Forums: Discussions for entrepreneurs and small business.

Good day all!

For the people that do not know who I am, my name is Tony Sorensen.  I want to share the lessons that I have learned so that some of you may not make the same mistakes that I did.

First the background, I purchased a business in January of this year.  I was approached in August of 2005 by a friend that could not purchase the business on his own and asked if I wanted to “partner” with him in the business.  I agreed to look at it.  I then met with the owner, someone that I knew through my job at the time and asked to see his financials, taxes for the last three years, and any contracts that he had that would be going with the sale of the business.  He delivered all of the “required” information.  There were no contracts so that part was easy.  I reviewed the tax information, saw that there was about a 40% growth rate in the business for the last three years.  Looked at the YTD income (all that consisted of was a print out from Excel that showed the customer, and the price that was charged the customer for each day).  Some of the information was missing and “Forgot to keep track but averaged to about $1000.00 per day” was supplied to me.  (First clue)  I sat down, did some numbers figured that some customers would “test” me as the new business owner or would leave all together.  The number I came up with was about 20% growth for 2006.  That put “sales” at about $240,000.00.  The sale price of the company was $225,000.00, the owner agreed to carry the contract, (mistake number 2) wanted $20,000 down and a payment of $3324.33 for 7 years at an fixed interest rate of 2% above prime, at the time was 7.25% so that worked out to be 9.25%. 

Here is the crux of all of this!  These “truths” are what I have learned and want to pass on to you.  (This is the only thing good to come out of this so please bare with me!)

1.      Decide how “smart” you are in business and divide by 2.  That is more closely the real number.

a.      I thought I was so smart asking for the “financials” and the taxes.  I did not really know what I was looking at, so I did not know that I needed to know his overhead.  If he was making a million it would not matter if his expenses were 1.5 million!

                                                                    i.              If you purchase a business, take all the information that you get to an accountant.  They know what to look for and how to see the “real” numbers.  All business have a “sales number”, but that is not the real number.  What did it cost to get that sale in product, labor, advertising, taxes, ect.  Make sure that the asking price is justified. 

                                                                     ii.              Go and see a business broker, take the same information that you took to the accountant.  The business broker then can see what that type of business is “selling” for both locally and nationally.  I over paid about $35-40k for the business.  That would have lowered my payment about $600.00.  Also they can advise you on the terms for the type of business that you are purchasing.  I did a 7 year contract.  The business broker that I had look at the company (too little too late) said that I should have done a 12 year repayment to get the monthly payment down then had a “balloon” payment in year 8.

                                                                   iii.              Find out what the overhead is, what the rent is if there is any.  What do the employees make, how do they get paid.  Electric, garbage, sewer, ect.  Make sure that you know all of that information before you proceed with the business.

                                                                    iv.              Make sure that there is no other “income” on the taxes.  If the business is a sole proprietor, they will file taxes just like any one else.  Make sure that the “income” on the tax form is for the business and that is the only number that you need to look at.

1.      My information led me to believe that the “sales” were about $200,000 in 2004 and I based all of my “decisions” on that number.  The person that I bought the business from also owned another business, was the income from that business included in his 2004 taxes?  I bet it was!  An accountant would (should) have caught that little piece of information.  Looking at the numbers now, his “sales” were closer to $165,000.  With my overhead at about $16,000 per month, that is that is about a $27,000 loss for this year!

2.      Never and I mean Never, do the contract your self.  Pay to have it done so that you and the seller are protected. 

a.      I did the contract, and when I was done I puffed out my chest and said “see we don’t need to pay a lawyer $500.00 to type for us!”  Boy was I wrong, forgot the no complete clause!  (I know, I know how do you forget that!)  The seller is a man of his word and agrees that we did have a “verbal” no complete and has honored that!  Saved my bacon! 

3.      Decide what your marketing strategy will be and then find out the cost!  How much will you have to spend to make the business grow?  Are you going to just sit back and hope that you will grow? 

a.      I did not do this, came in with NO MONEY at all.  Used it all for the down payment, and then found out that the old owner did ONLY word of mouth.  That is a great form of advertising and marketing, could be the best, but it can not be the only form.  Especially if you are purchasing a business.  Some of the customers came for the old owner, to support them, what are you going to do to replace them? 

b.      Never and I mean Never start, or buy a business with out having capital in reserve for back up that does not need to be used in other places.  I did not do this either.  Now, I am $40,000 in debt in the business and about $30,000 in debt in my household.  (I did not take any money out of the business.)

4.      Decide what you can pay yourself and how and make that happen!

a.      Make sure to pay yourself.  If you can not take a “wage” from the company, but have “given” the company personal funds for either monthly expenses or start up costs such as a down payment, repay that money in monthly installments, like a bank loan.  I did (could not) do this either causing the “house hold” financial picture to darken.

5.      And finally, do not go in to business with any one else, not even family.  It will cause problems.  If you need an investor, seek them outside your friends and family first.  If that does not work, then go to the people that you know.  Make it a point to have the lawyer draw up the contract between you and the other party.  Make sure that you and they are protected.  That way, there can be no hard feelings and everyone knows what they are in for.

Thank you for taking the time to read all of this, I know that it was long and somewhat boring J, but if I can help even one person from doing what I did then it was well worth it!!!!

Thank you again,

Tony Sorensen

PS I am on to the next adventure and will start or own another company by the end of the year!  I will have learned a lot of hard lessons this year, but that is what lets us know we are still alive right?