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#1 2013-05-13 13:33:02

Bargain Hunter
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From: Sydney, Australia
Registered: 2010-07-12
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Buying a small business run 'under management'

Hi, I just wanted to get people's thoughts on purchasing a small business run 'under management'.

For example lets say a large coffee shop which has a manager running it, with the owner just visiting now and then to make sure things are running smoothly. Let's say the business makes $150,000 profit (under management, with an owner operator would be higher) and is being sold (either through gumtree or a business brokers website) for $400,000. Would this kind of business be a good investment for a relatively passive investor (i.e. keep the management in place)? One often wonders if the business is almost fully run by management and not the owner why would they be selling the business? Especially given that small business tends to sell on low price to earnings ratios.

One suspects a lot of lies and figure fudging occur in small business sales.

Last edited by Bargain Hunter (2013-05-13 13:33:38)


"Paper is poverty,... it is only the ghost of money, and not money itself." --Thomas Jefferson
"You only find out who is swimming naked when the tide goes out" --Warren Buffett
"These days man knows the price of everything, but the value of nothing" --Oscar Wilde

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#2 2013-05-13 14:06:31

bordsilver
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From: Socialist Central
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Re: Buying a small business run 'under management'

Bargain Hunter wrote:

One often wonders if the business is almost fully run by management and not the owner why would they be selling the business?

There are a range of valid reasons, not least of which is the risk side (which is why small businesses trade at low multiples). Given many of the fixed outgoings, even a healthy business is only a month or two away from insolvency. One reason that will be increasingly common is simply baby boomers retiring and extracting their capital while they can ($3 in the hand now can be better than a risky $1 annual cash flow which can turn negative).


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#3 2013-05-13 14:07:17

Clawhammer
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From: Gone Fishin'
Registered: 2010-02-26
Posts: 7,710

Re: Buying a small business run 'under management'

If you've got money you want to throw away, these magic beans I have for sale are a way better investment... tongue

P.S.

It's not like it's a niche' business... there are a milion coffee shops out there... why would you choo- choo- choose one that had to be run under management.

Why not look for a niche' business in a narrow(er) marketplace without much competition.  Steer clear of something with too fragile a market place (eg. propellor caps, dehydrated curried watermellon, alpacca wool merkins). 

But paying for management in a small business just sounds like a needless drain.. that money should be going into the owner's pockets.... not some contractor.

Seriously, someone that needs outside help to run a coffee shop, really need to ask themselves what you're doing in the 1st place.  I'm not saying it's easy, not by any means.  Just that it may not be where there best skill sets sit.

Last edited by Clawhammer (2013-05-13 23:37:02)


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#4 2013-05-13 15:15:53

Austacker
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Registered: 2010-02-27
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Re: Buying a small business run 'under management'

alpacca wool merkins

Damn was just looking into these as well...

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#5 2013-05-13 15:23:53

Chillidog
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From: In the dog house SEQ
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Re: Buying a small business run 'under management'

Had a friend that bought a butcher shop under management. Sales went from 8 beasts to 13 beasts per week. He thought he was flying.
End of the financial year came and his accountant tells him he has lost $65000.
The guy running it had both hands in the till. 
Bottom line don't get involved in something you know nothing about.


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Still sure beats 4 days of dialysis a week. Soon to be free.

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#6 2013-05-13 15:25:44

mmm....shiney!
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Re: Buying a small business run 'under management'

Chillidog wrote:

Bottom line don't get involved in something you know nothing about.

Sright there  wink  +1000


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#7 2013-05-13 15:27:41

Bargain Hunter
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From: Sydney, Australia
Registered: 2010-07-12
Posts: 623
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Re: Buying a small business run 'under management'

Clawhammer the coffee shop was just an example it could be any sort of business really. A bloke my mum knows owns a King of Knives franchise that traded for many years before he bought it. He doesn't spend too much time working in the business and goes on holidays for months at a time and leave the store manager in charge. The point I'm trying to make is whether it is a good idea to buy a small business as a relatively passive investment. As for niche business I agree its better to be a in a niche business or have a location without nearby competition where they can't open up due to their being no other suitable premises within a short distance. Or be in a business with recurring revenue and locked in contracts (e.g. maintenance contracts and other forms of service contracts which are locked in for a period of time).

Last edited by Bargain Hunter (2013-05-13 15:29:46)


"Paper is poverty,... it is only the ghost of money, and not money itself." --Thomas Jefferson
"You only find out who is swimming naked when the tide goes out" --Warren Buffett
"These days man knows the price of everything, but the value of nothing" --Oscar Wilde

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#8 2013-05-13 15:33:48

valuecreator
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From: WA
Registered: 2012-12-03
Posts: 1,173
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Re: Buying a small business run 'under management'

I would do it if it's a recession proof business, and generate enough cash flow so you can hire "Bob"  to keep an eye on the manager, and then hire "Peter" to keep an eye on "Bob"  to double check. So basically I wouldn't do it!

