Business Opportunity - Good or Bad

[Prisha Acquesta]

Hi All,

I am a newbie to business (been a RE investor for a while) and need advice from folks on this forum.

I am currently in a dead end but decent paying job that I desperately wish to leave.

I am evaluating a business opportunity where the seller is willing to sell his business (no assets, no real estate, only opportunity cost) for $560K. He is willing to finance 300K over a term of 5 years. I will be paying the remaining 260K as down payment. The business currently nets 150-160K (after all expenses) annually and is estimated to do the same over the next years. The business does NOT really have potential to make significantly more than what it is currently makes.

I am looking for advice from existing business owners on whether or not this is a good opportunity. My dilemmna especially comes from the fact that per current calculation , it will take me 3-4 years to break even (i.e to get my initial investment back and pay off the seller’s loan).

Greatly appreciate any insights , suggestions and guidance you all can share.

Thanks,

Prisha

[Brian Schmelzlen]

We need a lot more information, but just based on the numbers it doesn't look like a good deal to me.

I don't like that there isn't any room to grow the business.  You still have downside risk (there is no guarantee that the business will continue to generate 150-160k per year after expenses), and you said that there is no real upside potential since it cannot make more than it currently does.

I also don't like the cash flow.  Optimistically you make 160,000, and pay taxes on it.  I am going to assume a 40% combined federal and state tax rate just for simplicity.  That means you are paying $64,000 in taxes.  Then you are paying the seller $60,000 per year plus interest.  That leaves you $36,000 per year IF you hit the top of the range of what you expect the business to produce.  For all of the hours that you would need to put into operating a business, that is a horrible return for a business that you don't expect to grow.

Finally, I don't like how much you are paying the seller upfront.  The seller is getting nearly 2x what he/she gets from a year's profit upfront, which doesn't give the seller a lot of incentive to help with the transition.