Think before you buy: Business ownership is no small commitment

By Jacqueline Rencontre*

It is frightening to see how many people want to run their own business without having a clue how to do so. I started looking at opening a food outlet with a partner that has more than 20 years’ experience in the restaurant industry as I have a passion for great food, great service and good value for money.  I have a rule: if I cannot make a great meal at home, I will pay the price for it at a restaurant. Over the past couple of months, I have learned how to run a restaurant, calculate profit margins and portioning on food cost and what suppliers to buy from.

My journey started in looking for a shop to rent in the areas we wanted to start a food outlet.  An offer to rent was declined by a shop in a shopping complex in an industrial area, reason being that the agent said we would lose our money and be stuck with the changes that have been made to the bare shop.  Small wonder that this shopping complex has been standing two-thirds empty, as they actually do not want to rent out the space. Worst is that the agent was there over the past three months when we went to take measurements and had the builders there for quotes. She knew what we were planning but let us do all the work first before telling us we couldn’t rent the space (although we can afford it and have a clean financial back ground).

We have looked high and low and it is astonishing that there are hardly any shops available for food outlets. Some small malls where shops are available already have too many food outlets and a few small malls are currently in the process of being sold to other property owners.  We altered our mind-set and started looking at current businesses that are for sale – what an eye-opener! One website provided me with seven businesses on the market in the areas I was interested in. One of these was a coffee shop that was within the price range I was prepared to pay, but the reality is that if a business is for sale at a low cost, it is generally in financial trouble.

We met up with the owner of this particular coffee shop – a lady in her late 50s. We heard her story on how she had bought the business five months ago without any knowledge of running a coffee shop, thinking it would be an easy task. She explained that the staff of this coffee shop had to guide her with the running of the store, what was required to be purchased as stock and what the menu was about. In the same breath, she explained that this coffee shop had much potential if the right person were to buy and manage it as she does not have the understanding and knowledge to succeed.

When purchasing a new business, one of the first things a person should examine is the financials. The owner produced a file with tons of slips, explaining that Excel is not her strong point and that she has filed everything in this manner over the last five months. She also confirmed that her bookkeeper would sort the financials out and send to us for review. Furthermore, these financials were inaccurate as she confirmed she has been taking money from the till without noting these amounts. I am curious how one can put a business up for sale without having this type of documentation ready for prospective buyers. Unfortunately, many of these business owners are only looking to get their original investment back.

In the interim, we calculated her sales for each month as well as the value of the equipment. This did not match her asking price as it was evident from her sales that she was not bringing in much profit. We calculated the business over a five-month period, which added up to approximately R100k on profit including the equipment. The takings per month were at an average of R40k and she spent R17k on stock per month for the store (this is way too high). Her overheads were also very high due to her not using gas and buying products from small suppliers. She was also only working on a markup of around 2% and she was running at a loss of R477 over the five-month period. We decided that we would need to rebrand the business and buy new equipment that is more economical. In the end, we offered her R115k for the business.

I was informed that she was not interested in our offer as she just wanted her money back – the amount she paid five months ago. Unfortunately, her books show the value of the business and the business is only worth what she is bringing in financially and not what it was purchased for.

The business may have great potential with the right person running it but unfortunately, the owner is looking for what she calls “goodwill” (her words). She is now looking for another buyer and is not interested in me purchasing the business. Her key objective: to get her money back. However, without the business sense, she does not understand the work that will need to go into rebuilding the brand and increasing the menu offerings for customers. This means more investment from the buyer when purchasing the business.

When her words “great potential” play in my mind, I realize that you simply cannot sell or buy a business at a high price based on great potential.

After our offer was declined, we went back to the proverbial drawing board with property searches and business searches. I answered another two ads – between R315k and R600k. After a gentleman called me, I enquired about the R315k ad, which was in a better area but sounded just like something I had already seen. When asking the name of the coffee shop, I was shocked to find that this was the same lady who had declined my offer. I informed him that I had already made an offer on this coffee shop but was declined. I also informed him that the business is not worth the asking price and that it is running at a loss. How could he agree to selling this business at a higher price? He confirmed that he cannot argue with the owner and if that is the price she wants, that is what he will sell it for. He also brought the potential of the business into the conversation and confirmed that another store (the R600k one) has run into financial problems and they want the price that they paid for it. This store was also offered R400k and they declined this.

Although I am by no means a financial guru, I am astounded by the fact that a ‘broker’ is assisting these people to sell their business without having reviewed their financials. He should be informing them on the worth of their business and then calculating the selling price.

A Financial Advisor should be FAIS accredited to give financial advice and an agent selling property should also be accredited. When you compare this to purchasing a house, you cannot buy a house for R1 million if it is falling apart and still have to spend R300k to make it a home. This is my thought process – you cannot look at the potential of a property.

I would like to warn people, who would like to purchase a business:

Firstly – ensure you have the knowledge to run the business. Don’t do it because it looks like a cash cow and a nice-to- have.

Secondly – ensure you review the financials as you are entitled to do so. If necessary, get expert advice on the value of the business and if the monthly turnover and equipment cost match more or less the selling price, negotiate if you feel it is not worth the selling price. Don’t just simple look at the possible potential, goodwill or the fact that you like the seller. This is business. Remember: you will dislike the seller later if you are not making any money on your investment!

Don’t invest your hard-earned savings, retrenchment package or pension pay out on something that you have no knowledge about or experience in. If you do, you are guaranteed to lose money.  Rather speak to a Financial Advisor or a Business Broker before investing any of your money, as you will burn your fingers if you don’t get expert advice.

* A member of the Biznews community, Jacqueline Rencontre’s marketing experience spans over 20 years, skills including Budgeting, Public Relations, Corporate Social Investment, Sponsorship and Event Management. The owner of GioPS Events Management, Jacqueline has worked in converged technology, asset management, the life insurance and short-term insurance industries.