the same supplier you"re working with. I"m also assuming that due to the scarcity of the product, you"re planning on working with a limited number of suppliers. What is your plan to minimize their bargaining power? Given the high threat of new entrants, what are you going to do to stay competitive should someone start the exact same business?

You said there are already retailers selling similar products state-side. Is the product you"re offering different enough that it"s worth the (presumably increased) price compared to the current offerings? If you are successful, and the current retailers take notice and start selling the same product, will you be able to compete? Corollary: why do they not offer this product already?

Feel free to totally ignore what I wrote or just respond to parts, it"s just food for thought/mental masturbation on my part.

Now I"m going to go do the same thing for early-90s Symantec. WOO
 
Heylel

Heylel

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No, those are all good questions and the sorts of things I"m not really expert enough to consider without them being spelled out. This is all a very new thing to me. I"m coming at this more as a customer who"s fed up with not having solid resources to purchase things myself.

To add a little clarity, I"m looking at selling costume/theater/renfaire/LARP supplies. Specifically, period costume. Leatherwork, platemail, chain etc. I have friends who make hand made leatherwork that is movie quality stuff, but it"s a hobby business and they"ve never made a solid run at getting anything going. I can sell their stuff, and supply a lot of the rest out of Europe. If that works out, I can look at expanding into things like masks, make up and special effects, with which I also have existing connections.

There"s a dearth of suppliers of that sort of thing in the States. Obviously, our country isn"t going to support that many retailers for something with such a narrow customer interest, but basically no one in the States produces this stuff themselves. The cost of metalwork production is astronomical compared to elsewhere. Meanwhile, Europe has a significantly larger and more developed market, both in terms of customers and suppliers. I can get very inexpensive, but quality merchandise out of eastern Europe that will match or beat any U.S. supplier at a lower cost to me.

As I said earlier, I"m not under any illusions that this would turn into a profitable enough business for it to become my main job. It"s just a potential way of making a little bit on the side to support my own hobbies. That, and having access to wholesaler discounts is pretty nice.
 
Shonuff

Shonuff

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Candiarie said:
If there"s one thing I"ve gotten out of undergrad it"s that it"s never a bad idea to do a really basic industry competitive analysis (usually porter"s 5 forces) before anything else. From what you said Heylel, your customers currently have relatively low bargaining power because they can"t get the product from anywhere else currently. This ties into the threat of new entrants though in that presumably anyone else can set up shop with the same supplier you"re working with. I"m also assuming that due to the scarcity of the product, you"re planning on working with a limited number of suppliers. What is your plan to minimize their bargaining power? Given the high threat of new entrants, what are you going to do to stay competitive should someone start the exact same business?

You said there are already retailers selling similar products state-side. Is the product you"re offering different enough that it"s worth the (presumably increased) price compared to the current offerings? If you are successful, and the current retailers take notice and start selling the same product, will you be able to compete? Corollary: why do they not offer this product already?

Feel free to totally ignore what I wrote or just respond to parts, it"s just food for thought/mental masturbation on my part.

Now I"m going to go do the same thing for early-90s Symantec. WOO
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For some reason, Porter"s 5 Forces even being mentioned makes me hawt. One of my professors in b-school was a student of his at Harvard.
 
Shonuff

Shonuff

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Heylel Teomim said:
You actually can trace them. The online ones, at least. Put a slightly different web address on each advertisement, with a redirect to your main site. You can monitor the traffic to each redirect and see which ones are getting you the most hits. I suppose you could do the same thing with phone lines if you have multiple numbers, but that"s likely to complicate things a bit more.

It"s one way of tracking things like specials and coupons.
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The problem is that alot of the advertising we do is to build an awareness. So the billboards and radio ads are there, someone hears of us months ago, but then they call in off of internet or phone book. And they tell us they heard us off of internet or radio, but in fact, they didn"t know we existed until they drove down the street and saw our boards and heard us on the radio.

I know its not a science. All I know is that we have more work this time of year than we"ve had since I"ve owned the company, and at the same time, our competitors have no work. Something is working, I just don"t know what. Its like the old marketing saying goes, "Half of my advertising works, the problem is finding out which half."
 
A

a_skeleton_03

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I have a quick question that may have been answered earlier.

