(Case History # 1): Part of a special summer series of three essays on select business issues that were dealt with by Lubicom Business Consulting. Some of the names and circumstances were changed to protect the identity of the clients.)
The Dilemma – Shloimie has been working as a manager in a store for the past two years. His wife Yehudis worked part-time as a bookkeeper in a local office. Between them and some help from the parents, they were able to get by. Says Shloimie: “I just managed to pay my bills, but I still needed to put away some money to eventually buy a house and perhaps treat our family to an item or two on our wish list.” The arrival of their fourth child sent Shloimie a message he knew was coming: to somehow switch gears to make a better living. Yehudis could no longer continue working and there simply was not enough income to hire steady help so that she could work.
Shloimie’ s in-laws understood the dilemma and offered to help him buy a business if it was the “right” business. But how would he know if it is the right business? Even with the help from the in-laws, could he possibly raise enough capital to buy that right business? The in-laws wondered if Shloimie had the knowledge and wherewithal to run his own business. His father-in-law was an accountant working for a large hospital and not in a position to guide his son-in-law in this venture. Shloimie himself had doubts whether he was up to the challenge but did not like the alternative of working for someone else or continuing in his current job.
Despite the challenges that lie ahead, Shloimie persisted. He investigated various businesses, consulted a business broker, and ultimately with Lubicom Business Consulting. At his first session with me, he came well prepared. Some of his questions included: “How will I know the true value of the business?” “Am I at all cut out to be a business owner?” “What if I fail to use my family money? The road ahead seemed extremely daunting.
The business he ultimately had his heart set on had its own set of problems. It was a retail business that on the surface seemed sound. The owner wanted to retire although, as is common, he was willing to stay on for a period to train Shloimie. “Why was there so much empty space in the store,” Shloimie wondered. Perhaps he could fill that space with a different line of goods which would make the store more attractive to a larger base of customers and result in more sales? Shloimie traveled to a different community where there was a similar store. The owner was surprisingly friendly and helpful, even suggesting that she would be willing to sell him some of the goods at wholesale prices.
The idea of buying the store constantly grew on Shloimie but there was still the issue of price. It was the key issue for Shloimie as he looked to Lubicom for advice. After all he looked at several years of sales and there was no appreciable growth. If in fact, this was all about him building up the business, then perhaps he should start a similar business from scratch. Would he ever be able to justify overpaying for a business that was partially paid for by his wife’s parents? Then there was the omnipresent question as to whether this business was for him.
To his surprise, the family was very supportive but ultimately wanted the final decision based on a professional opinion. They were impressed at the extent of Shloimie’ s due diligence and encouraged by his determination to succeed but still what would professional advice?
The Solution – I too was impressed with Shloimie’s determination to take a major step in providing for his family. A good part of our session dealt with the purchase price which he continued to insist was inflated. His attempts to bring the price down have thus far fallen on deaf ears. It was then that we shifted to a discussion about value and not just for anyone but for Shloimie.
We began by assessing what we thought the business was worth. First off, we looked at the history of the sales followed by a thorough review of the expenses. There was wiggle room in that he could initially replace the full-time worker with part-time help. Though this exercise proved that he might be overpaying, we reviewed his plans for the business.
Shloimie would replace several lines of goods that the owner professed to be the slowest moving. He would rearrange the space so that he could possibly add more items in the bothersome empty space. He would consider making a deal with the woman with the same type of store who had a good experience with a line she showcased and succeeded with. Then there was the possibility of rebranding the store with a good marketing effort. To test this hypothesis of a remake of the store model, we put numbers to each move and then redid the financials. It suddenly looked a lot better, but it was also true that he was overpaying for what he was buying if one based it on the financials.
We projected that within two years, he would recoup his investment by adding inventory, redesigning the store, and even changing the flooring and adding a new coat of paint. We added in a realistic marketing program and even factored in a new marquis for the front of the store. We also provided for a stepped-up merchandising and point of purchase marketing program. When it was all added up, the purchase price had value even if it left the price above what we thought it was worth.
There were some difficult moments in our discussions, especially when Shloimie professed that he was too scared of failure and was considering walking away from the deal. I knew that if he walked, he might never forgive himself and constantly think about what might have been.
PS. Shloimie looked at two other opportunities in the meantime but then came full circle to the acquisition. If I were a betting man, I would guess that he will ultimately close the deal. The lesson here is that very often, it is about value, not price!