I see the ruins of a failed small business multiples times a year when either the seller or buyer is in my office looking for help picking up the pieces. The common characteristics are seller financing, few hard assets (ie – no real estate), and a business driven by the personal labor of the owner. These are the hair salons, diners, cleaners, and small retail shops of the world. After time, buyers seek a way out or simply quit paying.
The mistake these buyers make is that they essentially buy a job. They end up working full time in the business to hopefully make what they made in their old job before they bought the business. Add on the monthly payment to the seller and the buyer falls further and further behind until the inevitable failure occurs.
Prospective purchasers need to evaluate a business by comparing the money to be made as a business owner versus how much can be made working a full time job. I think you need to be able to generate at least enough income out of the business in addition to the full time salary equivalent that will allow the business purchase payment to be made. Even then, it is taking a significant risk in order to simply break even.
Purchasers also need to consider how much it would cost to open the same business as they are purchasing. I understand that starting a whole new business is scary – I did it, and I get it. But, if a purchaser thinks about the premium being paid for an existing business, and thinks about how long it should reasonably take to start being profitable in a new business, it often makes more sense to start anew. Rarely is a hair salon with $15,000 worth of equipment in a rented building worth a six figure purchase price.
Midland Michigan business, real estate, construction and commercial lawyer W. Jay Brown provides experienced representation of businesses and individuals throughout Mid- Michigan. Brown Law PLC – 414 Townsend, Suite 201 – Midland Michigan 48640 – (989) 486-3676 – brown@brownlawplc.com – www.brownlawplc.com
Disclaimer: The foregoing is not intended to be specific legal advice on any particular set of facts or circumstances nor to establish any attorney-client relationship. Such materials are for informational purposes only. You need to contact a lawyer licensed in your jurisdiction for advice on specific legal issues or problems.