bodypainter

Especially a business you don't know much about.

I'm looking for a job for my wife. Instead of her getting yet another job working for the man for $10/hr I would love to invest in a small business and install her running the thing. We've looked at a couple bars/pubs in the area and now we're looking at a gas station/convenience store.

What I don't know is what I don't know. I know how much they want for the business, I know how much the rent is, I know what the owner claims to clear each year (although I haven't looked at his books or tax returns yet). But we haven't been to the bank yet and know nothing about financing.

I'm thinking we may have an advantage if she goes for a loan for a female owned business. I seem to recall there being special loan guarantees and such for minority and/or female owned businesses.

I am planning to keep my job. That way she can stay on my insurance and we have that steady paycheck coming in. But if anything ever happened to my job it would sure be nice to have a "Plan B" to fall back on.

So, any business experience on the board here? I would love to hear from you if so. I'm not scared to take a risk but it makes me pause to think about investing as much as my house is worth and then paying $8000 a month rent and so on. Unlike almost everything else I've wanted to learn about I've found very few resources on the web for newbie business owners. TIA.

gar1976

Cash flow is king. A few warnings:

Restaurants have a HUGE failure rate, especially with no experience in it. Have her take a job as an assistant manager for a while, or keep the current manager on to run the place until she gets the hang of it.

Also, with retaurants, the income on the tax return is vastly understated, in order to avoid paying taxes and stay in business (yes, the margins are that tight). Anywhere from 20% to a "legit" restaurant to 50% for the more aggressive ones.

Which leads to.....

How much to pay. Typically, business are worth 5 times the EBITDA (earnings before interest, taxes, and depreciaton/amortization). If the restaurant owner tells you that "wink wink, we don't report all income" that leads to some issues. One - how much is he not reporting? You'll never know for sure, and you could be getting seriously screwed over. and two - if the employees catch you turning off the till and pocketing money, it won't be long before they do it.

Gas stations are very tight as well. Some inside info for y'all - when gas prices go up, the margins cleared by the stations declines, as they are slow to pass on price increases (although it might not seem like it). And when the gas prices go down, the margins typically increase as they are slow to pass on price drops as well. You really need a few of these to make good money with economy of scale. Typical margins on retail petroleum range from 10 - 17%. Most of the profit is made on the retail stores themselves, from the beer/smokes sales and other sundry goods.

Last pointer - get everything in WRITING, no matter how trivial or how charming the seller might be. Have it signed by both parties, and both parties keep a copy.

You'll need three good professionals - an attorney, accountant, and IT person.

Good luck, make sure you keep us posted on how it goes.

onetime2

Alot of good advice above but I do disagree with what the typical multiplier is for EBITDA. It's going to vary (sometimes significantly) by industry and you need to adjust it based on the individual case you're in.

Some things you need to understand:

Current liabilities of the business- the obvious ones are debt for land, buildings, equipment, etc and whether they will be paid off in the transaction or you need to assume them. The not so obvious ones are debts to distributors or suppliers and the current business owner's standing with them. I know people who have bought bars only to learn the last owner was screwing over the liquor supplier and the supplier would only make deliveries COD even after the new owners took over. It took them more than a year to build any ability to pay by invoice (invoicing generally allows you some time to pay the bill usually net 30 or 45 meaning that's when the payment needs to get to the supplier).

Hazards-gas stations are notorious for pollution. A leaking tank (whether it leads now or it leaked 40 years ago) is a huge environmental hazard to you. It could easily kill any chance at profitability.

Corporations, LLC's, etc- you need to figure out how you will incorporate the business to protect your personal assets. LLCs typically give you less protection than a full incorporation but cost less to execute but they offer more protection than being unincorporated at all.

Personally, I would look at your general area's needs rather than looking from a business type persepective. What is lacking in the area you're looking to own a business? What's growing? Do the industries that are growing need certain types of support that's lacking right now? (copy centers, archiving, storage, etc?)

A close friend had outstanding luck with purchasing a flower shop. Relatively little in the way of start up costs, no franchising fees, a little money to sign up with the FTD type services, rent for a little space, and a delivery van or two. It turned out really well for him.

