With increasing frequency buyers are hiring me to help them evaluate prospective businesses they are seriously considering purchasing. Sometimes, they identify opportunities by themselves and other times they correctly recognize that the business broker or intermediary who has listed the business is working for and being paid by the Seller and therefore only represents the interests of the seller.
More…Recently a prospective buyer, whom I will refer to as Mr. Jones hired me to help him evaluate a business opportunity involving a service franchise. He was considering buying a new franchise but a sale of an existing franchise became available on Rockville Pike in Montgomery County, Maryland. The franchisor put him in direct contact with the owner of the Rockville Pike store and the owner provided Mr. Jones with the necessary financial documents and even provided a sales contract from a previous failed deal to use as a template for a new deal.
Mr. Jones was quite excited by this opportunity but since it was a business he was unfamiliar with he approached me about providing an objective analysis of this business acquisition opportunity. When we met, I reviewed the lease and the last three years and the current year-to-date financials statements of the business.
I pointed out to Mr. Jones that although Rockville Pike is the most heavily traveled road through retail and commercial areas in the State of Maryland that particular portion of Rockville Pike was slightly north of the areas that are historically more likely to foster small business growth. This, I knew to be true from my past years of experience in retail and commercial leasing.
When reviewing the financial statements and after looking closely at the trend of the monthly sales over the past three years, I noticed a recent quarter where sales dropped precipitously. Mr. Jones to this point had only looked at the year-end figures and had not noticed the drop in revenue during this recent quarter. When I identified this alarming trend to Mr. Jones, we discussed this is some detail.
Turns out, the store manager had quit just prior to the drop in sales and Mr. Jones said he intended to be a hands-on owner/operator. Since the business had been absentee owned, Mr. Jones felt reasonably certain that his personality, managerial skills, and mathematics background would make all the difference and sales would not only return to their former levels but sales were likely to grow as well.
I suggested the more likely scenario was when the previous manager quit, the service contracts or implied contracts and many customer contacts left with him. In the interim, the primary remaining employee who performed the skilled work was acting as the store manager as well.
In our discussions, I pointed out to Mr. Jones, there was little likelihood of the previous lost business returning, he may be too beholding to the remaining employee, and the position of this store front on Rockville Pike was historically poor for small businesses. I felt the price Mr. Jones was offering appeared to be a good value for him based on the annual statements but in view of the recent drop in revenue I suggested he offer substantially less.
Mr. Jones was grateful for my analysis and left considerably more somber than when he arrived. Later in the day I received the following e-mail from him.
“Thank YOU! Our visit today was a real eye-opener for me, and I’m glad I met with you.
In order for our meeting to have taken place, two fortuitous things had to happen: My wife saw an article in Entrepreneur on-line on how to buy a business, and I happened to have come upon the concept of a business buyer broker in that article. That led me to look for such a person for us, and we’re glad we found you.
Based on what I found out today from you, we probably will not buy the existing business in Rockville, but rather start our own store elsewhere. Perhaps purchasing this store IS a great opportunity, but we’re too risk-averse at this point to try it.
We will certainly contact you if we have any other professional questions, and in any event will let you know what comes of our dealings with this franchise.
Thanks again for your help today.”