moose/? for you

i have been looking at a business for a while. i am the manager now. owner is looking to sell sometime soon. my ? is. ya it a loaded ? but here goes,
how much net profit$ each year does it take to be a good investment at a initial cost of purchase of say $500,000. and does 1.5mill. per year in sales.
and does a revolving cash flow really help that much? thanks for any help|oo

I'm not sure of your Question. I will say that I don't know much about Business's. I am a partner in an Engineering firm so I am learning alot but I'm new to it....I have a couple rentals and I won't even claim to know much about them

There is a couple guys on here that could analize a bizz for ya though. As far as cashflow, that is Everything. If you don't cashflow, you'll have to borrow money. Then you are paying intreest waiting to get money in.

Whats the Buisness ? Is it taxidermy ? I ask becasue it could depend on the type of buisness if it is worth it. If someone likes the business because of the current owner and they sell, you could loose all the clients. Soemthing to think about.

1.5 Mill seems like alot but that doesn't mean much. If you are having to buy 100k of merch. each month and paying sales people Etc. You are puching 1.5 mill through a company and still losing money. You have to remember it's what you make that is important. If you only make 50k off of the 1.5 mill goin gthrogh the biz then you'd be better off just worknig for the company and not taking on the risk.

Gross sales is great but net cash flow is what counts. Net cash flow is profit plus interest plus depreciation plus owners comp. Figure out what the cash flow of the business is and relate it back to the purchase price. What are you getting for the price? Hard assets that can be re-sold or "goodwill" that in an intangible asset? Revolving cash flow? Not sure what you mean. There is no "magic number" to make it a good deal. For $500k I would make damn sure I understood the cash flow, asset value, replacement price, ease of entry into the market, competetive factors, etc.

o.k.

i am going to have to spill the beans.
the business is a grocery store in a small town. the owner lives in cali. most of the time. the rest of the time in montana. as far as people supporting the store for him, mmm, no most of them think i already own it. with the price i would get everything, $130,000 in inventory, lot building all fixtures. i do know that the registers need to replaced in a few years. they are outdated. new ones are around $40,000.
the cash flow, i deposit average of $4000.00 daily. now the owner charges me rent on the place of 48,500. per year. and ofcoarse there is labor, cost of goods.
the spread between the sales and the cost of goods last year was, $400,000. now take out the utilities. and labor taxes, all those. net was around $50,000+-.
never see the real amount, the accountant hides lots of funds. and i also make a living from the place, my wife also gets about 10,000 per year. so it is in my best interest to own, when he sales. he owned 7 stores at one time. now this is the only store he has. i am really looking to offer him a deal on it.
i was thinking of a lease option, i purchase the inventory,and $50,000 per year for 5 years, at that time having a balloon payment left. say 50% of the lease goes toward the purchase price. so in the end of 5 years i would have option to buy out right at 375,000. or i could sell him back inventory, or sell it out. if everything works out i would have around $200,000 saved at the end of the lease. to purchase or not?
any thoughts?
p.s. i have bought a business before and lost everything i owned, so a little concerned.

The owner charges you $48,500 rent? This must be paid to his real estate holding company. Based on your numbers, the owner is taking approximately $100k out of the business. Add back your salary and that would be approximately what you can take out before taxes. I'd ask to see the tax returns or the CPA prepared (not compiled) statements for the last three years to make sure.

Why wait. If the deal makes sense, try to negotiate a seller's note. Instead of paying $125k for a lease over five years, put it towards the purchase price.

Who gets the $50,000 net profit-you or the current owner? If the owner would accept what is basically the rent you have been paying him and apply some to principle it sounds like a decent deal. Do you think the value of the inventory, real estate and fixtures is $500,000?

If the owner is taking $50k profit plus $48k rent then cash him out. If the only add'l income you get by owning the deal is the rent then the owner carry sounds better (its a tighter deal).

Good luck.

Pretty hard for an outsider looking in to analize a complicated deal like that without a whole bunch more knowledge, facts and figures. I would suggest you spend a few of your own dollars with a good accountant analyzing the deal.

I will say this. A business is an investment, and it is a very risky investment compared to throwing money into normal passive investment tools such as CD's, mutual funds or the likes. As you are aware, you can lose it all.

That said, you should get a much higher return from purchasing this business than you would expect from those other investments. I'd think you should shoot for at least 15% annual return after paying all expenses, a fair market salary for yourself and staff, etc.

Now .... Do I think you can expect to make returns like that the first year or so .... probably not, as ownership will be new to you. A small profit or even breaking even might be realistic for the first year or two's projections.