The SBA (small business administration) is an excellent starting point. They offer excellent resources (including help from local retired business owners and executives who volunteer their time to help people just starting out).

Good luck and please let us know how it turns out.

__________________
Strive to be more curious than ignorant.

gar1976

Good point on the pollution, meant to bring that up. If the land is polluted, DO NOT PURCHASE IT. Lease it from the current owner.

bodypainter

I probably won't be purchasing any land or buildings no matter what we do. In the case of this store we're looking at I'm sure the land would drive the price into the millions.

The main criteria I have for the business, whatever it is, is that it can be operated most of the time by a single person. Hence a bar or small convenience store. We want to keep it simple as possible at first and part of that is keeping the number of employees down.

Good point on current liabilities. I will have to ponder and research how to best know what you're really getting into in that regard.

I believe I can handle the paperwork for incorporating and probably be our accountant too. I've dealt with that kind of stuff before.

As for what our area needs, I'm at a total loss. I'm a horrible consumer and just don't pay that much attention to trends and stuff.

Anyway, it's nice to have a dialog started about it. We are going to do *something*, just not sure what quite yet. I'll be sure to post with details and progress reports.

Arroe

what type of area is it? urban? suburban? middle of nowhere?

I always thought it would be cool to own a music/guitar store. sell records, guitars, rent out instruments like trumpets and saxaphones and stuff to local schools, and have a few instructors to teach at your store. depending on where you live, it seems that could work out pretty well. location is key though.

gar1976

Not quite accurate about the definition of current liabiliites. Some accounting 101 for our business buying friend here:

Liabilities - money you owe someone, give or take.

Current liabiliites - liabilities that are due to be paid within 12 months of the date of the financial statements.

Noncurrent liabilities - laibilities due more than 12 months out.

Now, usually when you purchase buildings/cars/equipment, etc., you enter into a note payable, with periodic payments, like your mortgage. Some of your payment will be interest, and some will pay down the debt (principal reduction). Whatever portion of the long-term debt that will be payed down by these periodic payments within the next 12 months will be classified as current (usually depicted as "current portion of long term debt" on the current asset portion of the balance sheet). The rest of the debt will be classified as non-current.

If you do assume a lease, though, you will need to know when the lease payments are due (what day of the month, crucial if you have a long collection period on your receivables - which is not likely for gas station/bars) and how much, to plan your cash flow. Also, how are you going to buy out the current owner? You're more than likely going to need to borrow against the company to pay him off, which will add more debt payments to your business.

And as far as incorporating, be careful if you do it yourself.

onetime2

My statement of "current liabilities" was not meant in the accounting sense but the general sense. There are certain liabilities with any business that go beyond accounting. Bad reputations with customers, suppliers, employees, neighbors, etc can all be substantial difficulties to overcome. That's all I was trying to point out.

__________________
Strive to be more curious than ignorant.

gar1976

I can't believe I spaced on this one, huge point -

If you're buying an existing business, try to buy only the assets and assume any leases. Leave the liabilities and the stock to the current owners, and adjust the difference through the purchase price.

Reason being - if you buy the stock/equity of a business, you also assume any liabilities, be it stated or not. Which means you're on the hook for anything the previous owners did but did not disclose. You might be able to come back and sue them, but that's a large risk to take.

Rodney

I would look at a business that was more service-oriented than straight retail, although a flower shop, which somebody mentioned above, is a nice business that involves both sales _and_ service. Service businesses usually don't require serious evening hours. You might consider some kind of rental business -- tool rental, costume rental and costume supplies, hell even a salon offering custom body painting and classes (I checked out your web page).

Or, if your wife is into a craft like beading or knitting or something, open a bead or knit shop (or whatever kind of craft) and offer classes as well. I know that such businesses sound marginal, but I know some local businesses based on hobbies or crafts that are doing quite well, and the people running them are doing things that they love.

If you're absolutely new to business, you might also look at businesses that can be operated by a single person, at least at first. Your wife could avoid the whole management/worker's comp/payroll withholding thing until she's more grown into the business.