Back in the “day”, when I had just embarked on my journey as a self-employed CPA/consultant, I was working a night gig as a payroll accountant at the CHS refinery in Laurel, MT, during a "turnaround."
During those night shifts, I often grabbed a late dinner at the local Subway sandwich shop located in a small town mini-mall. It turned out that the owner discovered I was an accountant and mentioned that he was selling the business.
Being "young and hungry," I took a serious interest in this opportunity! It was a franchise with an established client base and a solid reputation (or so it appeared), and I thought I could manage it as an absentee owner, aiming to create a reliable additional income stream while gaining practical, hands-on business experience. The owner boasted about a loyal lunch crowd of regulars and local high school teenagers, and he suggested that one dedicated employee could serve as an excellent absentee manager.
Intrigued, I requested to review the store’s financial statements for a deeper understanding of the business. The financials indicated that the store was profitable! However, since it operated as a sole proprietorship, the income statement did not account for the owner's compensation, his time spent working in and for the store.
This is a crucial aspect to analyze when assessing the investment potential of a proprietorship! It's essential for an owner to factor in total compensation for their time, as well as the time commitment required, to determine if the compensation is sufficient. Moreover, the owner should earn a profit from the business that is commensurate with the investment made! I believed that owning a restaurant was within my capabilities; I felt Subway had a good reputation, thought the owner would finance the sale, and envisioned it as a source of solid and growing income with minimal time involvement. I anticipated it would be easy to manage or at most, a challenging growth opportunity.
In spite of my general enthusiastic eagerness for the opportunity, I found myself concerned about the potential of becoming trapped by this business, questioning whether I would merely be purchasing a job for myself. The income statement indicated a profit, yet it was insufficient to ensure a reasonable return and even a modest amount of time spent at the store.
Nevertheless, I was attempting to convince myself that I could generate a satisfactory profit in time! Enter my external advisor, Ernie. Ernie was a mentor from a Christian youth ministry I had been involved in and he was my long-distance track coach. Also, as a commercial realtor, I had sought his guidance on a couple of real estate transactions to assess the returns. Ernie was a knowledgeable and savvy business person who had bought and sold businesses and rental properties.
I presented my plans to Ernie, and it proved to be a valuable use of time. He helped me realize that I would be making the short trip from Billings to Laurel, MT more frequently than I anticipated, that employee issues would arise in that type of business, and most importantly, he confirmed my key concern about whether I would be adequately compensated. I decided to pass!
Other factors to consider were the franchise fees required by Subway, which were significant, and the location was acceptable but not ideal. Interestingly, that site is now home to a different business, while the Subway in Laurel has moved to a better location in a new building! Today, Subway is contending with significant competition in the sandwich market. In the small town of Laurel, there is now a Jimmy John’s, a Jersey Mike’s, as well as other competition in nearby Billings. There were two Subways in Laurel (population 7,000) until one closed down recently. Looking back, I am grateful that I chose to pass.
Seeking wise advice is crucial when making significant choices such as purchasing or launching a business! Remember the old adage: look before you leap! Acquiring a business is a substantial commitment! It's essential to remove the "rose-colored glasses" and assess a business purchase with a clear, objective perspective from every angle. Consider questions like: are you merely buying yourself a job or, even worse, a source of stress? Do you possess the necessary experience to manage it? Can you finance it while ensuring it still makes sense in terms of delivering a solid return on investment and providing cash flow? Perhaps most importantly, will you find joy in running the business, and does it align with your personal goals? Reach out to us via phone (406-591-7291) or email at daniel@oharabiz.com to discover how OBS can assist you!
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