IMO these days the easiest "passive income" businesses, with a ROI and ROT  that is worth the risk, are online, not brick and mortar.

Last edited by valuecreator (2013-05-13 15:35:12)


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#9 2013-05-13 15:44:17

Clawhammer
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From: Gone Fishin'
Registered: 2010-02-26
Posts: 7,710

Re: Buying a small business run 'under management'

Bargain Hunter wrote:

Clawhammer the coffee shop was just an example it could be any sort of business really. A bloke my mum knows owns a King of Knives franchise that traded for many years before he bought it. He doesn't spend too much time working in the business and goes on holidays for months at a time and leave the store manager in charge. The point I'm trying to make is whether it is a good idea to buy a small business as a relatively passive investment. As for niche business I agree its better to be a in a niche business or have a location without nearby competition where they can't open up due to their being no other suitable premises within a short distance. Or be in a business with recurring revenue and locked in contracts (e.g. maintenance contracts and other forms of service contracts which are locked in for a period of time).

Yeah I know what you mean... replace 'coffee shop' with 'any small business with less than 4 staff.

Your last sentence sounds very close to being a franchise business (donut king, video shop, Jim's etc)... many I've spoken to consider themselves lucky to be able to just 'walk away' from a franchise these days. They are far from what they're advertised to be.  Unfortunately, many retirees have merely bought themselves another job sad


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#10 2013-05-13 15:55:19

willrocks
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Registered: 2012-05-11
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Re: Buying a small business run 'under management'

Austacker wrote:

alpacca wool merkins

Damn was just looking into these as well...

Reminds me of the 'Emu' investors in the early 1990s. A colleague was telling me of his 'Emu' investment back then. I asked why they're valuable. He said because they breed them, then other people buy the offspring as 'investments'. roll

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#11 2013-05-13 16:05:35

AngloSaxon
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From: Sydney
Registered: 2012-10-27
Posts: 1,784
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Re: Buying a small business run 'under management'

Clawhammer wrote:

Your last sentence sounds very close to being a franchise business (donut king, video shop, Jim's etc)... many I've spoken to consider themselves lucky to be able to just 'walk away' from a franchise these days. They are far from what they're advertised to be.  Unfortunately, many retirees have merely bought themselves another job sad

I looked into Pie Face a while ago, existing franchises with 24 hour trading in Sydney in prominent locations (George St, Oxford St, Kings Cross) are being offered for almost $1M. Probably higher now. They are a low margin high volume business with set menu products the franchisee cannot really deviate from. Most of that figure can be quickly explained as Goodwill on the balance sheet, the trading margins make it a very low annual return on investment. They usually don't own the real estate the outlets are situated in. As Clawhammer said, anyone buying one of those franchises is just buying a job with the hope of gradual capital growth in the franchise right when they want to sell.

Franchisees aren't the ones making the big bucks - it's whoever controls the company underpinning that business and owning the rights to issue/sell new franchises. Sumo Salad changed hands last year for something like $30M. That's nothing to do with the actual franchisees in shopping centres.

This may be a bit of a thread hijack or diversion, Bargain Hunter you're talking about stand alone businesses aren't you? I believe there are more opportunities in stand alone businesses to use your company for multiple businesses and enable tax minimisation. But that's me thinking as an accountant again.


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#12 2013-05-13 16:23:00

sammysilver
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Re: Buying a small business run 'under management'

Austacker wrote:

alpacca wool merkins

Damn was just looking into these as well...

I'm always mixing mine up with my toupee.


I think, therefore I stack.

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#13 2013-05-13 16:35:43

worldbubble
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From: Japan
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Re: Buying a small business run 'under management'

open funeral service business ...
baby-boomers and all bla-bla might need them

well, these are making pretty good money here in Japan selling the service to soon to be serviced people ...
and it can be passive investment as there's no need to personally service each one who needs it smile


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#14 2013-05-13 16:40:59

Clawhammer
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From: Gone Fishin'
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Posts: 7,710

Re: Buying a small business run 'under management'

Tattoo Removal is a growing Niche'.

I'd consider it myself, only I doubt I'd be able to stop laughing at my customers as they scream in pain under the laser. big_smile

"you put that there!??!... it really was a moment of weakness "


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#15 2013-05-13 16:48:35

sammysilver
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Re: Buying a small business run 'under management'

Clawhammer wrote:

Tattoo Removal is a growing Niche'.

