“Do You Have a Formula When Considering a Business Purchase”?
Question: I’m considering several businesses for purchase. I know you prefer starting businesses from the ground up. But time is an issue for me, and I would rather buy. Do you have a formula when considering a business acquisition?
W.T. Golden Valley MN
Answer Marc Charles:
It’s true I prefer starting businesses from the ground up, or work them “on the side” until they become profitable.
But I also realize buying a business is a better fit for some entrepreneurs…considering the time, energy and sometimes money involved.
However, my objective is still the same…to make money not lose it.
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You can start most businesses “on the side” or part time for very little investment to get a feel for it….and learn the hidden “essence” or money making formula with very little downside risk.
The formula taught by the largest business schools for acquiring a business is typically three times net profit.
This means if you bought a restaurant with an annual net profit of $500,000, you would pay $1.5 million…..or three times the net profit.
Obviously I’m not a big fan of business school formulas, especially when it comes to buying a business.
I would never pay $1.5 million dollars for a restaurant with an annual net profit of $500,000. There are too many variables to go into the details here.
But the biggest question to ask is whether or not the restaurant will produce the same kind of numbers going forward — in the current environment. This is the #1 basis of my formula.
There’s a hot dog stand on the coast of Maine with annual sales of about $300,000.
The owner’s net profit is about $95,000 per year. If the owner listed his restaurant for sale using the “three times net profit” formula, it would be offered for $285,000. A purchase like this would make more sense to me because you would only have to shell out $285k to make $95k annually….and the chances of this restaurant surviving the current economy is much higher than a fancy “boutique” restaurant.
On top of that, this particular hot dog stand is always packed with customers and it only takes two or three people to run it.
I’m confident he’s taken business from the surrounding restaurants during the current economic downturn too.
I’m not big on buying someone else’s business, but there are exceptions.
I prefer starting businesses on a smaller scale from the ground up, with as little overhead and debt as possible….in a market emerging in a hot rising trend.
The “three times net profit” formula can be used a guide though…or for reference.
Formula Secret #2
Debt and overhead are business killers. Almost no one agrees with me but such is life.
When you launch a business and it’s already saddled with debt, not to mention overhead like inventory, equipment maintenance, vehicles, supplies, buildings,taxes, etc…..it sucks the life out of you.
I’ve been there and done that so I know what I’m talking about.
Granted, some people can handle the debt and overhead better than others.
My brother in law has a wildly successful restaurant equipment and refrigeration company and doesn’t have a care in the world….at least not on his face!
It’s true…if your business is wildly successful and generating a nice net profit, you can handle debt and overhead a little better. But if sales taper off, employees abandon ship or other problems creep in…then you’ve got problems.
Formula Secret #3
Can the business run on auto-pilot? In other words, do you have people in place who can run the business as good as or better than you?
Whenever I look at business acquisition (for myself or clients) auto-pilot is always a concern. I like the idea of businesses running smoothly without my assistance.
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I hope that helps!
Your humble host,
(Ed Note: Marc Charles is referred to as “The King of Business Opportunities”….and for good reason. He should be known as “The King of Legitimate Business Opportunities”…because he’s launched, bought, sold reviewed and advised on hundreds of businesses and money making opportunities. He understands legitimate opportunities. Marc has agreed supply League of Power members with crucial updates regarding legitimate business and money making opportunities.)
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Use the conventional “business school formula” of three times net as a general rule of thumb to evaluate prices.
Then, ask yourself if the business is in a rising trend and whether or not it could produce the same numbers going forward — in the current conditions (recession / depression).
Now ask yourself if it would be possible to start any of these businesses part time, or on the side, with less start up capital.
My general rule of thumb is most businesses for sale (90% +) are overvalued and overpriced.
Plus, in most cases (90%) businesses are unable to produce the same kind of numbers in the current environment.
Use the “three times net profit” as a guideline…nothing more. Use my other formula secrets for even better results.