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  • #967505
    tujar
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    Hi all, I am male and 25 years of age. This is the first time I have looked at the topic “business”, I work in IT and I have recently been approached by a relative to buy a established business together, he wants to buy a bakery as he has worked in the baking industry previously and he currently works for a company that makes pies.

    He has asked me to own 50% of the business but I am not sure if it’s the right thing for me to do since I have zero experience in owning my own business, though he has suggested that I should keep my current job and he will manage the business with employees.

    The business owner is asking for $100,000 and he has agreed to give us a two weeks trial with the condition that the business will make $5000 a week. The net profit is suggested to be around 30-40%. With this in mind the net profit would be around $1500-2000 a week at its current state, and this will barely cover “or may not” the wages of my relative and the other two employees to help him run the business. Though we have some ideas on how to improve the it but it’s something not guaranteed to work.

    Given the above info what would you suggest, I know it’s not easy but I would appreciate your thoughts. Is this a good move or would I be better of looking at online trading? This is also something that I have started looking at.

    Thanks

    #1026693
    Melinda B
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    I would suggest you go see your accountant – and take along a copy of the books of this bakery.

    If it’s making that much money per week, why is the owner selling it? Doesn’t sound like a lot of money for a thriving business….

    If you’re at all hesitant then don’t do it.

    #1026694
    tujar
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    Melinda_B, post: 31477 wrote:
    I would suggest you go see your accountant – and take along a copy of the books of this bakery.

    If it’s making that much money per week, why is the owner selling it? Doesn’t sound like a lot of money for a thriving business….

    If you’re at all hesitant then don’t do it.

    Thanks for the response. I am not sure if he has such a book that shows his real income and I am also a bit suspicious as to why he is selling a business that is making him $2000 a week according to his agent. We could go with the option of two weeks trial and then again not sure if he will be doing anything dodgy to inflate the takings.

    Is there a ratio of what a business earning should be against the money spent on it? Or how long before it pays of the investment?

    Thanks

    #1026695
    Watotech
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    As Melinda said it sounds a little suss so bring in an accountant. Also check to make sure there isn’t anything dodgy going on with trade marks or legal cases.

    If the guy is making 2000 net profit before paying the employees

    Assuming 40k a year for each + 10% ($880 pw) you would be losing money and this is before taxes and any running expenses

    I know this is an over simplification but I hope it helps

    #1026696
    Melinda B
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    Before you buy a business then they have to provide their books to you. You need to have your accountant go through them with a fine tooth comb.

    You’re not really going to buy a business without checking out their books are you?

    #1026697
    tujar
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    Watotech, post: 31516 wrote:
    As Melinda said it sounds a little suss so bring in an accountant. Also check to make sure there isn’t anything dodgy going on with trade marks or legal cases.

    If the guy is making 2000 net profit before paying the employees

    Assuming 40k a year for each + 10% ($880 pw) you would be losing money and this is before taxes and any running expenses

    I know this is an over simplification but I hope it helps

    Thanks, you are correct in simplifying this and I have been doing this in my head as well and at it’s current state I will be losing money given that I won’t be working there myself and I have to employ other people. But I am hoping to start selling food like Kebab on the side to increase the taking and the shop is big enough, it’s something that may not work and if it doesn’t I am going to be in trouble. This is my life’s savings so not sure…

    You’re not really going to buy a business without checking out their books are you?

    Hi Melinda, Certainly not but I am not sure how trust worthy their book is and I have no idea how else to base their taking on.

    #1026698
    Anonymous
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    Hi tujar

    Good on you for seeking advice before taking this big step.

    As others have already mentioned, I would highly recommend that you speak to an accountant before going too much further. Someone like forum member James Millar (http://www.flyingsolo.com.au/forums/members/jamesmillar.html) or your existing accountant will soon help you to determine the true worth of this business and its likelihood of success.

    Take a look at this article too (I suspect Deadly Sin #7 will sound familiar to you?) http://www.flyingsolo.com.au/p309431586_The-7-deadly-sins-of-buying-a-small-business.html

    All the best with your decision making!
    Jayne

    #1026699
    Karen Wardle
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    Hi Tugar
    I agree with Melinda in that if you are hesitant, dont’ do it. I also agree with Jayne that you should be congratulated for doing your research first.

    I appreciate that this is a business forum and we are all here to encourage, but my advice is DON’T DO IT!

    I say this for a number of reasons. And when put together they spell disaster. Others may disagree with me, this is just my opinion, but it is based on over twenty years experience in small business.

    • You are young – nothing wrong with that. But in addition to that you will be entering an industry that you have no experience with. You also, by your own admission, have little business knowledge.
    • The business has staff. Do you or your relative have any experience in managing staff. Even with great staff you will need management skills to be able to run a happy, productive workplace.
    • You will not be involved in the day to day running of the bakery. Being hands on is important in the early stages especially. Without your presence you will be relying on your relative to provide you with feedback and updates on how things are progressing. With such a large financial investment I would want more imput then that as I think this is a huge risk.

