100,000.00 cash (what to do?)

[alexh]

I have this money, and im looking to purchase a business in quebec.
It is a conveniance store, gas station, video store, and
and 2 rentals including a penthouse suite 3 bedrooms, and a subway restaurant (commercial lease)

owner is financing at a low commercial rate, with 100,000 down.
asking for 500,000. municipal evaluation is 417,000.
Including almost 75-100,000 in inventory.
(built in cooler, video store equipment dvds, games etc, gas reservoirs)
Everyting is owned

looking to pay it in 15 years with tight cash flow.

Should i buy this or invest in a multi plex.

In my opinion a commercial business will generate more equity at a faster rate than residential, this is why im considering this purchase even though cash flow is tight.
Also there is the fact that owner financing is available on a commercial property.

 

[invst4profit]

Have you or someone experienced with this type of investment completed the due diligence.
Considering you are going into this with little positive cash flow how long can you survive if you lose one or more of your income streams for a extended period of time.
If you lose the penthouse for 6 months or your commercial lease for a year will you manage.
Do you have sufficient reserve funds to carry you through if a gas tank leaks and you lose that income for 1-2 months and the associated business it brings in.

Do you have any experience in operating this type of business or are you taking on a steep learning curve day one.
Are you up to the challenge of 18 hr days or are you looking for a less intensive investment vehicle.

Your question is difficult to answer without knowing more about you, the numbers and your operating plans.

 

[Nir]

What is the difference risk-wise between buying that business and buying a stock index/DOW - both generate no cashflow, both are speculative. (ok except the leverage but before even mentioning amount of WORK the business will require!!!) buy DOW then.

 

[gwasser]

Pay special care to the $75-100K inventory value. Who says it is worth that much? How much of the inventory is obsolete or junk? For example the DVDs are they old movies that you can only sell for a few dolllars? This is a truly important issue to check.

How do I know? My father - he build up this inventory over the years to reduce his profits and thus his taxes. But then when the time came to sell a lot was obsolete and had gone bad so he had to put a lot on `Sale`. In the end he did OK but a lot less than he expected.


Also, sounds like this business comprises several quite different assets ranging from a convenience store to rental property. What is the break up value and how much can you sell right away to reduce your debt and improve cashflow?

Also, the Videostore is probably a liability - these days even Blockbuster has big trouble and Rogers is closing down a lot of stores as well. They can`t compete against internet downloading and pay per view.

 

[kir]

For commercial ventures, more cashflow is better because of bank will use the income approach for refinancing. Hence, equity is secondary.
Also, it`s better if you live there and manage it, which might not be your intentions.

Kir.



QUOTE (alexh @ Feb 3 2009, 11:10 PM) I have this money, and im looking to purchase a business in quebec.
It is a conveniance store, gas station, video store, and
and 2 rentals including a penthouse suite 3 bedrooms, and a subway restaurant (commercial lease)

owner is financing at a low commercial rate, with 100,000 down.
asking for 500,000. municipal evaluation is 417,000.
Including almost 75-100,000 in inventory.
(built in cooler, video store equipment dvds, games etc, gas reservoirs)
Everyting is owned

looking to pay it in 15 years with tight cash flow.

Should i buy this or invest in a multi plex.

In my opinion a commercial business will generate more equity at a faster rate than residential, this is why im considering this purchase even though cash flow is tight.
Also there is the fact that owner financing is available on a commercial property.

 

[alexh]

QUOTE (invst4profit @ Feb 4 2009, 06:26 AM) Have you or someone experienced with this type of investment completed the due diligence.
Considering you are going into this with little positive cash flow how long can you survive if you lose one or more of your income streams for a extended period of time.
If you lose the penthouse for 6 months or your commercial lease for a year will you manage.
Do you have sufficient reserve funds to carry you through if a gas tank leaks and you lose that income for 1-2 months and the associated business it brings in.

