Is It Worth Buying?
Dave has a gut feeling about Ray's scenario ... Ray thinks he should buy into a small business, but Dave reminds him of something first.
QUESTION: Raymond’s wife is a cosmetologist and was just offered to take over an established small business for $40,000 that has been open for a year. They would have to get a business loan to do that, and he’s not sure what kind of profit they are clearing. How would they go about doing that?
ANSWER: You don’t want to buy a new business that’s not profitable. If you buy into a business that’s not making money, you’re just buying equipment. I want to know how the current owner came up with that number, because I bet you could buy all this equipment from her for $10,000. I have a feeling she’s not making money. I don’t recommend going into debt to buy a business. That will put you in a cash flow bind and cause you all kinds of other issues.
If you were going to pay $40,000 and make 20% on your money, you need $8,000 per year net profit in there. A shop that’s been open a year could be making a profit, but it would be small. If it’s not making money, it would be worth book value, which is what you could buy all the equipment and inventory for. Investigate the profits, and don’t pay more than 4 or 5 times that. If it makes $10,000 a year, this is a reasonably good buy.
I don’t think she’s making money. I think you’re better to start small and build your own business. What I would do is make this lady an offer to buy the business; have an option to buy the business a year from now, and in the meantime your wife becomes the manager and operates the business for her for a percentage of the profits. Then get in there and run the business for a year and see if you can make money doing it. If you can, than your wife can pay cash at the end of the year for the business.