Buying a business - smart idea?

[White98LS]

I don't own an NSX yet, but I've been coming here for years and have always found helpful advice, NSX-related or not. I'm hoping someone can give me their opinions.

I graduated in Finance from UW a year ago, and have a great job in finance for an insurance company making $50-60k/yr. I own 50% of my condo in Seattle purchased 9 months ago, the other half is shared with my parents. My plan is to get an MBA in a top 25 school in California (USC, UCLA, Berkeley, Stanford) in 2 years. I have about $60k invested in mutual funds and am saving over $1k/mo on average. Only debt is a $6k loan from college.

I am considering buying a proprietary freight/shipping route locally. The business is for sale asking $92,500, grosses $94k/yr, cash flow is $77k/yr, and revenue has grown at least 10% every year for the past 5 years. The business comes with a van and a driver paid $43.5k/yr including taxes. Seller claims passive earnings of $33k/yr for the owner. I am always looking for smarter ways to invest my money, and at this point with a decent personal cash flow and no wife/kids/debt, I feel maybe it's not a bad time to take on something like this. It seems like the cash flows and expenses are pretty stable with not much risk. My only worries I can think of would be filling the driver's position if he were to quit unexpectedly/suddenly, and maintaining/repairing the van, which is a 1993 International said to be well-maintained.

My questions are, do you think this is a good time for me to buy a business like this, or is it too risky? Would I be making a mistake by buying this business, then moving out of state in a couple of years (I plan to rent out my condo, should just about break even with mortgage once tax breaks are factored in)? Anybody have experience in the shipping/freight business? Any input would be appreciated. Thanks!

 

[chado]

Hey 98Ls,

I've got experience in the logistics/forwarding business, but I'd really like to hear more about exactly what the company does? Only one driver huh? How do they generate new business. Etc.
I'd like to take me customers from here (bigger ones Air Jamaica etc.) and start my own business as well. I'm just waiting for the right time as well. But I would be interested in some more of the details before really weighing in. I know there are a ton of guys on here with more "business" knowledge and background as well.

 

[White98LS]

Sorry for not being clearer - the business is basically a contracting deal with a major shipping company, with rights to exclusively service a given area.

 

[TURBO2GO]

IMO, people that have not really owned their own businesses before, have no idea what it is about. To me the only businesses worth buying are multi-million dollar operations with a proven and long history and something that you would have some serious knowledge about. 90% of all "businesses" being sold usually have some sort of issues or problems. In this case, you are entirely reliant on too many things... a driver, a contract with a major company, one vehicle.

I am not saying don't, as its not a huge sum of money... all things considered it sounds like a simple operation. But if I were in your shoes, I would really think long and hard. I don't think this is the right move for you right now. You want to pay $92K, lets say gross 33K, leave in two years if nothing goes wrong and you still have not recovered 30K of your investment. So you have to keep the business for a while to make it worthwhile. Are you gonna try to manage it from afar? That may be a huge PITA.

You sound like a pretty intelligent guy. I think your condo thing is a good investment, keep that and stay more liquid with the rest of your money. Keep an open eye out and something better will pop up. Beig liquid in itself is quite valuable. It allows you to take advantage of situations that require timing, something most people cannot do.

 

[Ultraman]

I don't own an NSX yet, but I've been coming here for years and have always found helpful advice, NSX-related or not. I'm hoping someone can give me their opinions.

I graduated in Finance from UW a year ago, and have a great job in finance for an insurance company making $50-60k/yr. I own 50% of my condo in Seattle purchased 9 months ago, the other half is shared with my parents. My plan is to get an MBA in a top 25 school in California (USC, UCLA, Berkeley, Stanford) in 2 years. I have about $60k invested in mutual funds and am saving over $1k/mo on average. Only debt is a $6k loan from college.

I am considering buying a proprietary freight/shipping route locally. The business is for sale asking $92,500, grosses $94k/yr, cash flow is $77k/yr, and revenue has grown at least 10% every year for the past 5 years. The business comes with a van and a driver paid $43.5k/yr including taxes. Seller claims passive earnings of $33k/yr for the owner. I am always looking for smarter ways to invest my money, and at this point with a decent personal cash flow and no wife/kids/debt, I feel maybe it's not a bad time to take on something like this. It seems like the cash flows and expenses are pretty stable with not much risk. My only worries I can think of would be filling the driver's position if he were to quit unexpectedly/suddenly, and maintaining/repairing the van, which is a 1993 International said to be well-maintained.

My questions are, do you think this is a good time for me to buy a business like this, or is it too risky? Would I be making a mistake by buying this business, then moving out of state in a couple of years (I plan to rent out my condo, should just about break even with mortgage once tax breaks are factored in)? Anybody have experience in the shipping/freight business? Any input would be appreciated. Thanks!

I think that's a smart way to go buddie. Personally I don't have any experience owning a small business, but I always know using money, instead of labor, to earn additional money is the smartest way to go. I'm also looking for small business ideas and so far I'm still doing my research. Good luck with your venture and please share your experience with us.