Do you have any experience in operating this type of business or are you taking on a steep learning curve day one.
Are you up to the challenge of 18 hr days or are you looking for a less intensive investment vehicle.

Your question is difficult to answer without knowing more about you, the numbers and your operating plans.


What youre saying is true, I will not be operating the business myself. So I can keep my full time job building capital as a backup for any unforseen incident.

Posting on this forum is a small part of my due diligence, still taking it further with a cma accountant.
Reserve funds, very important like a vacancy allowance etc.

I have some general experience, but still feel like this is a venture. Not enough to scare me out from investing.
I have calculated in my expenses 5720 hours of salary. (16 hours a day-52 weeks a year)

Im still wondering if 100,000. will be better spent on a multi plex or commercial business.

I still think commercial business generates more and faster at the end.

 

[alexh]

QUOTE (gwasser @ Feb 4 2009, 08:22 AM) Pay special care to the $75-100K inventory value. Who says it is worth that much? How much of the inventory is obsolete or junk? For example the DVDs are they old movies that you can only sell for a few dolllars? This is a truly important issue to check.

How do I know? My father - he build up this inventory over the years to reduce his profits and thus his taxes. But then when the time came to sell a lot was obsolete and had gone bad so he had to put a lot on `Sale`. In the end he did OK but a lot less than he expected.


Also, sounds like this business comprises several quite different assets ranging from a convenience store to rental property. What is the break up value and how much can you sell right away to reduce your debt and improve cashflow?

Also, the Videostore is probably a liability - these days even Blockbuster has big trouble and Rogers is closing down a lot of stores as well. They can`t compete against internet downloading and pay per view.


2008 municipal evaluation - 417,000.00 for the building.
Business generates 6 to 8% profit margin.
gross revenue 1800,000.00

1800,000,00 * 6% = 125.000.00 yearly

6-8% is all that is left after all expenses. Not a huge profit margin, but very typical for conveniant stores.

The seller is selling for 500,000,000
Inventory is worth between 75 and 100K
I know tapes go bad fast, they are liquidated as you go, but the video store attracts alot of customers.
i did consider your comment about internet movie downloading.

I see upside potential in the building and its why im interested, its a developping area. And once i own the building i could change the business structure. Possibly make a pharmacy or dentisit office and rent it out.

Heres a question i have : Is it advantageous that the owner is willing to finance at a low rate.

 

[Nir]

Alex, why "small part"? can`t you give some more credit. just joking. good luck!

 

[gwasser]

QUOTE (alexh @ Feb 4 2009, 10:53 PM) Heres a question i have : Is it advantageous that the owner is willing to finance at a low rate.

Today Cash is King. Yesterday I was offered to buy a property 25% below peak sale value of just a year ago. Yet, I am reluctant with my heloc I can finance @ 3% so I would be definitely have positive cashflow. In fact I want now at least net cashflow of 10% and I decided to let go. I can buy in the stock market below book value with 6% dividend (that is tax advantaged) and it is a lot more liquid (and volatile).

Maybe that is greedy, but for now, I am waiting - along with many others - at the side lines and accumulate cash. Everything is now too uncertain to actually make a big commitment. Besides, I bought three properties last year and bought most stocks that I wanted - so for now, I am just nibbling, trying to sell some call options, collect dividends and rents and wait.

I suggest you consider whether this deal is truly a `once in a lifetime opportunity` or whether it may be wiser to keep your powder dry for now. With deep pockets you can nibble. Warren Buffett just bough into Harley Davidson with 300 million - that is a nibble for him.

From Globe and Mail:

Billionaire investor Warren Buffett`s Berkshire Hathaway Inc. agreed to buy $300-million (U.S.) of debt from Harley-Davidson Inc., the biggest U.S. motorcycle maker, adding to holdings of corporate debt as yields rise. Berkshire will get 15-per-cent interest on the senior unsecured notes, Milwaukee-based Harley said yesterday in a statement. Davis Selected Advisers LP, the largest holder of the company`s stock, also committed to buy $300-million of debt. Harley is raising the cash to lend to customers. Mr. Buffett is arranging private deals with some of the most recognizable U.S. brands and taking advantage of rising interest rates as the global credit crunch drives off his competitors. HOG (NYSE) gained $1.87 to $13.73 and BRK.A (NYSE) rose $1,100 to $90,500.

