Don't Overpay For This Business

Julie and her husband have a chance to buy a small business at a great price. They would have to borrow to purchase it. When she tells Dave the price, he thinks she can work a better deal than that.

QUESTION: Julie in California and her husband have a chance to buy a small business at a great price. They don’t own a home and have $10,000 in debt with no savings. They would have to borrow to purchase it. Julie would run it. When she tells Dave the price, he thinks she can work a better deal than that.

ANSWER: Her business is worth what she can turn the key on it and sell her stuff off for. It’s called book value. It sounds like her inventory is perishable inventory in the flower business. I’m not sure this is a bargain at $8,000. If you added all this stuff up and put it up for sale used at a garage sale—a liquidation sale, going-out-of-business sale—I’m still not sure it’s going to bring $8,000. I haven’t heard anything on this inventory list that does that unless there’s a whole bunch of pots in there or something. All of the things in the shop don’t have value except what somebody will pay for them today in a used, as-is condition or except to the extent they’re used to make a profit, and she doesn’t make a profit. You can take all of this and go make a profit, and that is exciting. It’s not $8,000 exciting while you’re $10,000 in debt.

Let’s think about how we can do this dream a different way so it doesn’t turn into a nightmare. You’re getting excited, and you’re about to overpay for this. I would offer her $5,000 of your profits for the first year. If you can go in there and turn this around and make a profit, you’ll give her the first $5,000 out of the profits. Be willing to let her see the certified books to that. Go to $6,000 if you want. That’s fine. Don’t go into debt to do it, and you’re not in debt to her if this stuff doesn’t work. If it makes no profit, you owe her nothing. The first $5,000 of profit it makes in the first year—or $6,000—she gets paid out of that. Otherwise, she gets nothing because she’s got nothing. She doesn’t have anything.

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