Cotton Fitzsimmons Posted July 20, 2010 Posted July 20, 2010 As some of you may know YE OLE recently found himself joining the ranks of YE UNEMPLOYED. In light of this I am looking to go back into business for myself, and found an existing small business for sale. The business is a Dollar Store, and is in a small town and has modest sales. That being said it has been at this location for 20 years and has had 2 owners during this time. Seemingly, it has done well for them. When it recently came up for sale, I went in to talk to the woman who owns it and she claimed that the first 3 years she owned it she cleared 70-75k, while the last two years she has cleared in the mid 50k range, attributing the dip to the economy. She specifically stated that she cleared 53k last year. I became very interested, because she is desperate to sell as her mother has become very ill and requires 24 hour care, otherwise her plan had been to work the store another 5 years and then retire. Now, excuse my long winded intro. and on to the meat of the problem... I requested to see her P&L, and she obliged and promptly faxed me a copy of last year's statement. I was shocked as it read nothing like what I had expected. Here's a brief synopsis: Total Sales: 109,876.16 Total Cost of Goods Sold: 54,089.00 Gross Profit: 55,787.16 Now, the Operating Costs are broken down as follows: Payroll Expense: 18,612.85 Donation: 50.00 FICA: 1423.87 FUTA: 144.40 SUTA: 48.07 Advertising: 135.00 Bank Expense: 422.91 Car and Truck Expense: 1641.75 Depreciation Expense: 1810.00 Insurance (Business): 2012.00 Legal/Accounting Fees: 3004.42 Licenses and Permits: 31.00 Rent- Building: 15,600.00 Repair and Maintenance: 202.00 Office Supplies: 1605.76 Taxes (Property): 3291.49 Telephone: 1878.12 Utilities: 9048.65 TOTAL Operating Expense: 60,962.29 Net Operating Income: -5175.13 Interest Expense: 4053.35 Net Income: -9228.48 Now, YE OLE has previously been a small business owner, been a retail manager, as well as a manager of a bank. I like to think I know my way around a P&L, but what am I missing here? I did contact the owner after receipt of the statement and she told me that she has shown a loss on paper for each of the 5 years she has owned the business and you are allowed to a show a loss on a business for tax purposes for 5 years and that's what she has done. So... I'm throwing this out there, especially to any CPA's or lawyers amongst us, what am I missing or what are possible explanations for this? How could she legitimately be pulling 50-70k per year out of this?
BarkLessWagMore Posted July 20, 2010 Posted July 20, 2010 As some of you may know YE OLE recently found himself joining the ranks of YE UNEMPLOYED. In light of this I am looking to go back into business for myself, and found an existing small business for sale. The business is a Dollar Store, and is in a small town and has modest sales. That being said it has been at this location for 20 years and has had 2 owners during this time. Seemingly, it has done well for them. When it recently came up for sale, I went in to talk to the woman who owns it and she claimed that the first 3 years she owned it she cleared 70-75k, while the last two years she has cleared in the mid 50k range, attributing the dip to the economy. She specifically stated that she cleared 53k last year. I became very interested, because she is desperate to sell as her mother has become very ill and requires 24 hour care, otherwise her plan had been to work the store another 5 years and then retire. Now, excuse my long winded intro. and on to the meat of the problem... I requested to see her P&L, and she obliged and promptly faxed me a copy of last year's statement. I was shocked as it read nothing like what I had expected. Here's a brief synopsis: Net Income: -9228.48 Now, YE OLE has previously been a small business owner, been a retail manager, as well as a manager of a bank. I like to think I know my way around a P&L, but what am I missing here? I did contact the owner after receipt of the statement and she told me that she has shown a loss on paper for each of the 5 years she has owned the business and you are allowed to a show a loss on a business for tax purposes for 5 years and that's what she has done. So... I'm throwing this out there, especially to any CPA's or lawyers amongst us, what am I missing or what are possible explanations for this? How could she legitimately be pulling 50-70k per year out of this? 25+ year CPA here. You are not missing anything. She is full of it. If here explanation is the profit resides "off the books" politely advise her that you are not going to pay for the potential, only the actual results. My opinion, walk away from this one. With my clients, what you see on the P&L is the real story, not some myth. Good luck.
erynthered Posted July 20, 2010 Posted July 20, 2010 She's renting the building AND paying property taxes on it? WHA???
Cotton Fitzsimmons Posted July 20, 2010 Author Posted July 20, 2010 She's renting the building AND paying property taxes on it? WHA??? Yeah, the landlord charges her 18% of the property tax. I used to have a similar set up with a building I leased. I've seen it usually rolled in to the rent with "CAM" fees, but she split it up as separate from her rent in this case. But, I think that part is legit.
