If you're considering buying a business, consider veteran entrepreneur Norm Brodsky's advice first.
Last May, my husband and I purchased the assets of a failing catering company that we believed had a strong client base and a great deal of potential. We're still in business, but we're struggling. Although I believe labor cost is the main issue, I'm afraid that if we lay people off, we won't have enough staff to meet demand. To make matters worse, our overhead is higher than we expected, because the figures we were given by the previous owner were not accurate. (For example, he showed us an electricity bill of $200 a month, but we're paying $900.) What should I do?
-Emma Cerulli, Em & Seb | Boutique Catering, Montreal
Buying a business is tricky. Every company has secrets you discover only after you own it for a while. Emma Cerulli and her husband, Sebastien Barthe, obviously didn't do enough research before buying their company. The business's actual cost of electricity should have been one of the easiest pieces of information to obtain. They simply had to examine a couple of years of utility bills, rather than looking at just one. They also should have determined before the purchase why the business was failing under the previous owner. Instead, they are still figuring it out almost a year later.
Nevertheless, I think Sebastien and Emma are going to be all right. By the time I spoke to them, they had taken steps to get their food and labor costs in line with industry averages. They had also raised prices-which hadn't changed in nine years-and received no complaints from customers. I see no reason they can't begin earning a profit of eight percent to 10 percent of sales in fairly short order. I advised them to focus on that first. Once they are consistently making money, they can turn their attention to finding new business. I suggested they begin by looking for ways to offer additional services to their current customers.
Finally, I urged them to talk to their lawyer about withholding future payments to the previous owner. Knowingly providing false information to a buyer is fraud. It would be a waste of time and money to pursue litigation, but-if what Sebastien and Emma say is true-they shouldn't pay the seller another dime.