Several years ago, I knew an enterprising Entrepreneur.  He was a good friend with a man and wife team who wanted their own business.   As you will recall, the Entrepreneur is the guy who comes to the rescue when others want to go into business.  Usually neither party has any money but there is always a way to make it happen.

 

This particular couple both worked for a franchise owner.  The franchisee owned several retail locations around their city.   You can imagine that our new friends would just love to own this business.
Here comes the good news!  Our business owner (franchisee) just happened to decide to sell his business.  The perfect opportunity is about to unfold.  It almost sounds too good to be true…but it really did happen within just a few months time.

 

You guessed it!  The franchise owner suddenly wanted to seek other opportunities or take a few months off.   (Watch out big time for this one!).   He wanted to sell his business and take it easy for a little while.

 

The real truth was….he could have made as much or more money working for someone else.   Why have the headaches of owning a business?/!!   However, you certainly don’t want a potential buyer to know this and be discouraged. Now it’s time to build up the VALUE of the business to make it attractive for our potential buyers.  Therefore, we paint the following scene.

 

The big dollars (profits) are just over the horizon (yet to arrive!).  Over the NEXT hill!  The business would soon be ready to explode with PROFIT. A real CASH COW!!   This picture means you pay more for the business….based on future projections.  It’s called…pay me now… and hope you can make it in the future.

 

Lights Are On!  For the franchisee . . . .

 

The franchise owner realized that SELLING his business was a good idea. He had not been as successful as anticipated as a franchise owner. He began to seek out possible buyers to whom he could sell the firm.

 

Whom better to sell the business (franchise) to than one of HIS employees? A man and wife team!!  Two ideal folks…married to each other…. anxious to make a lot of money.  Already on staff!!    It’s hard to find a better potential buyer of the franchise.

 

Major Problem .….THEY (new potential buyers) had neither MONEY nor ASSETS! No Fear……

 

Entrepreneur Arrives On Scene …. (Remember Him?)

 

Money is NOT a problem.  Go to an Accountant.   Roll out a PRO-FORMA (this means a projection of the future) for the next 5 years and BINGO!! Next step…see your friendly banker.  Show your banker the figures …..sales….expenses…PROFIT (projected).

 

Borrow the money to buy the franchise backed with collateral from another business or bring in some additional partners.   No problem here! Easy as pie in the sky.
A MAJOR problem with the deal was….the couple (man and wife team) had NOTHING invested in the new company (franchise).  They simply had ownership potential in the future based on a unique formula dependent on their success in building the business.
You obviously recognize that the business was DEPENDENT on the man and wife team.   The whole deal was put together for them.  It was BASED on THEIR commitment to be in charge of running the business.

 

After a few months of running the new business…with a LOT OF DEBT assumed by the other partners.…the NICE couple said…”see ya!” “We don’t really like this business as much as we thought.   Both of us have decided to make a career change”…..and leave YOU GUYS (the partners) …HOLDING THE BAG!!

 

Obviously, you see the problem.   We have a business WITHOUT the managing TEAM to keep it running as a profitable enterprise.  Our point is…all of us can lose our life’s savings when we invest in a sure thing (there is no such!) and fail to set up our agreements in proper form and order.  EVERYONE has to be COMMITTED and signed on the dotted line.  Pass GO…and there’s no backing out of the deal.

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ACTION TIP:  KNOW YOUR PARTNERS.  Know the REAL REASON a person wants to SELL their business.   YOU may end up WITH the NOTE!   PRO-FORMA is NOT reality . . . . it is “pie in the sky” kind of forecasting a business.    Be sure EVERYONE has a “PAIN” if they leave YOU holding the bag.