I am going to peruse the thread in depth tomorrow.

What kind of collateral did you need in order to start this?

I have been mulling over this for a bit and haven"t jumped into research as of yet. My parents owned their own business while I was growing up and that was the 80"s so a lot was different. He said he didn"t need anything at the beginning. A good plan and good numbers. They started it and ran successful for over 25 years before they decided to move on.
 
E

Evelys_foh

shitlord
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I believe the rule of thumb in the current lending environment is that if you can even manage to get a business loan nowadays, they want you to have at least half the needed startup funds as your skin in the game, and you"re probably going to be backing the loan with personal property.
 
A

a_skeleton_03

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Evelys said:
I believe the rule of thumb in the current lending environment is that if you can even manage to get a business loan nowadays, they want you to have at least half the needed startup funds as your skin in the game, and you"re probably going to be backing the loan with personal property.
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Does that include a house that isn"t paid for?

Maybe these are assinine questions I just don"t know
 
U

Unidin_foh

shitlord
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You"d have to have at least a good chunk of equity. Remember this loan would be in 2nd position, so they"d only get the leftovers from the primary mortgage if the house went into foreclosure.
 
Cutlery

Cutlery

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Yeah, lotta shit changed in the last few years, and if you haven"t needed to or looked into getting a loan, you"d still think everything was easy sauce to get. Ain"t the case anymore.
 
R

r3probate_foh

shitlord
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I have worked for a "community" commercial lender for the last couple of years; for C&I loans (commercial and industrial loans, not secured by real estate), we"d usually want to see three years of personal tax returns, three years of business tax returns (if it"s not a start-up business), three years of business financial statements and a personal financial statement (that details all of your assets and liabilities, liquidity, etc.) at a minimum. If you had substantial liquidity in the way of brokerage accounts or deposits, we would take brokerage or bank statements to verify. Ideally we would want all of the financials to be CPA-prepared and have permission to discuss them with your CPA. We"d also obviously pull a personal credit report on you (and your spouse if applying jointly).

In addition to securing the loan by a blanket UCC filing on the business, we typically tried to take assignment of any substantial brokerage account or a CD to be deposited at our bank as additional collateral. If your house is worth anything, we might slap a second or third lien on it as an abundance of caution, behind your mortgage. Most of our commercial and industrial term loans were around $100K-$500K, so exclusively to small businesses. Anything less than that and you may as well just take out a HELOC and pay that way, it"d be less of a hassle. If you gave a little more info I could probably give better detail on what you"d need to secure credit.
 
A

a_skeleton_03

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I am looking at the following in assets and detriments:

House loan - $430k ($3k/mo to it) 2 years into a 30 year
Student loans - $6k
Car loan - $11k
Motorcycle loan - $11k
Misc debt (credit cards / vacation) - $13k

Childrens savings - $14k (not touching this)
401k - Losing money daily in the wifes and then bouncing back, $20k in mine

Annual income - $120k from the wife and I am about to quit my military job

Nothing else in the form of assets or equity.

Credit score - 750 me / 780 wife (I have one mark on my credit for Devry university screwing up paperwork thus the 750 and it drops off this year cause it"s been 7 years)
 
R

r3probate_foh

shitlord
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I mean, your personal financial statement would look thin on paper - especially since you"re about to quit your job entirely. Your wife would definitely have to co-sign any loans, I don"t know what your situation is there, but anecdotally, almost all of our problem loans that I worked on had borrowers/guarantors behind them that had serious marital problems or divorces in progress. You can"t pledge your 401(k) funds as collateral either, so those are nice on paper, but from the bank"s perspective we can"t seize them so we ignore them.

What sort of business are you considering opening? Is it capital intensive? Is it a franchise? Is it some kind of thing you can run out of your house?
 
U

Unidin_foh

shitlord
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Three years in, I doubt you have any equity in your house so that"s out. You"re already at 30-40% DTI with your current debt. Getting a loan isn"t going to work for you and you didn"t list any savings you"re willing to put up.

Unless you can find a really nice Family member to float you some money, you shouldn"t quit your day job.
 
A

a_skeleton_03

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Well the day job is being quit regardless!

I am just not quite in the market for a business I would say 5 more years max.

Just to find a menial job that will generate as much as I can between now and then..
 
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