 

[Thomas Beyer]

Alex:
Unclear if you`d buy the business + inventory only or the underlying real estate, land, business and inventory ? I assume the latter (ie. all 4 !!)

Ask yourself first if you like to OPERATE this kind of business, potentially 7 days / week with all its headaches of running a business, paying bills, doing employee payroll, broken pumps, ordering supplies, employees that steal cash, management of people, customers yelling at you @ midnight .. i.e. nature of the business and the closeness of "home" and business !

Who supervises cash and employees when you are in Hawaii for 2 weeks ?

Then consider that you don`t own this hands-on intensive business - THE BUSINESS OWNS YOU !!!

Is this what you want ?

Then look at the books for 3 years .. look for a REAL profit .. and also ask him how much unreported business he does .. as in a cash oriented business much of it is not reported. So you have to evaluate "on book" profit and "off book" profit.

Also ask where you could improve revenues ? new products ? longer hours ? a new sign ? better marketing ?

Look for potentially reduced revenue: Is revenue maximized because competition is setting up shop next door (the current owner would know, but may not wish to tell you ..) and your revenue drops by 50% ??

Then deduct a salary from this profit for a person that runs the business, say $50,000 to $75,000/year.

How much profit really is in the business ?

Then don`t pay more than 5 times that figure. i.e. a P/E ratio of 5, maybe 3 even. A small business trades for 3 to 5 times profit MAX.

Also look at real estate separate from business. i.e. if you owned teh real estate, but got sick of the business, could you lease it ? If so for how much ? say $2500/month ? That is $30,000/year .. using a 15% to 20% CAP rate the real estate in itself it worth about 150 - 200K. Could you lease it for more ? $4000/month perhaps ? Much less ?

The gas station alone might be worth a ton, depending on location, traffic flow and condition ! Is there a new highway somewhere which will reduce traffic ?

I think a 15 year pay back with little cash-flow probably means: this business is WAY OVERPRICED !

If you pay $500,000, and you do not clear yourself annually, after all expenses at least $150,000 I would not buy it ! Why: if you use a $50,000 salary and a P/E ratio of 5 you must make at least $150,000 / year personally .. and out of the $150,000 you`d pay down the $400,000 loan in 3-4 years.

Good luck. I learned the hard way in a restaurant !

How to make $100,000 in a restaurant business ?





...





Start with $250,000 ...

Proceed with caution .. but proceed if you like the business environment, the location and the numbers ! Otherwise: look for other opportunities with a better personal and financial fit !

 

[gwasser]

He Thomas, I read a Quote from Richard Branson on Airlines that sounds very similar and just as true:
"How to become a millionaire? - Start as a billionaire and buy an Airline".


Alex, The Rich Dad - Poor Dad series has also a booklet on how to buy/take over somebody`s business. That may be helpfull - I think this is the book: http://www.amazon.com/How-Buy-Sell-Busines...4234&sr=1-2

 

[alexh]

QUOTE (thomasbeyer2000 @ Feb 5 2009, 09:48 AM) Alex:
Unclear if you`d buy the business + inventory only or the underlying real estate, land, business and inventory ? I assume the latter (ie. all 4 !!)

Ask yourself first if you like to OPERATE this kind of business, potentially 7 days / week with all its headaches of running a business, paying bills, doing employee payroll, broken pumps, ordering supplies, employees that steal cash, management of people, customers yelling at you @ midnight .. i.e. nature of the business and the closeness of "home" and business !

Who supervises cash and employees when you are in Hawaii for 2 weeks ?

Then consider that you don`t own this hands-on intensive business - THE BUSINESS OWNS YOU !!!