    Combine all of this with the uncertainty of the financial records of the business and I think that it is a huge undertaking for someone with limited business and industry experience.

    Tujar this is a large financial investment. You say it is your life savings. I absolutely applaud you to have savings at such a young age. Well done!
    You obviously have the intelligent and determination to succeed in business. Personally though I don’t think that it is going to be this one and I would caution you strongy against it.

    #1026700
    Kwaka_Chris
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    Sounds a bit fishy, and a bit risky, plus the food industry, especially bakeries are notorious for highly intensive labor on the owners behalf.

    My own suggestion is to reverse recruit your relative and start an IT business together ;)

    #1026701
    James Millar
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    Ok some observations and thoughts for you (to add to those that are on the money here).

    Pro’s
    1. It’s a pure investment case for you as your family member / business partner will handle all else. (no opportunity cost in lost salary income for you).
    2. Bakery’s often have fantastic financial characteristics. (independent or franchised). Strong cash flow.
    3. Your family member / business partner has experience within the industry.
    4. HR is pretty simple as its largely unskilled labour which means lower payroll and wide availability. The downside is that these staff will often need lots of supervision (ideally by an owner unless of course it’s franchised with adequate systems and controls in place eg bakers delight).
    5. You don’t need vast small business experience to operate and manage one successfully.
    6. There is potential to expand offerings (kebabs etc)

    Cons
    1. You will be a passive investor and have little input or control on your investment.
    2. You have limited small business financial and commercial analysis experience. (And limited business experience, however that can be made up by your business partner. Again it’s a simple operation).
    3. You are looking at purchasing a business with inadequate information and research (although this is easily solved provided they hand over the requisite due diligence information. In Victoria this is compulsory under law. It would be highly advisable to review with an accountant).
    4. The business doesn’t sound like its profitable and yet they have derived a valuation figure of $100k. For these purposes, net profit is the bottom line number after all necessary wages. You should include all managers’ wages (on an arm’s length basis) in valuing the business. ie assume you had to hire all staff and no owners were to work in the business and draw a salary. If there is a profit after that then that’s what the valuation is based on.
    5. Investing your life savings into any business is a bold and risky move. You want to be 110% sure with your analysis if that’s the case.

    The key for you now is to determine the real profitability of the business (including any non declared amounts). Working in the shop for two weeks around Easter may or may not be the most representative trading period (but yes, seeing trading first hand is the only way to analyse a bakery). Get the details of exactly what you are buying (fixed assets) and exactly what liabilities you are taking on (long lease, staff entitlements, trade liabilities etc).

    For $50k you would want to be getting a return of at least $10k per annum to make it worthwhile (20% for an investment with this risk profile). Anything less and you are probably tying your money up in a non productive way.

    What was the “online” trading opportunity you refer to? Helps for comparisons sake.

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
    #1026702
    Anonymous
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    Thanks James, Karen and Kwaka for your fine advice and taking the time to help tujar out.

    You guys are awesome.
    Jayne

    #1026703
    tujar
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    FS Concierge, post: 31640 wrote:
    Thanks James, Karen and Kwaka for your fine advice and taking the time to help tujar out.

    You guys are awesome.
    Jayne

    Thanks everyone for the great advice and it’s really appreciated.

    I have asked the owner for his book but he doesn’t have one and his reason is that it’s a family business where his wife and daughter works for him so he has never had the need to keep a book. But he has said that he would make one if I really want one which I said no as I can’t trust him making something up.

    I like the idea of two weeks trial but he is only doing that if I sign the contract and buy his business and he will put this as a clause in the contact. I have told my relative that it’s better if we take our time and don’t rush with this which he has agreed with.

    James, thanks for the detailed response. I agree with the 20% return a year and I have read on the net that the business should pay off the investment within 5 years but at it’s currently profitability it may only covers three people’s wages and there will be basically 0 return for me.

    The online trade that I was talking about is share trading on the stock exchange. I have registered for playing a game on the net where you trade with papers “not really money” on ASX’s website to get the feel of share trading but again I am learning here and not sure how it will turn out.

    Thanks

    #1026704
    Melinda B
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    tujar, post: 31683 wrote:
    I have asked the owner for his book but he doesn’t have one and his reason is that it’s a family business where his wife and daughter works for him so he has never had the need to keep a book. But he has said that he would make one if I really want one which I said no as I can’t trust him making something up.
    WHAT?

    Family business is irrelevant, we’re talking about his accounting bookkeeping here, he MUST be keeping books. How does he account for income, expenses, tax, wages etc?

    You can’t just ‘make one up’, books need to be kept from before the business starts to record every financial transaction. I wonder what he’d say if the tax office auditors turned up… “hang on, I’ll just make up my books”. I don’t think so…..

    #1026705
    Karen Wardle
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    Huh? How can he not have a set of books. What type of business is he running?

    What does he use to provide figures to the ATO. That just doesn’t ring true. Every business has some form of record, it doesn’t matter if it is a family business or not!

    I would stay well clear.

    #1026706
    Karen Wardle
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    Sorry Melinda

    You must have hit the ‘submit’ button a minute or two before me :)

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