A few of the biggest mistakes I see self employed people making, include:
a. Trying to do everything themself. For instance ... Don't be stocking shelves or cutting meat, when you ought to be sending out bills, paying bills, promoting your business, etc.
b. Robbing the business of all the cash. You should pay yourself a fair market salary for the job you perform within the business. If a typical grocery manager makes $50K, then you can't pay yourself a salary of $100K and drive a company Cadillac. At the end of the quarter or year, when you know exactly where you stand financially, you can take a portion of the profits. Don't take it all, share some with key personnel, leave some for hard times, growth, etc.
c. Using ownership as an excuse to be a goof off. If you are on the golf course every day, take off early all the time, and generally d!ck off ... don't expect your employees to do a great job. Lead by example and set up a structured plan to take some "scheduled" vacation days off.

Good luck on the deal.
Hard to beat self employment.

rent

he owns the company that owns the building. the store (he owns) pays rent to the company that owns the building(he owns). he is paying himself rent.


and i see the PNL statement every year. i also tract everything on my computer at work. on his pnl it shows a 1% of sales going to a "office charge". i ask whats this?? he replied a charge of !% of sales that goes into a "holding" account. that way if we have a compressor go bad or a case loose free-on then we have the $ to fix it. O.K. WHERE'S THAT $16,000. GO AT THE END OF THE YEAR WHEN WE HAD NO BREAK DOWNS? his anwser is it's still there. but then at the end of the year it should be put back into the bottom line right?


as far as worth the money, yes i believe so, the building and lot was appraised 2 years ago in march. it came back at 350,000. the property value has had to come up since then, as has all this area of wyoming.

as i see it, he gets 48,500 rent, +-50,000 profit, and 16,500 for the 1% sales that gets lost? thats =115,000 per year.
then add my 36,000 per year, i think i would be doing alright.
not sure if i could buy it straight out. not made of money, so the lease is the only way i can see it working for me.? thanks guys

Speedy:

Stieny is correct. This is a tricky proposition. You need good reliable numbers to make the correct decision. I am a CPA and have helped hundreds of clients buy and sell businesses.

I have a couple of concerns from what you have listed above.

Why is the owner selling?

Are the assets really worth what he is saying? I find it hard to see a seller allowing $350K of real estate, $130K of inventory, and a profitable business to be sold for $500K. That puts a value on fixtures and goodwill to be $20K.

Is he asking you to take on the accounts payable? Retail stores, especially grocery stores, usually operate on lower margins with higher inventory turnover. This results in a decent amount of accounts payable at any time. I assume the amount of invetory he is selling, is net of any payables?

If the real estate is worth $350K, and you will pay $48,500 per year rent, let me know if you are not going to buy it, as I will. Seriously, if that is the true value of the real estate, buy that in a separate LLC. Pay yourself the $48,500 of rent and you will own the building soon.

Is the seller willing to carry a contract? If he was my client, the answer would be "No." In fact, it would be "Hell No." Most sellers will not carry a contract on a business sale. But, if he is willing to carry a contract, that is a good sign, as he sees little risk that you would not be able to service your debt to him.

If you buy, allocate more of your purchase price to inventory, fixtures, and goodwill. You can deduct/depreciate those items much faster than buildings and land is non-depreciable.

You would know if the inventory is "good." I assume the $130K is valued at cost.

This is a bad time of year for me, but if you send me a PM with your contact information, I could give you a half hour of time to point out any glaring problems and provide some additional thoughts. No cost to you. Just seen too many folks jump into the deep end of the pool only to find there were sharp rocks just below the surface.

At a minimum, you need the last three year's 1) tax returns, 2) income statements, 3)balance sheets, and 4)cash flow statements, if such are available. A list of equipment and other depreciable assets is also needed.

Do you know if the owner is putting any money in his pocket that is not hitting the tax return or financial statements? Not that you care, but it gives you further comfort. If the business can make it on what was reported on the tax returns and that is not all the cash flow, you should have some extra cushion.

You will want to purchase this business as an asset purchase, not a stock purchase (if the current owner operates as a C or S corporation).

You may want two entities. One being an LLC to hold the land and taxed as a partnership (more favorable tax rules for real estate) and the other being an S corporation to hold and operate the business (better self-employment tax savings for a trade or business activity).

Not to self-promote my profession, but if you are going to do this, get yourself connected with a good local CPA who knows retail businesses. They are expensive, but they will save you more than they cost you.

If it is a good business, it will be the best money you ever spent. If not, it can be a disaster. If you have been running the business for many years, you are the best buyer the seller could have.

Good luck!

seller

the business is not listed nor is it even in descution as of now. i talk with the owner about 10 times per year. in the past he has told me he isn't going to own this place for ever. he has asked "how would you like to own it" my answer yes ofcoarse i am not here because of the paycheck. i want to own this place.
as i see in a couple reply's store managers average wage is $50,000. per year, well i make 36,000. i am pleased with that for now.


