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Page 25
How To Investigate Any Business Opportunity
long hours he had to spend in the store a real hardship.
Furthermore, during the last 4 years, business had declined from a high of $400,000 gross sales to less
than $200,000. The main reason for the decline in sales, in Sam's opinion, was the competition from
several new supermarkets in his area.
Finally, he was concerned about a space of about 1,100 square feet at one end of the building in which
the store was located. Sam owned the entire building and had been unable to find a tenant for this
space for more than 3 months. Now a discount paint company had offered him a local franchise.
Sam believed he could use the vacant space for this operation and handle the business with much less
effort than he was putting into the grocery store. If he could sell the grocery business and lease that part
of the building to the new owner, he would have a comfortable arrangement.
The transaction. After talking to the salesman, Bill called Sam and expressed an interest in the store.
They arranged several meetings to discuss the situation. Bill learned that Sam wanted to sell in order to
take advantage of the paint-store opportunity. When Sam announced that he was asking $50,000 cash
and $600 a month rent, the conversation went like this:
Bill : Could I spend some time with your books?
Sam : I can't let you do that. Most of my personal affairs are in those books. Besides, I don't want to be
giving away everything about my business to someone who might be a competitor someday.
Bill : But I have to have something to go on!
Sam : Well, you ask me what you think you need to know, and I'll tell you - if I can.
During the discussions that followed, Bill learned the following facts about the store:
The modern fixtures and equipment had cost $60,000 new. Now 6 years old, they had a depreciated
value of $30,000. The inventory had a wholesale cost of $20,000. Gross sales were running about
$16,000 a month with a gross margin between 14 and 16 percent. In the past, annual sales had been as
high as $400,000. The 3,900 square feet of store space appeared well organized.
From this information and his observation of the store, Bill figured that he could increase sales to
$40,000 a month within a year by more aggressive sales promotion - handbills, radio spot announce-
ments, an extra large neon sign, and more personal service. This meant, in Bill's opinion, that inventory
would need to be enlarged to $24,000.
To better the profit, which had been averaging 2.5 percent of gross sales including Sam's salary, Bill be-
lieved the average markup should be raised from 18 percent to 20 percent. An additional increase in
profit could be realized, according to Bill's analysis, if he reduced the staff by one full-time and one part-
time clerk.