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How To Investigate Any Business Opportunity
Bill was unable to borrow the difference between his $16,000 savings and Sams asking price of
$50,000. Several banks turned him down before one agreed to lend him $20,000 at 11.5 percent interest
with monthly payments over 5 years.
Sam refused Bill's offer of $36,000 but offered to carry part of the price. After several more discussions,
agreement was reached on the following terms:
1. $24,000 cash.
2. $22,000 unsecured note, payable monthly over 5 years at 12 percent interest.
3. $400 a month rent.
Bill planned to use the $12,000 cash left from the bank loan to increase inventory and provide working
capital.
The store changed owners about September 1. Bill discovered that the inventory was worth only
$16,000 at wholesale cost. He immediately used $8,000 to increase his shelf stock. Sales during the first
few months increased to $30,000 a month, and Bill felt sure he could reach his goal of $40,000 a month.
Profit, however, was running only 2 percent of gross sales in spite of Bill's attempt to increase margins
and reduce costs.
A sad ending. Six months later, the doors were closed on Bill's Market. The remaining $ 12,000 inven-
tory was sold to a wholesale outlet for $10,800. The fixtures were sold for $16,400. Bill was trying to find
a way to pay his debts and forget the loss of his life's savings.
Four months later, Sam still had not been able to rent the space formerly occupied by the food store. He
had little prospect of recovering his loan to Bill, and he had lost over $4,000 in rental income. He was
undecided what action he should take.
The Big Question Regarding Fair Value
Bill and Sam each thought he had received a fair value. But the final result showed that neither one had
made a right decision. Both lost savings and income. What went wrong? How do you go about buying or
selling a business?
An important question? To the Bills and Sams - past, preset, and future - few questions could be more
important.
A difficult question? Either buying or selling a business requires personal, financial, and management
decisions. At no steps along the way are the decisions easy to make. But it will be helpful to establish
the basic steps or elements in a buy-sell transaction and then to examine each of these elements.