An existing franchise business with excellent equity built in.

[Cecil Russell]

I am inquiring about an existing business (Cold Stone Creameries franchise). Records indicates an average annual income of $169,000. The owner is asking $49,000-according to the information sheet on the property. This would be my very first investment deal. I am undecided whether to hold or resell. I would appreciate any information that I should be aware of in this type of transaction specifically, any "red flags" I should look for, specific questions to ask, etc. Thank you in advance.

[Joel Owens]

You are just buying the assets of the business and not the liabilities.

Having said that Cold Stone is  a seasonal product of ice cream. If you look at the books this time of year is the slow season in most states where it is winter now.

Even if not peak season is summer.

Businesses trade at 2 times multiple. So if net was 100,000 a year profit it would sell for 200,000.I do not care how much sales a business has. I want to know net profit before taxes. A business could do 1 million a year in sales and have nothing to show for it. Conversely a business could do 500,000 in sales and have a net profit of 220,000 before taxes each year.

The biggest component when I look at buying a business is that if it's a job or an investment?? What I mean is these small businesses tend to have owner operators working 40 hours a week for nothing. Then they claim the business made 40,000 profit. If I have to put a manager in now I am at zero profit having to pay them. A big brand like that will also cause you to have to re-image every so many years inside which can be expensive. Machines will need replacing causing a lot of capex outlay eating profits. Big franchise fees and you have to make sure you are not having to take on a crappy lease with high rent increases and  a personal guarantee. I could go on and on why this is not a deal.

I look for retiring business owners with a business that has done well for decades and has management in place. These businesses cost more money but the structure is there to be hands off. Decades of experience from worker to restaurant owner before I went into commercial real estate.