I'd consider it myself, only I doubt I'd be able to stop laughing at my customers as they scream in pain under the laser. big_smile

"you put that there!??!... it really was a moment of weakness "

Perhaps open up a tattoo parlour with laser removals next door. I imagine it uses the same skill set so you an save on wages.


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#16 2013-05-13 16:53:27

mmm....shiney!
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Re: Buying a small business run 'under management'

AngloSaxon wrote:

But that's me thinking as an accountant again.

I knew you were weird.  big_smile


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#17 2013-05-13 16:57:49

bloomst
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From: Melbourne, Australia.
Registered: 2012-07-16
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Re: Buying a small business run 'under management'

This remind me of my friend who bought those Noodle-ina-box franchise. They control everything, and all supplies gave to be bought from HO.

It get to the point where my friend "steal" from hiw own shop, buy sneaking in coca cola bought cheaper at Woolies and didn't put the sale through the register.

I remember one time he told me, he want to print a notice "table and chair for customers only". After a visit from management, he was being told it will be $50 because it has to be printed in official material.


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#18 2013-05-13 17:03:54

Clawhammer
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From: Gone Fishin'
Registered: 2010-02-26
Posts: 7,710

Re: Buying a small business run 'under management'

bloomst wrote:

This remind me of my friend who bought those Noodle-ina-box franchise. They control everything, and all supplies gave to be bought from HO.

It get to the point where my friend "steal" from hiw own shop, buy sneaking in coca cola bought cheaper at Woolies and didn't put the sale through the register.

I remember one time he told me, he want to print a notice "table and chair for customers only". After a visit from management, he was being told it will be $50 because it has to be printed in official material.

Donut King are notorious for that.  You have to buy milk,flour, sugar, coffee etc at 3 times the going price.  There was a recent case where a Melbourne Franchise holder committed suicide to get out sad

I went to a mum & dad, Noodlebox 'rip-off' store the other night... they had snuck big chunks of bread in...b@$t@rds smile


Specialisation is for insects

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#19 2013-05-13 17:22:34

mmm....shiney!
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From: U-fkn-topia
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Re: Buying a small business run 'under management'

What was that old 80's movie with the black guy that owned a "Macdonalds" store and was being sued by McDonalds for using a logo similar to theirs?


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#20 2013-05-13 17:30:07

Clawhammer
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From: Gone Fishin'
Registered: 2010-02-26
Posts: 7,710

Re: Buying a small business run 'under management'

mmm....shiney! wrote:

What was that old 80's movie with the black guy that owned a "Macdonalds" store and was being sued by McDonalds for using a logo similar to theirs?

Coming to America smile

"In da face!!!"


Specialisation is for insects

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#21 2013-05-13 17:45:41

mmm....shiney!
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From: U-fkn-topia
Registered: 2010-11-15
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Re: Buying a small business run 'under management'

Clawhammer wrote:
mmm....shiney! wrote:

What was that old 80's movie with the black guy that owned a "Macdonalds" store and was being sued by McDonalds for using a logo similar to theirs?

Coming to America smile

"In da face!!!"

Aaah, thanks hammer, just googled it and I was wrong, it was "McDowells".  lol

"We both got two all-beef patties, special sauce, lettuce, cheese, pickles and onions, but their buns have sesame seeds. My buns have no seeds".

http://www.movielocationsguide.com/Comi … _locations


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#22 2013-05-13 17:55:17

bloomst
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From: Melbourne, Australia.
Registered: 2012-07-16
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Re: Buying a small business run 'under management'

Will smith? big_smile


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#23 2013-05-13 18:12:37

mmm....shiney!
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From: U-fkn-topia
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Re: Buying a small business run 'under management'

Nah, there's more black guys in hollywood than just will smith.  tongue

Eddie Murphy

He was "Black Guy of the Decade" in the 80's. I think WS was "Black guy of the 90's". Or was he "Black Guy of the 00's"? Sidney Poitier was "Black Guy of the 60's" i reckon. Who was black guy of the 70's?

Better than "White Guys" though, they get trashed and a new one is born every year.


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#24 2013-05-13 18:21:25

bloomst
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From: Melbourne, Australia.
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Re: Buying a small business run 'under management'

mmm....shiney! wrote:

Who was black guy of the 70's?

You showing your age!!! big_smile


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#25 2013-05-13 18:27:02

Eureka Moments
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Re: Buying a small business run 'under management'

mmm....shiney! wrote:

Nah, there's more black guys in hollywood than just will smith.  tongue

Eddie Murphy

He was "Black Guy of the Decade" in the 80's. I think WS was "Black guy of the 90's". Or was he "Black Guy of the 00's"? Sidney Poitier was "Black Guy of the 60's" i reckon. Who was black guy of the 70's?

Better than "White Guys" though, they get trashed and a new one is born every year.

Bill Cosby.


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