STIENY, a grocery store doesn't make that much, most of them make it on a 5-7% net. to make 15% i would have to charge $9.00 for a gallon of milk! see it would not work. other that, i greatly respect your reply, thanks


o.k. some ? the owner is in his late 60's he doesn't want to pass-on with the business for his daughters to deal with it. he has sold a store last year, so it is only time. mmm, the price, it is not set, but my distibuter has thrown that # out. 1 thing to really look at is this was a business that did not profit for a couple years before i took manager job. it is doing very well as of now.
that inventory # is what our total $ of inventory in the store is.
as far as contract, i was told if i was to pay for the inventory up front he would carry. thats all that was said.
i am very interested, just not sure on all the details? thanks

Seems like a no brainer to me. You have the experience to run the store and the store will produce approximatley $100M in cash flow before taxes.

Do you have the funds for the downpayment? It sounds like $130M for the inventory. I'd imagine that's your biggest stumbling block.

SpGoat....

BigFin made you an incredible offer to spare you 30 minutes during his Tax Time to talk you thru this. You should be all over that genrous offer.

As for the 15% return that Steiny was suggesting, that was not the Profit Margin, but that was the Return on Investment. A Return on Investment (ROI) is different than "mark-up" on retail product.

If you invest $500k, Steiny thinks you should make $75k in "return" each year. That seems reasonable.

IF you borrow the $130k for Inventory, you likely have $1k per month in interest on your inventory.

If you borrow the $350k for the Land, you have $2k per month in interest on your land/building.

So, you need $36k per year in "margin" to cover your loan(s).

Then, you want $36k per year for your salary.

And your wife wants $10k per year.

Is there $82k after you pay for your inventory purchases, utilities, depreciation, taxes, wages, insurance, etc???

IF there is more than $82k, that is the amount that would go toward the prinicpal on your real estate loan.

wow

JoseCuervo said:

SpGoat....

BigFin made you an incredible offer to spare you 30 minutes during his Tax Time to talk you thru this. You should be all over that genrous offer.

As for the 15% return that Steiny was suggesting, that was not the Profit Margin, but that was the Return on Investment. A Return on Investment (ROI) is different than "mark-up" on retail product.

If you invest $500k, Steiny thinks you should make $75k in "return" each year. That seems reasonable.

IF you borrow the $130k for Inventory, you likely have $1k per month in interest on your inventory.

If you borrow the $350k for the Land, you have $2k per month in interest on your land/building.

So, you need $36k per year in "margin" to cover your loan(s).

Then, you want $36k per year for your salary.

And your wife wants $10k per year.

Is there $82k after you pay for your inventory purchases, utilities, depreciation, taxes, wages, insurance, etc???

IF there is more than $82k, that is the amount that would go toward the prinicpal on your real estate loan.

Click to expand...

thanks that summed it up very easy for me! thanks
ya i am going to p.m. bigfin, that would be the best chance to a head start on this!
thanks again

lets put some # down

JoseCuervo said:

SpGoat....

BigFin made you an incredible offer to spare you 30 minutes during his Tax Time to talk you thru this. You should be all over that genrous offer.

As for the 15% return that Steiny was suggesting, that was not the Profit Margin, but that was the Return on Investment. A Return on Investment (ROI) is different than "mark-up" on retail product.

If you invest $500k, Steiny thinks you should make $75k in "return" each year. That seems reasonable.

IF you borrow the $130k for Inventory, you likely have $1k per month in interest on your inventory.

If you borrow the $350k for the Land, you have $2k per month in interest on your land/building.

So, you need $36k per year in "margin" to cover your loan(s).

Then, you want $36k per year for your salary.

And your wife wants $10k per year.

Is there $82k after you pay for your inventory purchases, utilities, depreciation, taxes, wages, insurance, etc???

IF there is more than $82k, that is the amount that would go toward the prinicpal on your real estate loan.

Click to expand...

o.k.
loan, 36k per year to cover, well rent is now 48,500k per year. so i would say yes it would be able to cover that.

my salary and wife's at 46,000k per year, is already coming out of the labor expense, so it is a new cost.



so to sum it up,
cost as of now 48500k rent
profit now +- 50,000k this is net after everything has been paid
1% of sales that disappers 16500k
that equal 115,000k per year

if i purchase cost
payments %36,000k
+ principal ? 3000k month 12 years?
total = 72,000 per year
when i put # to it, it looks good, 10 years or so building would be paid for, then that 70,000k a year could be re invested.

thanks for the idea's