Should I invest in this business?

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creditdefaultswaps
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Joined: Mon Jan 02, 2017 7:56 pm

Should I invest in this business?

Post by creditdefaultswaps » Sun Jul 09, 2017 10:28 pm

I have an opportunity to invest in a Hooka Lounge near a major university. The offer is 49% ownership with a 50/50 profit split for $50K.

I've never met the owner but the nature of my consulting permits me access to many investment and business opportunities.

Should I even consider this opportunity? What due diligence would you suggest to help answer the question?

mchriton
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Joined: Sat Oct 24, 2015 3:26 pm

Re: Should I invest in this business?

Post by mchriton » Sun Jul 09, 2017 10:49 pm

Others may have positive experience in this type of arrangement but I wouldn't consider it.

You don't have control of the business. There might never be a profit. If it ever starts making money the majority owner could pay himself salary, contracting fees, etc so the company never makes a "profit".

arsenalfan
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Re: Should I invest in this business?

Post by arsenalfan » Sun Jul 09, 2017 10:52 pm

If it is fun money (you can lose the $50k no sweat) and it would be fun/educational for you, and the partner is trustworthy, the business plan seems solid, and he has a proven track record, yes.

Else, no.

123
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Joined: Fri Oct 12, 2012 3:55 pm

Re: Should I invest in this business?

Post by 123 » Sun Jul 09, 2017 10:53 pm

Insufficient information. There is no indication about how much, if any, profit the business makes.

I would start by reviewing copies of the federal and state tax returns for the business for the last 3 - 5 years and I would run a credit and background check on the business and its owners. Tax returns generally show the most conservative indication of profit.
The closest helping hand is at the end of your own arm.

pepperz
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Re: Should I invest in this business?

Post by pepperz » Sun Jul 09, 2017 10:53 pm

Before you delve into the specifics of this type of business and what you expect from it:

What is this person's (your potential future partner) background and how successful has he been with entrepreneurial ventures in the past? What were they and what were the outcomes?

Has he opened a brick and mortar biz before? Has he ever sold one or more?

InsideTheBeltway
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Re: Should I invest in this business?

Post by InsideTheBeltway » Sun Jul 09, 2017 11:02 pm

When reading the subject line I said, "no" before even reading the body of the post. Upon reading, I'm even more "no." Zero chance I buy 49% of small business. You'll never see a return and will always be at the mercy of the majority owner. If you put the $50,000 into the VTI, based on historic returns it will be worth $100,000 in 6-10 years. Why take a risk?

daveydoo
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Re: Should I invest in this business?

Post by daveydoo » Sun Jul 09, 2017 11:29 pm

creditdefaultswaps wrote:I have an opportunity to invest in a Hooka Lounge near a major university.
In the US, this is a fad -- and a dreadfully unhealthy one at that. Candy-flavored additives to rope in the uninitiated. It's way worse than Joe Camel. It's hard to say "no" to a business opportunity on principle alone, but this is an easy one, imo.
"I mean, it's one banana, Michael...what could it cost? Ten dollars?"

InvestorThom
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Re: Should I invest in this business?

Post by InvestorThom » Mon Jul 10, 2017 12:31 am

"I've never met the owner but..."

No.

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BL
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Re: Should I invest in this business?

Post by BL » Mon Jul 10, 2017 12:51 am

InsideTheBeltway wrote:When reading the subject line I said, "no" before even reading the body of the post. Upon reading, I'm even more "no." Zero chance I buy 49% of small business. You'll never see a return and will always be at the mercy of the majority owner. If you put the $50,000 into the VTI, based on historic returns it will be worth $100,000 in 6-10 years. Why take a risk?
+1
Just say no.

runner540
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Re: Should I invest in this business?

Post by runner540 » Mon Jul 10, 2017 6:22 am

No. Many solid reasons above, and the fact that you don't know what to ask diligence wise.

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TomatoTomahto
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Re: Should I invest in this business?

Post by TomatoTomahto » Mon Jul 10, 2017 6:47 am

daveydoo wrote:
creditdefaultswaps wrote:I have an opportunity to invest in a Hooka Lounge near a major university.
In the US, this is a fad -- and a dreadfully unhealthy one at that. Candy-flavored additives to rope in the uninitiated. It's way worse than Joe Camel. It's hard to say "no" to a business opportunity on principle alone, but this is an easy one, imo.
I hear there's more money in opioids.

Like the posters above, I said No before I opened the thread. Now that I've read it, a thousand times No.