Cotton Fitzsimmons Posted July 20, 2010 Author Posted July 20, 2010 25+ year CPA here. You are not missing anything. She is full of it. If here explanation is the profit resides "off the books" politely advise her that you are not going to pay for the potential, only the actual results. My opinion, walk away from this one. With my clients, what you see on the P&L is the real story, not some myth. Good luck. Thanks for the advice. The thing I can't figure here is she wasn't at all hesitant to send me the P&L a day after telling me what she had "cleared" Then obviously she responded that you are allowed to show a loss for 5 years so she has shown that "on paper" Clearly something seems amiss here, but it's odd that the business has been in town for so long and is so well established. If it weren't for that fact alone, I would've never even pursued this.
DC Tom Posted July 20, 2010 Posted July 20, 2010 As some of you may know YE OLE recently found himself joining the ranks of YE UNEMPLOYED. In light of this I am looking to go back into business for myself, and found an existing small business for sale. The business is a Dollar Store, and is in a small town and has modest sales. That being said it has been at this location for 20 years and has had 2 owners during this time. Seemingly, it has done well for them. When it recently came up for sale, I went in to talk to the woman who owns it and she claimed that the first 3 years she owned it she cleared 70-75k, while the last two years she has cleared in the mid 50k range, attributing the dip to the economy. She specifically stated that she cleared 53k last year. I became very interested, because she is desperate to sell as her mother has become very ill and requires 24 hour care, otherwise her plan had been to work the store another 5 years and then retire. Now, excuse my long winded intro. and on to the meat of the problem... I requested to see her P&L, and she obliged and promptly faxed me a copy of last year's statement. I was shocked as it read nothing like what I had expected. Here's a brief synopsis: Total Sales: 109,876.16 Total Cost of Goods Sold: 54,089.00 Gross Profit: 55,787.16 Now, the Operating Costs are broken down as follows: Payroll Expense: 18,612.85 Donation: 50.00 FICA: 1423.87 FUTA: 144.40 SUTA: 48.07 Advertising: 135.00 Bank Expense: 422.91 Car and Truck Expense: 1641.75 Depreciation Expense: 1810.00 Insurance (Business): 2012.00 Legal/Accounting Fees: 3004.42 Licenses and Permits: 31.00 Rent- Building: 15,600.00 Repair and Maintenance: 202.00 Office Supplies: 1605.76 Taxes (Property): 3291.49 Telephone: 1878.12 Utilities: 9048.65 TOTAL Operating Expense: 60,962.29 Net Operating Income: -5175.13 Interest Expense: 4053.35 Net Income: -9228.48 Now, YE OLE has previously been a small business owner, been a retail manager, as well as a manager of a bank. I like to think I know my way around a P&L, but what am I missing here? I did contact the owner after receipt of the statement and she told me that she has shown a loss on paper for each of the 5 years she has owned the business and you are allowed to a show a loss on a business for tax purposes for 5 years and that's what she has done. So... I'm throwing this out there, especially to any CPA's or lawyers amongst us, what am I missing or what are possible explanations for this? How could she legitimately be pulling 50-70k per year out of this? Are those the real numbers, or did you sanitize them for public consumption? How the hell does anyone clear $53k out of a $56k gross profit? I'd want to see a cash flow statement before I passed judgement, personally. It's at least theoretically possible to have a positive net cash flow with the negative net, if there's some sort of amortized depreciation or goodwill involved. Highly doubt it in this case, though.
Cotton Fitzsimmons Posted July 20, 2010 Author Posted July 20, 2010 Are those the real numbers, or did you sanitize them for public consumption? How the hell does anyone clear $53k out of a $56k gross profit? I'd want to see a cash flow statement before I passed judgement, personally. It's at least theoretically possible to have a positive net cash flow with the negative net, if there's some sort of amortized depreciation or goodwill involved. Highly doubt it in this case, though. They've only been sanitized for the sake of not transfering number for number to a public forum. But that being said, all numbers are very close and proportionate to the actual numbers so academically speaking there is no difference.
Chef Jim Posted July 20, 2010 Posted July 20, 2010 I'd ask for the last five years. Also her tax returns and have a chat with her CPA. Many small business owners that work on a cash basis do not report a good chuck of the sales. I'm surprised she has not been audited before.
Doc Posted July 20, 2010 Posted July 20, 2010 I can only assume she's not reporting ~$65K in sales. Somehow. But since she freely gave you the P&L, you should ask her how she clears $50K with those numbers. Just as an FYI, since I don't think you want to be not reporting $65K in sales annually. Or she's fudging other numbers.
Live&DieBillsFootball Posted July 20, 2010 Posted July 20, 2010 The only way she could be doing that is by not reporting all of her sales. For example, maybe she has an extra cash register that she runs sales through and doesn't report them with her sales. In which case she is not only under reporting her sales, she is also under reporting her sales taxes. I'm sure that lots of small businesses try to get around reporting all of their sales but unless she can prove it to you, I would pass. One further way to examine things would be to check her invoices. If she bought $50k of crap and is retailing it at $100k, that would be similar to the gross profit that she is showing you. However, if the crap costs 25k and it retails for $100k, her gross profit would be much greater than the 50% or so that shows on her p&l. This would also be important in valuing how much to pay for her inventory. You need to know how much it costs.
