[Taken from a conversation in the old forum:]
If you’re buying an existing business, ALWAYS-ALWAYS-ALWAYS check the financial records. Ask to see the books. Ask to see copies of quarterly tax returns as well as the owner’s income tax return.
When I bought the Inn in April of ’04, I made a mistake. I TRUSTED the innkeeper/owner. The owner had prepared a profit and loss statement complete with gross revenue, gross expenditures, rate of occupancy, and net profit.
According to the paper she gave me, the inn had a 40% occupancy and grossed $40,000 a year with a net profit of just over $28,000.
I SHOULD have verified this information.
And the result?
The day after closing the purchase of this turn key business, I literally turned the key in the front door, walked into the inn, did a double-take and said, “Where’s the furniture?”
The former innkeeper had raided the inn, taking furniture, linens, towels, lamps, alarm clocks, pots & pans, place settings, and all the sundry items needed to run a B&B.
As I stood in the empty parlor and looked around the facility in disbelief, I remember muttering to myself, “What else can go wrong?”
The lights went off. PP&L had disconnected my power.
I looked for a phone to call the electric company. The former owner had taken the downstairs office phone. I dug a phone out of my van and plugged it in. There was no dial tone. The Commonwealth Telephone Company had disconnected my phone.
The doorbell rang. I opened the door to find a cable guy on the front steps. “I need your cable box,” announced the serviceman. “I’m disconnecting your service.”
Not only had the former owner raided the inn, but she had disconnected all utility services instead of transferring the accounts to me.
What else could go wrong?
After spending $45,000 to replace everything the former owner had taken, I opened my doors and was ready for business.
Yes sir, the Inn — under new ownership, was ready for business. Having restored my phone service with the original number to the inn, I sat by the phone and waited for it to ring. The phone didn’t ring.
I looked out the window as people drove past the inn. Surely a passing motorist would notice this quaint little facility and stop? Nobody stopped.
During my first month of business, I sold five rooms for a stunning occupancy rate of 2%.
This was scarcely the 40% rate of occupancy promised by the former innkeeper. I frowned. Surely the former owner hadn’t lied to me about her profit/loss statement?
I called the former owner and asked for a copy of the inn’s financial records. The records should have been left as part of the turn-key agreement.
“I’m sorry,” said the woman. “The movers accidentally packed the books and they were lost enroute.”
I grunted and called the county hotel tax collector. I explained my situation and asked for copies of the former owner’s tax returns.
And surprise-surprise. In 2003, the former owner didn’t make $40,000. She made $15,800. She didn’t have a 40% occupancy. She only had an 11% occupancy.
I had been royally had.
To make matters worse, there was really nothing I could do about it. The woman had moved to New Hampshire. The district attorney for Dauphin County declined to press criminal charges against her for fraud. And the cost of civil litigation was prohibitive.
To go after the former owner, I’d have to file suit in Pennsylvania. If I won, I had no way to enforce a Pennsylvania court ruling in New Hampshire. Assuming I won, I’d have to take this ruling and go before a court in New
Hampshire or perhaps do an end run around the entire process by hiring an attorney to slap a lien against the former owner’s new bed and breakfast. And with attorneys charging $250 an hour …
I wrote this up as an expensive learning lesson and have spent the past nineteen months re-inventing this business.
Instead of having purchased a successful business, I bought a business that was on the verge of bankruptcy. It’s taken a lot of work to bring this business back. Since every penny I have is tied up in this business, I didn’t have much of a choice in the end. I had to revive this business or I’d literally lose everything.
In 2003, the former owner had an 11% rate of occupancy. Last year, with only 9 months of ownership, we had a 28% rate of occupancy. This year we’re just below 35%.
The local bed and breakfast association tells me that the average rate of occupancy for this area is 30% – so we’re doing well. On the other hand, I also think we can do better.
I am fortunate that I had sufficient cash reserves to withstand the cost of refurbishing the inn and to pay any deficit in expenses that were not met by the month’s gross revenue.
Last year I took a loss on this business. This year I will most likely break even. Come next year I anticipate showing my first profit.
So – a word to the wise.
If you’re buying an existing business:
1) Check the owner’s books for monthly gross revenue and gross expenditures. Don’t be afraid to take notes.
2) Get copies of the owner’s income tax return and quarterly sales taxes. Match the gross income figure to your notes. Do they match?
3) Get an itemized list of everything the owner plans to convey as a turn key. Don’t assume that you’ll have a functional business once you close the sale. Get everything in writing. What will be conveyed to your ownership in the parlor? The camel-back sofa? The grandfather clock? The wing-back chair with the matching ottoman? The antique photographs on the wall?
4) Hire an attorney to review the sales contract. Have your attorney present at the closing. Attorneys are expensive – but it’s even more expensive to have to refurbish an inn after it’s been raided.
5) Hire a contractor to go over the facility from basement to roof. Is the building in good condition? What needs immediate repair? How much might this cost? What will need to be repaired in the future? How much might this cost?
6) Don’t assume that the owner will transfer all business accounts with utility companies to your name. Verify this with each company. Some companies (such as Verizon yellow pages) will require that the former owner sign a release to complete the transfer of accounts.
If you do your homework before you buy a turn-key business, you will hopefully avoid many of the problems that I had.