What are the Downsides of Buying a Turnkey Business
So you want to buy a business? My three words of advice are: be very careful. I mean, careful like in buying a used car, only more so.
Here is a short list of the issues you may encounter:
- The reason given for the sale is rarely, if ever, the real reason. You need to know the real reason for the sale.
- The business, as represented is rarely, if ever the real state of the business. You need to know what it is you are buying. Are sales rising or falling, are margins going up or shrinking. Are competitors about to eat your lunch?
- The financials presented are rarely, if ever, truly representative of the operating results of the business. You need to see tax returns and you should have an accountant review them carefully. It may be a very valuable exercise to have the seller sign off on a Form 4506 to obtain a copy from the IRS. Remember, tax forms can be jimmied up pretty easily.
- The assets of the business are rarely, if ever, truly worth what the seller says they are. Inventories can be stale, nonexistent, or inflated. Physical assets can be old, needing replacement or about to fail. Leases can be about to expire with no guarantee of renewal.
- You are purchasing the “future” not the past of a business. So you have to look past the rosy forecasts of the seller to understand where the business is really going. This involves some independent analysis of the state of the economy (national and local), the state of the industry, the competition, the marketplace, the technology, and most importantly the USP ( unique selling proposition) that the business has (or had).
- If the potentials are so bright for the business, why is the seller jumping ship? Again, knowing the real reason for the sale will be illuminating. Don’t buy the “other interests” or “retiring at 40” BS.
- You need to understand the restrictions and liabilities you may incur by buying a turnkey business. You may have unfavorable leases, restrictive franchise agreements, uneconomic contracts, bad employees, pending lawsuits, unhappy customers, angry suppliers and a whole host of things which the seller won’t mention.
- You may be paying for the convenience of having things all put together ready to go. What are the costs of re-creating the business from scratch? Oftentimes this analysis shows that the seller has way over-priced his business.
- Be prepared for a number of unpleasant surprises when you close on the sale. Key employees will walk, customers will balk, vendors will be wary and want to renegotiate. Your “retiring” seller will wait a few months and then go back in business competing with you. Remember, no matter what you have in the contract, no matter how you try to legally avoid problems, they will occur.
- Be prepared to invest additional funds into the business, and work like a crazy person for months to fix what caused the seller to bail.
Have I been too pessimistic? Maybe
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