if the bottom line for a busines was $20,000, then the business
would be worth $200,000.
I hear what you’re saying and I’m not doubting its validity in
general but…
remember that a jewelry business is not a passive asset like real
estate(well, there’s an argument that says real estate is not an
asset but aliability but we’ll ignore that for the moment). The store
has to be worked which means someone has to do it(owner) plus service
the debt.
I used an online mortgage calculator and find that 200K for ten
years at 10% costs about $2,643 monthly which is $31,716 a year. If
the net profit of the business is 20K there’s a shortfall there. So
while the cap rate may say its good, maybe in reality its not so
good. The actual cost of the business would be $317K.
My point is that if one is buying a going concern with owner
financing, it should pay for itself from its own profits, because
debt service is now a bona fide business expense that wasn’t there
before. The business may have been free and clear but the instant a
deal is signed it has gone into huge debt.
But that debt really doesn’t build profits by itself, it just allows
the new owner into the game. How high a price is that? Owners/sellers
who structure deals for employees where the payments are more than
the business can legitimately handle are digging their own financial
graves. They may rub their hands and gloat that they’re getting a far
better price for the business but if the business collapses due to
being overburdened with debt the actual price received will be much
less than what’s on the contract.
Caveat…I’m no business maven, this was just from my experience
learned the hard way.
The more I think about this and reflect on the superb advice given
so far, the more I think the best advice may very well be to start on
your own, by yourself.
I would second Dave’s good advice. Although I did sell my shop about
three years ago. Prior to that I did have a few people talk to me
about selling it over the years and my reaction was always the same.
First, it would be less expensive for them to start their own
business from scratch, if they have the skills to do the work and run
a good business customers will usually come. Second, the value of my
business (and most small shops) was the people, not the name or the
equipment. So if you buy the business but don’t keep the talent,
you’re probably wasting your money. I ended up selling it to our
largest client who kept all of the employees (paid them all more and
improved their benefits) and he asked me to agree to a 5 years
employment contract. So he bought it but nothing changed from a
clients perspective, what was a successful shop still is.
But if you start your own thing from scratch, you will likely be as
successful as you would have been if you bought an existing
business…you will just have a lot more cash (or less debt).
Mark
I worked for a small shop for 8 years, 9 -5 in the back shop and a
weekly cheque. Learned SOME of the business
Then one day the owner proposed semi-retiring. He would be in the
back ground and keep a few favourite customers, and I would pay all
the expenses and cut him a cheque every week.
I ran so fast I was a mile away before my feet touched the ground.
Two different kinds of sales, I make rings and sell them, rather
different than making businesses and selling them. The first has
pretty obvious motives for the seller and buyer. The second scares
me…
Jeff
Demand Designs
Analog/Digital Modelling & Goldsmithing