Tue 15 Feb, 2005 04:19 pm
Hello everyone!
I was hoping that I could pose a question to all you experts out there. I am extremely green to the import/export business (i.e. no experience at all), and I am very interested to hear your thoughts about buying an existing importing business.
The reason why I'm asking is because I just recently stumbled on an import business that is for sale and I am at a loss as far as what to do and how to figure out whether or not the opportunity is a good investment.
Just to give you a little information on the opportunity:
the business has been around for over 10 years and does over $250,000 in sales. The business imports all sorts of general merchandise from China. The business appears to be fairly profitable ($35,000) and the seller is asking what seems to be a reasonable price ($90,000 to $100,000).
On the positive side, the business already has existing suppliers in Asia and customers back here in the US. I believe they must have a level of expertise in shipping and expiditing orders through customs. It seems like a really good platform from which to grow the business.
That said, I feel like there are some real risks out there. As far as my customers are concerned, I am worried about their loyalty over time. Should I place a lot of value in this company's existing customer base? Do you find that your customer relationships turn over frequently?
Also, how much value would you attribute to this company's existing supplier relationships? At first glance, it appears that top-notch suppliers are plentiful in China. Do you think I could replicate the existing supplier relationships fairly easily?
I'm really curious to hear how you would go about the investigative process on a company like this. What kind of questions would you be sure to ask the seller? What are the pitfalls that you would be most concerned about? Do you think I am crazy to consider buying a buysiness like this with no importing experience?
Thank you in advance for your thoughts. I have found the information available in this forum to be most helpful!
In my experience importing businesses tend to live or die on the expertise of the importer and the relationships he/she/they have built.
Therefore, I'd probably not buy an import business unless I knew I could match or exceed the expertise it operated under and could preserve the business relationships it had established.
Thanks for the feedback Craven!
I agree that it would be a big mistake to buy a business if I felt I could not match the expertise of the current owner and retain the relationships of the existing business. But how do you determine whether or not this is possible?
I could easily dismiss this opportunity because I don't have the requisite experience or contacts. But truth be told, I am excited about this opportunity. I am sufficiently motivated to learn the business and develop the relationships with the suppliers and customers myself -- this would be my full-time job. I know it is a difficult path, but I am fascinated and excited about all the possibilities.
Even without a lot of experience there must be some things I can do to mitigate this risk. (At this point I have the ability to ask for the moon and the sky from the seller). I've thought about a few options:
- I can request that the present owner to stay on for several months to help train me.
- I can travel to China with the current owner and meet/develop relationships with all of his contacts?
- For consistency with the suppliers/customers, I plan to retain all of the seller's existing employees.
- I can have the seller sign a non-compete (to avoid any direct competition with him in the future).
- I can tie the consideration for the business to the performance of the business over the next couple of years (thereby aligning the incentives of the seller with myself).
I know that none of these things will ensure success, but do you think that they will at least give me a fighting chance?
Are there any other steps you can think of that would help ease the ownership transition?
Thanks again for all of your feedback - this is super-helpful.
Those safeguards sound useful, but they bring me to my next question:
Why is the purchase more attractive than using the capital to start your own business?
It sounds like one advantage is a crash course on importing, and that makes me wonder if you can get that through a cheaper method.
Thing is, I think it all would boil down to sales. Importing is always the easy part. The companies live and die on their sales, not the imports.
So the other thing I'd look at is whether the purchase would jump start your sales to the point of justifying the expense.
Why buy vs. build? That is a good question Craven.
My thinking is that by buying a company I am considerably reducing the risk of the venture. Essentially, I have a proven model from which to grow my business. I have an existing customer base, an established supply chain, and an operating history (something that makes future sales much easier). I can leverage the institutional knowledge of the people within the business. All of these things lead to having momentum on my side.
Sure, there are risks. I am essentially buying "air" -- relationships are difficult to transfer and customers can leave at any time. I am laying out a lot of capital with the hope that the business will perform as it has historically -- but history is history and I am in no way guaranteed that the business will continue to thrive.
You are right to point out that all of this comes down to the scale of the business. Now you've asked a very theoretical question Craven (does the purchase jump start sales to the point of justifying the expense)? Being green to the industry I can honestly say I haven't the foggiest idea.
But, let me pose another question to you Craven (or anyone else out there). At what sales volume do you think the purchase of the company would justify the expense (putting expense aside for now)? Suppose that instead of $250,000 in sales the company had $1 million in sales? Would the purchase make sense then? How about $5 million? $10 million?
I'm very curious to hear your thoughts (FYI, I've got a really interesting follow-up question depending on your response).
I really can't answer that. I don't have enough market information in this case to know when it would be worth it.
A company with a million in sales could be as dangerous as any other.
The factor to me is not just sales, it's sales you expect to aquire that you would not be otherwise able to and the comparison to the investment.
I don't have the information or time to do an ROI, and don't think a theoretical answer has value.
This seems to be a limited discussion between myself and Craven, but given the number of hits on the message board it appears that many others are curious about this topic. That said, I would like to encourage others to respond to the following question (no expertise required -- though I would definitely like to hear Craven's opinion).
Leaving out all the conditionals (i.e. opportunity cost, future sales expectations, acquired expertise, etc., etc.), what is the most you would pay (one number only -- again, no conditionals) for an importing business that generates $1 million in profit. Assume that this profit is fairly stable and will continue for the next 10 years.
I am very curious to your thoughts. How did you determine your number?
I am by no means an expert in the valuation of business, but will comment.
Your exclusion of criteria leaves earnings multiplier as the only obvious metric to me, and I'd probably use a low multiple for this kind of business (i.e. trying to go under 3).
Is a <3x multiple typical?
Do you know of any resources I can look to which will confirm this?
I'm not a valuation expert but you could probably contact one and get the information out of them without actually going through a formal valuation.
Hi nu2importing and welcome to a2k. In reading the posts a number of things occurred to me. You may have already considered these possibilities but since they haven't been mentioned I'll trot them out. Why is the present owner selling? If business is on the ascendancy, why give it up? If on the decline, what caused the decline? Is there a forthcoming event known to him but not to you going to affect profit/loss? Let's assume for a moment that ietem/items will no longer be available from that source then you've dug a $100,000 mine shaft and jumped in. The other consideration is if there's to be a change in import/export laws. This must be examined not only in country of origin but also destination..
Excellent points bobsmythhawk!
As far as motivation for sale, I had been told that the seller was interested in retiring. This seems to be a very convenient explanation for sale - and one that is hard to disprove.
The business has been steadily growing but I am very worried about the business deteriorating as soon as I take over control -- you are right to point out that I need to uncover the seller's true motivations. This critical issue must be resolved through the due diligence process and you have just given me two really good points to raise (supplier/product obsolescence and changes in import/export laws).
Can you think of any other issues that the seller might be trying to hide?
Thanks again!!!
I am hoping to have a business of my own one day...so I'm interested in this thread purely for the tips on buying one.
My question is: How would somebody find out if there is an upcoming event that would negatively affect the business? Isn't that something that you just have to hope doesn't happen? I'm sure the seller is not going to give up information like that.
Just wondering.
Import/export laws can be checked with both governments. More to the point is finding out if changes are going to be made. As for the selling of the business my impression is that if it's viable a member of the family should have been given the opportunity to take it over. He could then retire and have a seamless continuation of the business. Additionally if you or a friend has a contact with a company doing this business now you may be able to ascertain if there are any bumps on the horizon.
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