The one thing you need to remember when buying a business is that there is not shortage of crook owners and scumbag business brokers. From franchise owner to mom and pop, they are all in the business of getting rid of “liability”. In the vast majority of cases you are not going to find an advertised good honest and money making business, otherwise why would they sell it and why to a stranger not a friend or a family member! Here are some of the things that might help you in seeing the warning signs.
Business owners who are selling a business because they are “moving” or “leaving the country”. That means by the time you are going to find out about “disasters” they will be long gone and you cannot find them.
Owners who claim they want to retire yet they will not give you a non-compete or they give you a very short term and very small distance non-compete agreement. That means they are going to wait till you fold and comeback pick all the customers and probably do it again.
Businesses that are based on a “book of business” and have no anchor, home cleaning business for example. Right after you buy it, they can hand the same list to 10 other “buyers” and what do you have?
Business that are “charity” in nature. These are business that are based on friends and family giving the owner business, such as glass cleaning business, or lawn mowing business if you have less that $100k in revenue. The customers have been waiting for them to come knocking the door forever they just do not have the heart to turn them down. But when you show up, they will have no problem spitting in your face.
Owners who just bought the business, that means they found out what is wrong with it and they want out. Or, they just benefited from huge landlord TIA (tenant improvement allowance). The latter is money given tot he tenant to help with the start up cost So, be ware of ads that say “owner just spent $100k but had to leave the area …. “. They probably pocketed the money and you are going to be on the hook for it.
Business that have been operating for a year or so, in most cases they were not paying rent for 6-9 months and when rent kicked in, all the sudden reality hit them, they are not making money. Also part of enticing tenants is free rent for a while and that makes people think they are making money or they will be making so much money that no matter what rent is, they will have enough to pay it.
Hidden labor cost. If a business is open 60 hours a week and you need two people to operate that is 120 hours a week of wages that is 3 full time jobs or about $70 in almost minimum wages. Most small business are worked buy couples or family and there is very little labor reported. So if you cash flow is $40k and you need 80 hours of labor to run the business, you are cash flow negative, i.e. you have to spend money out of pocket to keep you business alive. Any business that does not make you $50k as an owner (not operator) is not a business, it is a job without benefit and a whole lot of liability.
Rents, most business get stuck because they are agreed to very high rent (most likely due to poor credit). And that does not go away ever. I have seen small coffee shops or restaurants with rents that were $6k+ a month with a store that seats 30-40 people and no drive through. Unless you are getting close to million dollars in annual sales that this not sustainable. And trust me, it is very hard for small business to grind above the 1/2 million dollars in sales.