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.
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).
If you've got money you want to throw away, these magic beans I have for sale are a way better investment... 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.
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.
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).
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.
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
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'.
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.
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
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. "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.
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 $50 because it has to be printed in official material.
Donut King are notorious for that. You have to buy milk,flour, sugar, coffee etc at 3 times the going price. There was a recent case where a Melbourne Franchise holder committed suicide to get out I went to a mum & dad, Noodlebox 'rip-off' store the other night... they had snuck big chunks of bread in...b@$t@rds
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?