Is this what you want ?

Then look at the books for 3 years .. look for a REAL profit .. and also ask him how much unreported business he does .. as in a cash oriented business much of it is not reported. So you have to evaluate "on book" profit and "off book" profit.

Also ask where you could improve revenues ? new products ? longer hours ? a new sign ? better marketing ?

Look for potentially reduced revenue: Is revenue maximized because competition is setting up shop next door (the current owner would know, but may not wish to tell you ..) and your revenue drops by 50% ??

Then deduct a salary from this profit for a person that runs the business, say $50,000 to $75,000/year.

How much profit really is in the business ?

Then don`t pay more than 5 times that figure. i.e. a P/E ratio of 5, maybe 3 even. A small business trades for 3 to 5 times profit MAX.

Also look at real estate separate from business. i.e. if you owned teh real estate, but got sick of the business, could you lease it ? If so for how much ? say $2500/month ? That is $30,000/year .. using a 15% to 20% CAP rate the real estate in itself it worth about 150 - 200K. Could you lease it for more ? $4000/month perhaps ? Much less ?

The gas station alone might be worth a ton, depending on location, traffic flow and condition ! Is there a new highway somewhere which will reduce traffic ?

I think a 15 year pay back with little cash-flow probably means: this business is WAY OVERPRICED !

If you pay $500,000, and you do not clear yourself annually, after all expenses at least $150,000 I would not buy it ! Why: if you use a $50,000 salary and a P/E ratio of 5 you must make at least $150,000 / year personally .. and out of the $150,000 you`d pay down the $400,000 loan in 3-4 years.

Good luck. I learned the hard way in a restaurant !

How to make $100,000 in a restaurant business ?





...





Start with $250,000 ...

Proceed with caution .. but proceed if you like the business environment, the location and the numbers ! Otherwise: look for other opportunities with a better personal and financial fit !


Thanks so much. Its not an easy decision, because i see upside potential.
Busy intersection in a developping area. (about 500 new doors being built including s.family homes, and apartments)
New highway is bringing more traffik around the way.
Finally i would like to own the building to change the business structure in a few years.
But the numbers are not right, it takes someone who can improve revenues & cut expenses.
I dont think it will generate 150k net.
I guess having the building paid for in 15 years is not good enough.
I am conservative because the seller said i could pay it in 10 years.

His financial statements report less than 150K net.
But he says there are revenues that are not declared to reduce income tax. (ex 1 year salary) 50K

I have an option to pay a cma accountant to do a financial audit : but its 1000$ out of my pockets, should i pay or this?

 

[rymac]

QUOTE (alexh @ Feb 5 2009, 01:54 PM) I have an option to pay a cma accountant to do a financial audit : but its 1000$ out of my pockets, should i pay or this?

You`re about to spend half a million dollars! yes, it would be wise to pay an accountant to audit their finacial statements. Could be the best $1000 you ever spend. Make sure you chose the accountant and better yet ask the vendor to pay for the audit.

 

[Dejavu]

QUOTE (rymac @ Feb 5 2009, 04:30 PM) You`re about to spend half a million dollars! yes, it would be wise to pay an accountant to audit their finacial statements. Could be the best $1000 you ever spend. Make sure you chose the accountant and better yet ask the vendor to pay for the audit.

You also may want to consider if a CMA is the right accountant for the job. Not to reflect badly on CMAs but unless he/she specialized specifically in due diligence and external audit, you may be better off with a CGA better yet a CA. CA`s are particularly trained to audit.

 

[Thomas Beyer]

QUOTE (alexh @ Feb 5 2009, 01:54 PM) I have an option to pay a cma accountant to do a financial audit : but its 1000$ out of my pockets, should i pay or this?
yes .. but get an accepted offer first .. subject to
- financial statement review
- inventory inspection
- appraisal satisfactory to purchaser

good for 4-8 weeks ..

then yes, spend some $s due dilligence !

