• Last Updated:
  • Feb 8th, 2020 5:52 am
[OP]
Newbie
Mar 21, 2006
74 posts
2 upvotes
Toronto

Advice On Purchasing A Business

My wife and I have been presented with an opportunity to purchase an existing small business. The business is a retail store, in a small town in Ontario, selling products related to a specific hobby. The hobby is something that my wife has been enjoying for roughly 5 years. I do not share the same interest in the hobby however believe that I would enjoy being part of the "backend" of a small business.

Neither of us has any experience in operating a small business however my wife has worked retail in the past. She is a people person and believes that working in the store would be enjoyable.

We have only had an initial discussion with the current owners however we have a follow-up meeting scheduled and we were hoping for some guidance to ensure that we ask the right questions. What we know so far is:
- Inventory (wholesale cost) of $130,000
- Margin of 40%
- Revenue is unknown
- Profit of $47,000 (last year)
- The business is 2 years old and being sold for family health reasons
- Asking price $100,000 which includes everything in the store, all contacts, and the name of the business

The current owners staffed the business themselves and did not take any money out of the business so the profit of $47,000 does not reflect paying them any salary (8 hours a day, 5 days a week).

During our next meeting we have expressed an intent to go over all of the finances of the business. The current owners are open to sharing revenue and expenses with us however seem hesitant to share details on their inventory purchases. This makes me nervous because I think that profit can easily be artificially inflated by not restocking sold inventory however I wonder if there is some kind of "informal" standard that is used when a potential buyer vets the purchase of a business?

Would anyone have any advice or opinions they can provide? Any "gotchas" that you can pass on that you wish you had known prior to buying a business? Thoughts on the valuation of the business based on the info?
6 replies
Deal Addict
Aug 28, 2007
1868 posts
260 upvotes
Calgary
I would not proceed with this "opportunity".

Firstly, the business is only two years old, so it has no meaningful track record. Even if their financial accounting was immaculate you'd be buying this on hope and a prayer.

Secondly, we know their financial record-keeping is not immaculate, when they say "unknown revenue" but claim $47K in profit.... that is outright fabrication. You can't know profit without clear knowledge of revenue and expenses.

Thirdly, inventory is notorious... it's still inventory because nobody wants to buy it. In other words, worthless should be discounted by 90%. There is no mention of anything else this business has that would justify the price tag.

A key line in any purchase "Opportunities are like streetcars; there is always another one coming along." Don't be forced into a rush to buy anything. You have the money so you are in the driver's seat.

And if your spouse's passion is overpowering you, be sure to take this yo your accountant for a third party opinion.
Deal Expert
Aug 2, 2004
31338 posts
5544 upvotes
East Gwillimbury
@dealpig

Run as far as you can from this "opportunity"

A profit of 47,000$ and they don't draw a salary?

You can find a job that pays 50,000$ without you investing 100,000$
[OP]
Newbie
Mar 21, 2006
74 posts
2 upvotes
Toronto
@Just Confused

Thanks very much for the thoughtful and detailed response. We did have a meeting with the owners and while we did receive more details on their financials they still did not understand why we would need a complete picture.

We put what we received into a spreadsheet and tried to estimate the unknowns. Even with the best case scenario, we still were unable to even come close to making it work.

Thank you for breaking down your thought process. I have never heard of inventory described the way you did but I'll remember that (accurate) perspective forever.

We'll continue waiting for the right streetcar to come along. Slightly Smiling Face
Last edited by dealpig on Feb 2nd, 2020 8:05 pm, edited 1 time in total.
Sr. Member
Jun 21, 2006
710 posts
231 upvotes
With 100k you can probably start your own business and buy your own inventory. Now a day it's easy to contact any supplier and tell them you will buy 10-20k and they would be happy to do business with you. Instead of getting suck with someone else's problem
[OP]
Newbie
Mar 21, 2006
74 posts
2 upvotes
Toronto
@Gee

Thanks for your perspective. What you've said is exactly true. We had considered that and we were hopeful that we could figure out some way to make it grow and reap the benefits but after getting more info it's not for us.
Deal Addict
User avatar
Aug 15, 2015
1568 posts
194 upvotes
Markham, ON
dealpig wrote: My wife and I have been presented with an opportunity to purchase an existing small business. The business is a retail store, in a small town in Ontario, selling products related to a specific hobby. The hobby is something that my wife has been enjoying for roughly 5 years. I do not share the same interest in the hobby however believe that I would enjoy being part of the "backend" of a small business.

Neither of us has any experience in operating a small business however my wife has worked retail in the past. She is a people person and believes that working in the store would be enjoyable.

We have only had an initial discussion with the current owners however we have a follow-up meeting scheduled and we were hoping for some guidance to ensure that we ask the right questions. What we know so far is:
- Inventory (wholesale cost) of $130,000
- Margin of 40%
- Revenue is unknown
- Profit of $47,000 (last year)
- The business is 2 years old and being sold for family health reasons
- Asking price $100,000 which includes everything in the store, all contacts, and the name of the business

The current owners staffed the business themselves and did not take any money out of the business so the profit of $47,000 does not reflect paying them any salary (8 hours a day, 5 days a week).

During our next meeting we have expressed an intent to go over all of the finances of the business. The current owners are open to sharing revenue and expenses with us however seem hesitant to share details on their inventory purchases. This makes me nervous because I think that profit can easily be artificially inflated by not restocking sold inventory however I wonder if there is some kind of "informal" standard that is used when a potential buyer vets the purchase of a business?

Would anyone have any advice or opinions they can provide? Any "gotchas" that you can pass on that you wish you had known prior to buying a business? Thoughts on the valuation of the business based on the info?
It's your wife's hobby. Is all the inventory there worth 100k after you deduct every liability? This stuff you speak of is it going to increase in value with time?

You can always buy the business, close it down and put everything into storage.

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