ACor58 Posted July 23, 2010 Posted July 23, 2010 As some of you may know YE OLE recently found himself joining the ranks of YE UNEMPLOYED. In light of this I am looking to go back into business for myself, and found an existing small business for sale. The business is a Dollar Store, and is in a small town and has modest sales. That being said it has been at this location for 20 years and has had 2 owners during this time. Seemingly, it has done well for them. When it recently came up for sale, I went in to talk to the woman who owns it and she claimed that the first 3 years she owned it she cleared 70-75k, while the last two years she has cleared in the mid 50k range, attributing the dip to the economy. She specifically stated that she cleared 53k last year. I became very interested, because she is desperate to sell as her mother has become very ill and requires 24 hour care, otherwise her plan had been to work the store another 5 years and then retire. Now, excuse my long winded intro. and on to the meat of the problem... I requested to see her P&L, and she obliged and promptly faxed me a copy of last year's statement. I was shocked as it read nothing like what I had expected. Here's a brief synopsis: Total Sales: 109,876.16 Total Cost of Goods Sold: 54,089.00 Gross Profit: 55,787.16 Now, the Operating Costs are broken down as follows: Payroll Expense: 18,612.85 Donation: 50.00 FICA: 1423.87 FUTA: 144.40 SUTA: 48.07 Advertising: 135.00 Bank Expense: 422.91 Car and Truck Expense: 1641.75 Depreciation Expense: 1810.00 Insurance (Business): 2012.00 Legal/Accounting Fees: 3004.42 Licenses and Permits: 31.00 Rent- Building: 15,600.00 Repair and Maintenance: 202.00 Office Supplies: 1605.76 Taxes (Property): 3291.49 Telephone: 1878.12 Utilities: 9048.65 TOTAL Operating Expense: 60,962.29 Net Operating Income: -5175.13 Interest Expense: 4053.35 Net Income: -9228.48 Now, YE OLE has previously been a small business owner, been a retail manager, as well as a manager of a bank. I like to think I know my way around a P&L, but what am I missing here? I did contact the owner after receipt of the statement and she told me that she has shown a loss on paper for each of the 5 years she has owned the business and you are allowed to a show a loss on a business for tax purposes for 5 years and that's what she has done. So... I'm throwing this out there, especially to any CPA's or lawyers amongst us, what am I missing or what are possible explanations for this? How could she legitimately be pulling 50-70k per year out of this? I am a commercial banker and I would never lend her money if that helps.
thebug Posted July 23, 2010 Posted July 23, 2010 Run away from this one. You would be shocked at how many business have been around for a long time, that don't make any money. Appearances can be deceiving. It looks good from far, but it's far from good.
The Dean Posted July 23, 2010 Posted July 23, 2010 I know nothing about any of this, so take this with a huge pile of salt. But shouldn't a full accounting have the value of the unsold inventory somewhere on the page? She showed you the value of the sold inventory but I have to assume she has a store full of unsold inventory, too. Is that inventory worth $50K+?
Stussy109 Posted July 23, 2010 Posted July 23, 2010 I'm assuming all credit card transactions are reported, and a percentage of the cash transactions... ask if you can work in the store for a few days with her to see the real deal. I'f she's been there for over 5 years, I'm sure she is making money. she probably takes a salary as well which comes off the business profit, but is still in your pocket. People don't run red for 5 years and stay open unless they are millionaires and can afford to lose 40k/yr and their time. I'm a strong advocate for self-employment. two things that scare me, is if it is profitable, why not hire a manager, or bring in a working partner. Does she know somehting you don't know about the area, is another similar store opening soon? Typically an ideal sale price for a biz is 3 years profit plus inventory (ideal for the seller). in your case she has a net loss on the books, so u need to get in there on the frontlines for a few days to see what she's really making. if she's telling you fifty, she's probably making 40k
ACor58 Posted July 23, 2010 Posted July 23, 2010 I know nothing about any of this, so take this with a huge pile of salt. But shouldn't a full accounting have the value of the unsold inventory somewhere on the page? She showed you the value of the sold inventory but I have to assume she has a store full of unsold inventory, too. Is that inventory worth $50K+? All on the balance sheet - cotton can you post the balance sheet - also, what type of business is this.
Richmond_Bills Posted July 23, 2010 Posted July 23, 2010 The only other thing that I can think that she is doing is taking a Weekly/Monthly Draw that would not show on the P&L. When doing this, she would actually debit a balance sheet account (Equity) and credit cash. Additionally, I'd ask to see the balance sheet and specfically look at Retained Earnings and Owner's Equity. If either one has a debit balance - RUN. You will need some type of accounting firm/CPA to help with your business - run it by them - I know many would look at the books for free for you if they felt that you had the idea of using their firm when/if you buy the business. They would want to see financials and bank recons.
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