 

[Dan_Eisenhauer]

One of my biggest mistakes was to buy a restaurant. I did not want to spend the couple hundred dollars it woould have cost me to get a professional opinion of the financial statements. And, in fact, I was so intent on making a change that I am not even sure I would have heeded the advice I may have received.
My reluctance to pay $500 for the advice probably cost me $100,000.

My sense from reading the replies to this post is that most of us are saying you can get a better return on your time and money by buying something other than a retail outlet. Retail is a game you need to know and understand before you jump in.

I would never consider investing an ANY retail operation again. If anyone ever hears me seriously talking about doing so, you have my permission to take me out to the back 40 and shoot me. I will sign a release in advance.

 

[Thomas Beyer]

QUOTE (alexh @ Feb 3 2009, 11:10 PM) It is a conveniance store, gas station, video store, and and 2 rentals including a penthouse suite 3 bedrooms, and a subway restaurant (commercial lease)treat the REAL ESTATE separate from the 3 BUSINESSES. The real estate can be financed separately with a mortgage, much cheaper, than a business !

Try to separate gas station (with conv. store) from video store from subway $ wise and income wise !

Value each of the 4 profit centers, and analyze if you owned the real estate how much income you could get from the 3 businesses by leasing them to someone else .. even if you owned them ..

The gas station might be a great business, but the sub-way might not .. so better leased to a 3rd party for XXXX $s/month perhaps.

 

[gwasser]

QUOTE (thomasbeyer2000 @ Feb 6 2009, 07:41 PM) treat the REAL ESTATE separate from the 3 BUSINESSES. The real estate can be financed separately with a mortgage, much cheaper, than a business !

Try to separate gas station (with conv. store) from video store from subway $ wise and income wise !

Value each of the 4 profit centers, and analyze if you owned the real estate how much income you could get from the 3 businesses by leasing them to someone else .. even if you owned them ..

The gas station might be a great business, but the sub-way might not .. so better leased to a 3rd party for XXXX $s/month perhaps.

Hi Alex,

Since you seem intent to proceed on this deal, I would suggest that you incorporate some of these entities separately to protect you from liability and so if one goes, the bank could not necessarily be able to grab the rest.

Finally, since you are buyin a gas station, you also buy an environmental liability. If you have a leaky tank polluting the soil that can easily bankrupt you. So do as a mininum an independant environmental audit and... just like with the financial audit, don`t try to save pennies.

 

[JoefromTO]

Does the current owner run the business or does he/she have someone else doing it. If they run it themselves, do they live there? Look carefully at the current owners lifestyle. How do they dress, how do they look, what kind of car do they drive, have they had a vacation in the past year or 2...these are signs of what to expect from the business. If things look grim, don`t expect anyone to work that hard for you.

All I can say Alex, if you plan on paying someone else to run this business, be prepared to see the profits on the books dwindle. The nature of this business revolves alot around cash. Even if you hired someone you felt you could really trust...well you get the picture.

I own a collision facility and cater to the afluent community. I can tell you that if I let one of my staff run the business, it would not perform the way it should. Every business needs a driver. Someone who cares for the business by taking care of the customers and manages the staff and all the financials and legal issues that come up. Its almost impossible to hire someone to run your business the way you would. There`s no passion. The only motivator is money, meaning how much are they making. So temptation will always be there and you will be faced with the dilemna of worrying about it.

In my opinion, the whole concept of real estate investing is to have something that provides a fairly safe and stable return on your investment while freeing up your time. Being a sophiticated investor is what we all strive to be, so we create systems to help manage the business of real estate investing.

This ventor your interested in, is a business, not real estate. Be prepared to do the dirty work (so to speak) if your employee bails.

Now, thats not to say that this isn`t a great oportunity for you, but in my opinion, I would strongly consider being there for at least a couple years so that you can fully learn everything there is to know about the business before hiring someone to run it for you. Even a couple years isn`t really long enough to truly learn all the different things but you get the idea.