 

[White98LS]

IMO, people that have not really owned their own businesses before, have no idea what it is about. To me the only businesses worth buying are multi-million dollar operations with a proven and long history and something that you would have some serious knowledge about. 90% of all "businesses" being sold usually have some sort of issues or problems. In this case, you are entirely reliant on too many things... a driver, a contract with a major company, one vehicle.

I am not saying don't, as its not a huge sum of money... all things considered it sounds like a simple operation. But if I were in your shoes, I would really think long and hard. I don't think this is the right move for you right now. You want to pay $92K, lets say gross 33K, leave in two years if nothing goes wrong and you still have not recovered 30K of your investment. So you have to keep the business for a while to make it worthwhile. Are you gonna try to manage it from afar? That may be a huge PITA.

You sound like a pretty intelligent guy. I think your condo thing is a good investment, keep that and stay more liquid with the rest of your money. Keep an open eye out and something better will pop up. Beig liquid in itself is quite valuable. It allows you to take advantage of situations that require timing, something most people cannot do.

Thanks for your input, that's a helpful perspective.

A couple details regarding what you brought up. The route has been established since 1985, and the owner is selling so he can move and return to school. Which brings up your point about recouping my investment - if I gross $33k/yr for 2 years then sell, I should be able to sell the business for a comparable amount to what I bought it for unless something were to change - it's not like the endeavor is a total loss at that point. While potentially causing short-term problems, the driver can be replaced and the van can be repaired... not small expenses by any means, but not business-killing catastrophes, either.

 

[TURBO2GO]

Well... 90K is also the downpayment on a good piece of real estate. Instead of having one person rent and pay your mortgage, you can have two of them doing so. Have you thought of this option?

Have you thoroughly looked at the operation in this delivery company? The person I'd like to talk to perhaps, is the delivery driver although the owner may not want you to. You definitely should try to talk to the company that has this established route and is subcontracting to him. Have you done this already?

 

[White98LS]

Well... 90K is also the downpayment on a good piece of real estate. Instead of having one person rent and pay your mortgage, you can have two of them doing so. Have you thought of this option?

Have you thoroughly looked at the operation in this delivery company? The person I'd like to talk to perhaps, is the delivery driver although the owner may not want you to. You definitely should try to talk to the company that has this established route and is subcontracting to him. Have you done this already?

I didn't plan to pay cash for the whole business - I was going to get a small business loan. I don't want to get in over my head with real estate because I don't want the financial risk of 2 mortgage payments if things go wrong with renters, while I'll be spending $40k/yr for 2 years on tuition and books, not to mention living expenses. I want a good portion of that $60k I have invested (which I hope to be $100k thru saving and gains when I leave for school) to help carry me through grad school as I plan to do an MBA full-time. With the business I would get a less-long-term investment when compared to RE, which doesn't require me to give up all my liquidity but generates a positive cash flow. Plus RE is expensive here around Seattle!

My condo now is a 2br and my best friend rents from me at a great rate (for him). He plans to move out within the year and I'll get someone to replace him, then when I move for grad school I will rent it as a 2br.

I have not talked to the driver/seller because I am not ready to be that serious about the investment quite yet - that's why I'm asking more basic questions like this first.

 

[TURBO2GO]

Have you talked to the people I mentioned? can you? I understand if you don't want to get into another condo. I would think the parent company providing the established territory and the driver would know quite a bit.

 

[White98LS]

Have you talked to the people I mentioned? can you? I understand if you don't want to get into another condo. I would think the parent company providing the established territory and the driver would know quite a bit.

Forgot to address that part of your post and was editing my previous post while you were responding:redface:

 

[DocL]

White, if you are still in school and you're planning on getting a higher education, invest in yourself. Buying this small business is a risk for you at this time. Now, if the seller would finance you based on the gross revenue of the businees over the next year, I'd jump on it. But, paying 100% for a business is risky unless you have experience in that arena. For example, I just bought another practice from a doctor who got himself into a jam. I ultimately paid 0.10cents on the dollar from what he grossed last year. Furthermore, I'm only giving him 20% down and then I'm paying him the remaining balance each quarter over the 12 months. :biggrin:

 

[nsxotic911]

I've found that one of the ways to maximize your chance of success -and definetly required for GREAT success - is by living, breathing & investing your soul in it 24/7.

Is this the business you want to do that? Maybe not for the rest of your life, but at lest for the period you planning on holding it?

If yes, go for it, and ignore what everyone else says...You can be like Bill Gates, Jeff Bezos, Michael Dell, Ralph Lauren... and all the other college dropouts that had a vision that no one would believe, worked their ass off, and made billions.

If not, then proceed with caution. Remember, you are now the BOL. You are the one that is responsible to deliver the service on the time expected regardless of circumstance, get a driver if your driver quits (or be THE driver if you can't get one.. in 24 hours..), handle customer complaints, lawsuits, pay the bills, pay taxes to 14 different government institutions... fix the truck, advertise... etc...

Can be a tremendous learning experience & pay off dividends, just know what you're getting yourself into.

