buying a business

[Road Guy]

This probably wont happen but I have been looking at buying some dive shops (yeah dumb idea with the economy and all but I am just thinking out loud)

There are a couple of dive shops for sale around the coastal areas of florida

For example one I have looked at is for sale at a cost of $800,000. The seller gave me audited financials for the last three years averaging sales of $650,000 / year.

I assume this isn’t like buying a house, but do you think I would just contact banks about rates and terms? 20 year loan? Are business loans much less than that? Will I need at least $100K down payment, $200K down payment? I recall looking into franchising agreements with a friend several years ago and most big franchises required you to be liquid around half a million to a million or more.

Again this is just something I had been looking into at lunch and on the weekends, most likely wouldn’t ever happen but I am just curious / bored……..

Also engineerboards.com may be for sale at a cost of $100,000

 

[SuperAlpha]

800k seems way too high with only 650k in sales. What is the profitability? What are the main assets and their Depreciated value? Do they have a client base and established name? With that you can figure your rate of return. For example, Solectron revenue was 11B per tear but they were only purchased for 3.6B. Their profit was only 3% but the payoff was not just profit but wiping out a competitor.

On the surface this sounds like a bad deal. Remember, it is for sale for a reason. If it were a cash cow then the owner could just hire a manager and retire.

 

[SuperAlpha]

Oh. At typical 10 % profit (which is considered good) that would put 65k back into the company or your pocket. Does he have employees?

 

[udpolo15]

I wouldn't compare multiples from other industries and would probably recommend that you hire an appraiser if you ever decide to move forward.

As far as the loan, you probably need to talk to a commercial banker about it. On the business side, the more you but down, the less restrictive the covenants will be. For example, if you aren't putting much into it, you might have a covenant on how much you can pay yourself until the loan is paid out or other controls that would limit the attractiveness opportunity.

My feel is that you would need to put more than 20% equity into the venture, but I have no basis for that. That doesn't have to be all your money, you can always get other investors.

 

[udpolo15]

Oh. At typical 10 % profit (which is considered good) that would put 65k back into the company or your pocket. Does he have employees?

10% profit is considered good for what? again depends on the industry.

Also would you be working in the store or would you have to hire a manager? Don't forget to include that income in your ROI if you are going to be working in the store.

 

[Sschell]

only $100K?!? for this cash cow?

 

[MA_PE]

Totally agree that it depends on the profit margin. Also do the books reflect the true income of the business or are there aspects where cash income may have been inadvertently "missed" from the company ledgers.

My experience with a small business is that if the owner gets to keep 10% of the gross he's doing pretty well. Does the purchase price of $800k include the physical real estate (i.e. you'll own the building and land) or is it just for the "business"?

Sometimes owners of an established business will self-finance the sale without having to go through a bank.

My 0.02.

 

[Road Guy]

havent really looked that far into it, the brokerage firms would just give me limited info without me filling out some paperwork. They did tell me the names of the shops and some of them I have actually seen or been too.

Most all of these are being sold for abuot $100K over their average sales, and include the land, dock frontage lease,building, boats, etc.

Several mentioned that they were owned absentee (someone else running the shop day to day)

I figure the economy will start to turn after the mid year elections and want to be ready

But I assume that if I claim to be "really interested" I would get a full look at books, tax returns, etc?

mailny just dreaming you know....

 

[udpolo15]

havent really looked that far into it, the brokerage firms would just give me limited info without me filling out some paperwork. They did tell me the names of the shops and some of them I have actually seen or been too.
Most all of these are being sold for abuot $100K over their average sales, and include the land, dock frontage lease,building, boats, etc.

Several mentioned that they were owned absentee (someone else running the shop day to day)

I figure the economy will start to turn after the mid year elections and want to be ready

But I assume that if I claim to be "really interested" I would get a full look at books, tax returns, etc?

mailny just dreaming you know....

A couple of other things to keep in mind. A shop with a that is well run is going to command top dollar and make it hard to get a decent return. Your best bet would be to find a shop that is not well run for what ever reason (absentee owner, poor marketing, old equipment, etc) and that you can improve upon.

Also, beside the cost of the business, don't ignore the transition cost and capital investments that may be needed.

 

[Dark Knight]

This probably wont happen but I have been looking at buying some dive shops (yeah dumb idea with the economy and all but I am just thinking out loud)
There are a couple of dive shops for sale around the coastal areas of florida

For example one I have looked at is for sale at a cost of $800,000. The seller gave me audited financials for the last three years averaging sales of $650,000 / year.

I assume this isn’t like buying a house, but do you think I would just contact banks about rates and terms? 20 year loan? Are business loans much less than that? Will I need at least $100K down payment, $200K down payment? I recall looking into franchising agreements with a friend several years ago and most big franchises required you to be liquid around half a million to a million or more.

Again this is just something I had been looking into at lunch and on the weekends, most likely wouldn’t ever happen but I am just curious / bored……..

I will say this RG, but take it at face value. I have first hand experience on working in dive shops. My uncle had one a long time ago, I was without a job(fresh out of college) and he asked me to take care of it since he had a job and did not want to quit.

