Should I invest in a candy making business that only works about 2 months out of the year and profits 50 to 60k a year? ?
They're asking 200,000, but will take 50k down and are willing to work out the rest in some kind of a payment plan. And these are people we know very well. Also comes with 11 years of consistent clients. Also could a reg. person with a reg. job get some of loan & would it be worth it?
- Anonymous1 month ago
No one ever sells a business that is rolling along great. People that buy it shouldnt just "keep doing the same thing" and hope it works. How knowledgeable are you in running a business? What would you change to put it in a better direction? Why will it be successfull when theirs doesnt seem to be (if they were super successfull they wouldn't be selling it).
- STEPHENLv 71 month ago
That's very good of them. Only wanting 50k down and they'll work out a payment plan for the rest.
You know they're wanting you to invest 4 times their annual profits?
I'd run a mile from this.
- JoeLv 62 months ago
Sounds like risky business.
- 2 months ago
$200,000 for a company that works for two months a year? They don't seem like the hardest working company in the world.
If they have 11 years of clients and are asking you for money they're probably not making enough to grow or support themselves, and it seems like it would be a pretty bad investment in general.
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- JudyLv 72 months ago
You will have to have the down payment in your own money. A lender will expect you to have 1/4 to 1/3 of the price invested yourself, from you own money. Do you have a written business plan? Have you had a CPA go over their books? How much experience do you have in this business? Who will actually make and pack the candy, and handle the orders and accounting and the overall business operation?
- Casey YLv 72 months ago
1. They wont be cool with you taking out a loan for the down payment...most likely.
2. Do you know anything about the business??? If they decide to stop working...what happens to your investment?
3. Why do they want/need investors exactly?
- DEBSLv 72 months ago
You invest $200k and the business makes $50k a year? How much of that money do you get? Even if that were your share of the profits, you still have to wait 4 years just to get your initial investment back. That's along time to have that much money invested in one place. What happens if the owners get hit by a bus or just decide they don't want to put the effort in it anymore?
- Coffee DrinkerLv 72 months ago
A very simple, but useful rule of thumb for purchasing an established business is that any business is worth roughly 5x the annual net profit.
This rule works because it gives you a 20% return on your investment.
Look at it this way, if you have $200k to invest, you could put that in a money market account with no risk and get about 3%. You could buy bonds with a small risk but still very safe, and get about 5% return. You could buy stocks (via a mutual fund) with modest risk and get anywhere from 8% to 15% average return (but with some down years)
Buying an individual small business is more risky, so the return on investment should be even higher to compensate you for the risk. So you should be looking for at least 15% annual return. 20% would be nice, and it works out as a nice round figure since 5x annual profits means 20% ROI.
This is of course just a rough starting point to get a ballpark value of a business, but its better than a wild guess.
So, they want $200k to "invest" in a business with $50k annual profit - that's 4x profit or 25% annual ROI, which means their asking price is actually a little below the rule of thumb (5x would mean asking $250k for a business with $50k profit).First of all, what do they mean by "invest" in the business. Are you buying the business outright? Or buying a share in the business? or buying bonds with a fixed rate of return? For $200k I would expect at least an 80% stake in a business with $50k annual profit - that would mean I get $40k annually (80% of the profit) for a 20% ROI
BUT there is one major factor to consider before you get too excited - how much time and effort do the current owners spend producing that profit? If they're putting in 40 hours per week without drawing a salary in order to produce $50k "profit" then they're really just working a full time job for $50k salary. If you buy that business, you're just buying yourself a job since you'll have to put in 40 hours per week to keep generating those profits.
So BEFORE you apply that 5x rule, ask yourself how much it would cost to hire someone to replace the current owners? Subtract that cost (including taxes, benefits etc) from the net profit, and use that number x5 as the value of the company.
For example, if you think it would cost $40k to hire a general manager to replace the existing owner, then you'll only get $10k annual profit as a passive investor, with an asking price of $200k that's a hard pass. Heck I can turn $200k into $10k annual return with an FDIC insured money market account or an annuity from an A+ rated financial company - so why would I take all the unnecessary risk of investing in a small business for 5% ROI?
- EvaLv 72 months ago
That's a good profit for 2 months work, but you would need to expand the business into something that would cover more months in order to pay back the loan and make enough money to support yourself. It's unlikely that you would be able to get a loan for the down payment. A bank or other lender wants to see that you have a significant personal investment in the business. Do you have experience in this type of business? It could be a good investment, but you may not be ready for it.