I know a number of highly sucesfull small business owners, but they all WORKED THEIR BUTTS OFF, and it took at least 5+ years before the 'good times were rolling.' At the same time, I know business owners that are working harder for less money, more risk, stress and responsibility than they had anticipated...


On the other hand, if you're interested in investing in RE in the Seattle area... contact me, I can discuss options. :biggrin:

 

[chado]

Yeah the company with which the contract is held is critical in this industry. If it is a large, stable company such as a Fedex, DHL/Danza, or a large forwarder than you will have steady business (can't comment on the margins). However many smaller companies come and go because of the high level of competition.

 

[sahtt]

Obviously you'd need to have the actual money making process analyzed and looked over for weaknesses. The most obvious that jumps out at me as I've been in distribution for about 4 years is the contract. How stable is the main customer? If he goes out of business or relocates are you dead in the water? If it's an oil company in Houston, location is probably fairly solidified but there are only a few companies I'd rely on if they were my customer in the business you are speaking of as if gas went to 30 a barral.. your customer may either a) be gone or b) downsizing and good as gone to you.

Let's say the contract was rock solid with a rock solid company with little to no chance of not needing your services in the future, relocating, or collapsing all together.

If that was the case, I would consider it. However, if it really was that rock solid, do you think he'd sell on one years gross revenue? I wouldn't, would you?

This is how you really make some $$$, currently* the company doesn't look overly secure, but before* you buy it you take a few people to lunch and find out it is more solid than the previous guy believes.

But to do that, you need to know the business well which was mentioned a few times before and justly so.

In your position age/education/$ wise, I'd go real estate if it's feasible in your area until you know a business well enough to take advantage of a situation, not simply pay the full price for it and then attempt to figure it out [refer to DocL's situation to taking advantage AND knowing the business very well personally].

 

[BD]

It is well worth the price, judgine from the description.

The risk is minimum, and all honest truth is, if you don't gamble, there will be no return. UW - Washington?

I bought my shop three years ago, I went from working at the Postal service, owning nothing, to now, two properties (Seattle and California), and be able to have two nice cars (2003 NSX and 2006 S2k).

You are young, and if the venturn don't work out, you can always sell it.

 

[slamstrom]

What do you know about this business/industry? Do you have a plan to expand the business? Do you have enough cash reserve to weather through the tough time if it come right after you purchase this business? How are you going to promote/market your business? Fuel cost is going to be you biggest unknown variable.

Too many new business owners are out of business in the first 2 years, because they didn't do their research, do not have a contingency plan, or not know enough about the business that they are in. Selling the business 2 years down the road is not a guarantee return on your principle if the business does not expand. I am not saying don't do it, but do lots of research, and have a contingency plan.

My wife and I started a part time online business 3 years ago. Part time meaning 10 hours a week. Last year, our net income from our online business was 75% of my 40 hour a week job. Two years ago, it was 50% of my job. Our online business grew about 50% for the last 3 years. I think in 2 years, I can quit my job, and work 20 hours a week for myself. Having a wife that was a controller in a previous life also helps with business planning.

If you really know this industry and have done your homework, this is the time to do it when you don't have any dependents. Good luck and wish you success.:smile:

 

[Ski_Banker]

Think about your exit as much as anything. What will the business look like in X years and what will it honestly take to get it there, if possible. Who will buy it? Know your exit before you make your investment.

 

[nsxjacko]

Dig deep and find out why the seller is selling it.

Most of the time you'll find skeletons in the closet.

2nd, I'd have my CPA look at the books. (cost money but it'll save you in the long run.)

Also, have your attorney look at any contracts. (same thing as above, but better to spend money now, instead of losing your arse later).

I personally think at least 75% of the sale price should be in assets (inventory, intellectual property, some type of equity, equipment and etc.). There's always exceptions to that rule, but if you think about it, if your business goes south, you have 75% of your investment that you can salvage.

I'm impressed with what you've accomplished and your goals. You're on the right track.

"if you're not making mistakes, you're not making decisions."

You'll make some for sure. We all do. Just keep that in mind and take calculated risks.

 

[SilverStone05]

If you choose to get more serious, you have to make the current owner show you tax returns for the business. Numbers are easy to fudge, but the tax forms will give you the real story.

Also, like TURBO recommended, talk to the driver and the Logistics company that is subcontracting the business to the company. If the current owner has nothing to hide, he won't be against you doing so.

The only thing that is bugging me is that the guy is selling the business because he is going back to school. If it truly is "passive" income he should be able to run the sucker while he's at school. Furthermore, if you are planning running this operation while you are in school.....what makes you more proficient than the current owner? Why would you do it if he's not willing to?

Do your homework and you'll make a good decision. Good luck.

 

[White98LS]

Thanks so much for all the helpful insight. The input from all angles was great to hear.

I have decided to pass on it for now. With only one driver, one van, and one area, that's just too much risk to take and could possibly postpone going to grad school. I'm already in good shape financially and shouldn't take such a dangerous endeavor just because some extra income would be good to have. I remain interested in this type of a business later in life, but right now it's just not the time. I'll just continue making mortgage payments and dumping money into my mutual funds as much as I can. Thanks again!

 

[nsxjacko]

Automatic millionaire