To keep a competitive inventory in a dive shop you will have to invest a ton of money. The dive gear is always changing and it is almost abusive. To be able to be in the fight you will have to go with it and there is where the things get very tough.

My uncle was not the best businessman anyways but he had good ideas. He became an Instructor so he did not have to pay anyone to offer the classes. I have to say that he did well for a year or so, but after that it went South in a hurry. He did not put the time and did not give the attention to his business. Sometines he did not show at the shop for two weeks. When he called about how things were going I always let him know who called and what the person wanted. He never called a person back. He gave me instructions about business decissions and then was mad at me when I followed them. The sales price was always too low or too high. He was never happy. He failed to develop loyal clients since he did not offer discounts or stuff like that. That is vital for that kind of business.

Bottom line...in that kind of business personal attention is a key. I love the sea and enjoyed each and everytime I went for a dive but as much as I like it I would not invest my money in that if I cannot take care of it personally.

I do not want to scare you or someting like that. I just want to make you aware that a dive shop requires a lot of personal attention by the owner. One more thing. He had only one major competitor. In Florida that will not be the case.

Just my :2cents: :construction:

 

[DVINNY]

I was under the impression that two years of NET, plus appraised inventory was fair price for a business.

So if the place made $100k/yr profit, and the used equipments current value was $75k, then the biz would be worth $275k.

maybe I'm way off base. dunno

 

[Road Guy]

thanks for all the comments, truly appreciated..

one of the things that stuck out to me each time I have been diving with a charter type place is that most of them have that south florida laid back attitude, we would show up at a dive shop and ask where they were diving the next few days (to make our plans) most of the beach bums that worked their were like ahh man, dont really know just going to see where we head to when we turn the boat on... most of them did not seem to have any customer service skills or businesslike qualitites, every one I was at I had the feeling that with just a little more emphasis here or there this experience would go from so so to awesome.

I am looking at doing this with a partner and both of us have wives who can work just about anywhere...

The more expensive shops for sale are ones that own the property / dock / etc, so that appears to be why the cost is higher because of the property value with direct access to the Ocean.

I am going to invest a little time into this out of morbid curiousity, but the two that I was going to look into have already sold...

 

[Dleg]

I've never run a dive shop, but I've known several people who have, and I have to listen to all the bragging, day in and out, from all the dive masters and instructors I know.

Th biggest caution I can give you is this: diving is an extremely dangerous activity. The equipment you provide, as the business owner, is nothing short of life-support equipment: if it fails, your clients die. When your clients die, you go out of business, in a most devastating way. And it's not just related to your equipment: your dive masters can do literally an infinite amount of things that will pile the liability squarely on your shoulders, if the client's own equipment fails, or if they screw up somehow or are otherwise unsuited for survival underwater.

Thus, you are going to have spend a fortune on insurance. You are going to have find good quality, reliable, trustworthy employees - not just the first beach bums that walk in. You cannot survive as an "absentee" dive shop owner - the moment your staff begins to drop below 100% attention to the details of their work, is the moment you start on your slide toward a dead client, or at the very least, a client in an isobaric chamber, which will end your business just as decisively. Because - remember - it's not your staff that will take the fall if something happens, it is you.

I've seen literally dozens of dive shops come and go around here, servicing the Japanese, Korean, Russian, and American tourist market. Probably 12 of those have gone out of business due to one or more deaths. The others, I don't really know. But I've seen maybe only 1-2 survive the entire time I have been out here (14 years). So in other words, it's my observation that owning a dive shop is more of a "dream" for the Jimmy Buffet wannabes, than a truly viable business investment.

But hey, maybe Florida is different than the West Pacific.

 

[rudy]

Please, oh please, get incorporated BEFORE you sign anything. Get a lawyer, you trust, involved. If anything unfortunate ever happens, your assets (home, property) will be protected.

Definitely look into their books, especially their taxes. Get an "All Clear" letter from the State tax office. An "All Clear" letter says their taxes are up to date. The sellers should be able to provide this. It does not take but a few minutes for the State tax office to print this out. If they give you the run around on this, watch out. Once the business is transferred into your name, you will be responsible for ALL unpaid taxes.

Look into how they are paid (are all of the receipts cleared). Them bringing in $650k/year, may not be that they are actually getting the $650k in that year. They can have receipts out, that they sold $650k worth, but their buyers might still be owing them.

Definitely establish a contract with you and your partner BEFORE you buy the business. Again, get a lawyer, you trust, involved. It should include: Who will be responsible for what. What % will each own. How will the profits be distributed. If the venture fails, how will the burden (loans, taxes, etc) be shared.

 

[SSmith]

If it is profitable, 1x EBITDA for a small business is typical. But its not unheard of to see offers in the 0.85x EBITDA range get accepted. Takes a lot of due diligence to verify the profitability of the shop though.

Also, if you are serious about buying the shop, then I would work it as a two part deal. First part is that they hire you as a manager for some term (6 months or so) with the option to purchase at the end of that term at the agreed price.