Cheap Businesses for Sale. Are they worth it?
When buyers search for businesses for sale, they are typically attracted to businesses that are priced cheap! There’s no other way to phrase it better. However, we at Crowne Atlantic want people to know that if a business is priced at an unusually low price, there is typically a reason for it and many times it is not the reason Buyers are hoping for. Buyers are often hoping that businesses will be priced cheap because the owners are 100 years old and are tired and want to give the business away for FREE. This unfortunately is rarely the case.
Our office has a usual method for evaluating businesses that have very low prices. Now there are some exceptions. For example, if a business is a one-person labor operation that nets $50K a year and is priced at $50K that’s one thing. However if a business is priced $200,000 and is netting $200,000 there is normally an unappealing issue that is driving that price to that level. Depending on the issue at hand it may or may not be an issue that a buyer is willing to accept in the deal.
Below are the top reasons why businesses may be priced cheap:
a) The business is making money, but cannot prove it beyond a reasonable doubt on it’s business tax records.
So you might see the business is priced at $200K and nets $200K but the seller basically doesn’t keep good books and records and doesn’t report a large amounts of cash received in the business. Some buyers are open to working with this issue and others aren’t, but if a buyer wants that inexpensive deal, they have to accept this kind of issue. One important thing to keep in mind is sometimes businesses take in cash, but they also pay expenses and employees in cash so it is then really hard to prove everything on paper. Many buyers still purchase these businesses because they understand how to back out all the expenses and evaluate them. Some buyers however are not up for that challenge, and that’s okay, but it is important that buyer recognize whether or not they will be able to deal with cash in a business they look to purchase or not.
b) The business is undesirable to the majority of buyers in the overall market.
A business may be deemed undesirable by the general business buying population for a number of reasons. These reasons may include: high rent, undesirable work, rough work schedule, tough location, or an overall unglamorous industry. A great example of this would be a buyer purchasing the business for $200K and netting $200K, but they might have to work from 8pm to 8am every morning. Rough hours may not attract as many buyers, but a solid business at an unbelievable cheap price can force buyers to reconsider.
c) The business requires the buyer has a specific or licensed skill that most don’t have.
For example, if we are selling a plumbing company it may be a tougher sell because most buyers will not have a plumbing license and they may not be open to hiring a licensed plumber to their staff their company in order to operate. So a price strategy might be put into action to lower the price and attract more potential buyers. However, if you are open to finding a plumber who will rent you their license or work for the business then it is possible to own and manage one of these companies successfully using that person’s license. Because of these license and experience issues, we can get sometimes find these businesses at a cheaper multiple than other businesses. For example, we have seen plumbing businesses sell for as little as one times earnings (earning $300,000 net and selling for $300,000 net). However, many more main stream businesses with a net of $300,000 will sell for two or three times earnings. The major plus side to owning one of these businesses is that businesses where the owners need a license and a skill to operate is a great way to keep out competition.
d) The business advertisement is simply full of fluff and proforma numbers not based on anything solid.
There are a lot of business for sale advertisements that are advertising false, misleading, or proforma financial numbers. Some are basically advertising numbers that are a year old and these old numbers are being passed on as the current numbers. Always ask the business broker or business owner how the financial numbers posted were derived or how good the records are. It is a fair question, but don’t be surprised if the business records aren’t perfect especially if you’re looking at notorious cash businesses such as coin laundries, bars, restaurants, and nightclubs.
Just remember to be proactive. Businesses with an inexpensive price are typically priced that way for a reason and the Buyer’s main goal is to find out what that reason is and to make sure that they can deal with that reason. The great deals are always out there, but most importantly buyers should be looking for the best business for them and not necessarily the cheapest business advertised.
Recently we sold a restaurant for $50,000. The owners had put in $150,000 to build out this place and took a chance on a concept that wasn’t popular. We sold those assets to a buyer who has multiple restaurants and a unique concept who is absolutely flourishing. This owner has experience, he has vision, and he knows his market. This is someone who can handle a turnaround and make it work and get a great deal. That being said, there is nothing wrong with paying good money for a great business. The security, cash flow, and clientele will make that purchase worthwhile. Buying a cheap business will generally come with other issues that a new buyer will have to work with, so if a buyer doesn’t know what they’re doing, it can cost them much more down the road.
Our advice is for buyers to have a plan, to know their talents, and to know their limits. If you’re searching a great business to purchase and you don’t want to have to remember all this stuff, you can hire a great business broker like the business brokers at Crowne Atlantic Business Brokers. We will do a lot of the remembering for you when you’re searching to buy the right business. Our commissions work the same way they do in real estate, our fee is built into the purchase price of a business, so hiring us doesn’t cost a buyer any additional money so any future business owner should like the idea of that!