There is this small business in my area that is for sale for ~$1.2 Million. I know that the business is a bit struggling (and I know the reasons). As a customer in the sector, I know that there is demand and I have some ideas to increase the gross revenue and the profit margins. This is an absentee-run business with ~12 employees and a manager.
I have a full time job (in a different sector) and I want to keep it. I have never run a business but I have successfully managed big long-running projects. I have a CS degree but read some books on finance and business. I am married with a kid and we have a net worth of $500k. It is a bit scary to buy a million dollar business.
Question: I am curious if anyone has any suggestion on how to tell if it is okay to buy a business twice someone’s net worth. Is it too big of a step for a first business? Any suggestion on risk analysis or minimizing the risk here?
“This is an indoor playground business.”
Based on ask of $1.2 million, I assume business does not include real estate.
This means you would be buying goodwill and perhaps some equipment, furniture, and fixtures, and inventory.
Here, the true investment value of the business will be a function of the free cash flow available to you as new owner.
Consequently, key to understanding market value is to determine stabilize earnings (weighted three-year average) and apply appropriate multiple or capitalization rate.
The latter of which can be determine with industry benchmarks, broker guidance, commercial software, appraiser, or industry consultant.
As for finance, a rational approach might suggest a cash injection of between 20 and 30 percent for someone new-to-industry.
Another consideration is best fit.
What happens if key personnel such as manager and lead staff decide to split after you take over?
Are you capable of taking over day-to-day operations and providing a customer-centric operation?