It’s interesting, one of the major obstacles apparently standing between many people that I talk to and a few million dollars is the want of a ‘killer business idea’ … or, even ANY reasonable business idea.
But, that problem magically disappears when you wake up one day to find a spare few million in your bank account … people-with-ideas seem to just spring out of the woodwork.
You know how you can never seem to find a cab when you need one? 😉
Well, it’s been nearly a year since I’ve found myself with both a lot of spare change and nothing of substance to occupy me during the daylight hours …
… a little less than one year and I have:
– Three blogs,
– Three Web 2.0 internet businesses under various stages of development
– A Fourth one under negotiation to buy into
– And, just yesterday a new business opportunity was presented to me.
This last one is interesting because it is a ‘bricks and mortar’ business (with an internet sales site as an adjunct):
It’s interesting because a friend of mine is the finance director and has spent the last two years of our time together complaining about the excesses of his boss, the entrepreneur/owner/founder …
… without giving away too much, the guy developed a business around an innovative niche product with a strong brand name that was even featured on Oprah (as one of her ‘favorite products’), resulting in a business generating $2 million to $3 million profit per year in the USA and overseas.
Yet, through excess (taking all the profits out of the business), divorce, and mismanagement this company is now barely breaking even in the face of declining sales. From what I can see, even though the product is no longer unique, the reason for the sales drop is the management of the company rather than product or market issues.
So, I have an indication that the owner of the business will sell for:
– $400k up front cash, plus
– $350k to pay off a personal loan, plus
– $150k to $200k per year for the next four year (sort of a ‘deferred payment’).
By my reckoning, this is $1.55 million …
Now, here is where it gets interesting:
– The business has an excess of money owed to it (accounts receivable) LESS amount owed by it (accounts payable) of about $200k, and
– Inventory worth $800k+
Provided that the receivables can be collected (my friend, the CFO assures me that it can) and that the inventory can be sold close to book value (he assures me it can), I am essentially buying the ‘goodwill’ of the brand-name + suppliers in place + distribution network in place + staff in place for a globally recognized niche brand for a little over $500,000.00
So, there’s two ways to look at this:
– A brand in decline, so the owner is selling out while he can still salvage some value, or
– A ‘vulture’ opportunity to buy a no-worse-than-break-even business + established international brand (endorsed by Oprah, no less!) for only $500k.
What to do? What to do? Hmmmmm ….
I’d love to hear your ideas!
Hey, aren’t you suppose to be retired!! lol 😉
I think I remember you saying you don’t like partnerships but you could buy it with your friend and have him run it day-to-day. If he can still assure you of those numbers when he has skin in the game then it’s a smart in my opinion.
@ Scott – EXACTLY what I was thinking! Yet, I was hoping to make it more of a hobby than an obsession …. albeit, a bloody expensive hobby 😉
Yeah, I know what you mean, that’s how I feel about my practice too. It will be hard to let go completely.
@ Brandon – Yes, the idea of running hands-off is appealing, but the idea of partners isn’t … it’s a conflict that needs resolution in order to move ahead!
A brand in decline. Not a bad thing if your the one who can turn it around . With the right marketing , a committed few employees, and a few new idea to breath fresh air into it, it might be something more than its appears. But , it will take a bit of looking into.Then again, is it something your heart is really into?
Do you believe in the product or service? Do yo understand it? Lots of things to consider.
I have recently (in the past 13 months) purchased 2 companies of this size. One is doing very well. The other had many “skeletons in the closet” and is struggling.
My projections for this 2nd company was a small but reasonable positive cash flow but has only lost money since I acquired it in December. After putting a lot more money (and time!!!) into it, it is now at the point that it is basically breaking even.
I view the purchase (and valuation) of companies like real estate…. based on cash flow. Even though my projections and due diligence suggested otherwise, I spent a lot of money on a company with no (or worse…negative!!) cash flow. Positive cash flow –> less risk.
I accept this as an investment risk and I am in the process of turning this around but it is taking up a lot more of my time that I would prefer.
Having said that, I don’t think that I would ever voluntarily purchase a zero-cash flow company. If I did, it would only be because I thought that it had EXCEPTIONALLY high potential for growth.
If I really felt that I had to purchase this company. I would reduce my risk by tying the future performance (positive and negative) of the business with the current owners “deferred payments”. Should the business not perform well or some of the receivables are not collectible then the “deferred payments” should be reduced. To be fair, if you are able to turn the company around the “deferred payments” should be higher… I would consider that an acceptable price for reduced risk.
Finally, my personal conclusion based on the limited information provided…PASS, keep looking for other opportunities.
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