Rich Cape Cod
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Re: Should I invest in this business?

Post by Rich Cape Cod » Mon Jul 10, 2017 7:10 am

Just curious, how did you find out about this "opportunity?"

Rich
Rich Cape Cod/AZ

BlackStrat
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Re: Should I invest in this business?

Post by BlackStrat » Mon Jul 10, 2017 8:37 am

I hear the latest craze for the kids is snorting chocolate.

Perhaps you open a 'SnortBucks' (??)

:shock:

LawyersGunsAndMoney
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Re: Should I invest in this business?

Post by LawyersGunsAndMoney » Mon Jul 10, 2017 8:41 am

Unless you have Jon Taffer on speed dial, I wouldn't touch this opportunity with a 10-foot-pole.

amateurnovice
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Re: Should I invest in this business?

Post by amateurnovice » Mon Jul 10, 2017 9:18 am

One of these went into a prime location in my hometown which has three colleges (one two-year baptist affiliated, one four-year major liberal arts which you'd think would've really brought in the crowds given it was less than 1/4 mile away, one four-year mid-level public) and didn't last very long. Now, very close by to where that location was, there is a piano bar that has only grown over the last six years it's been open. Maybe if the lounge was there now it would make it, but I still doubt it.

Are there bars nearby? Or social spots? Boutiques, stores, banks, churches, businesses that aren't hangouts do not count. Even chain restaurants nearby wouldn't be sufficient to the type of crowd this place would draw. Even if it's just across the street from the college, the clientele would be very niche. Fraternity and sorority types would not go there except if their pot dealer brought them in. Hookah lounges tend to bring in people that don't expect to spend much if any money and may just sit there for hours doing nothing.

I'd say no.

chinto
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Re: Should I invest in this business?

Post by chinto » Mon Jul 10, 2017 2:42 pm

You really need a lot more information. It starts with a customer demographic profile, to make sure you have the customer base and they have the disposable income to support the business. Next you need a survey of the competitors and also what happens to the projected profit and loss if a competitor or two enters the market (this is an easy add on for established bars for example). You also need to do a site study to make sure you have a strategy to get the traffic needed. Next you need to really analyze the lease unless you are going to own the premises. Since this is more of a fad enterprise there should be a multiple exit strategies. For one this should be considered a temporary enterprise and not an on-going concern. So there should be a logical termination/liquidation of the business in the business plan(generally coincides with the lease terms). So from start to finish of the logical life of the enterprise you need to recoup the build out costs, the liquidation fees and somewhere between the two produce a profit. The lease will in large part dictate things. If you have no control over the renewal lease bump and a guarantee of renewal then the business needs to turn a profit in the first lease term. At renewal can the landlord simply not renew and thus put in his own hookah bar now that you built a customer base for him? You likely want to review the lease several times. The longer the lease, the more risk ensued with a triple net lease. And a triple net lease in certain states can be very. very risky (IL for example). There also should be a business failure exit plan. If your partner does not have these things I would suggest you walk away. In such an enterprise I would be looking for a 12-18 month return on investment and certainly no longer than 36 months. I would get nervous with a projected 24-30 month return on investment. Frankly I would be uncomfortable in the 18-24 month range.
Last edited by chinto on Tue Jul 11, 2017 1:34 pm, edited 1 time in total.

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Pajamas
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Re: Should I invest in this business?

Post by Pajamas » Mon Jul 10, 2017 2:49 pm

My first thought is that if it is such a great business, why is the owner wanting to sell 49%? If it were a huge sum of money I could understand wanting liquidity but you're talking about $50k.

I also would have concerns about the long-term viability of the business as the hookah fad is not so hot these days. Seems like also functioning as a vape shop would be the way to go, as a minimum.

Also, at least where I live, the laws regarding hookah lounges have evolved and a bunch of them got shut down a couple of years ago for illicitly selling tobacco. Regulation could be a problem.

I'm also thinking you might not have been looking for a direct business investment but that this is either being sold to you or is an impulse buy. It would not be my first choice as an investment or even as a direct business investment, but obviously it is for some people.

llama1963
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Re: Should I invest in this business?

Post by llama1963 » Mon Jul 10, 2017 2:53 pm

Let me give you the secret code.....

If it is such a great business, why is he willing to give up 49%?

A. He wants to cash out and leave you holding the bag. Pardon the pun.
B. He needs a cash infusion to continue to operate the business.

Hell, no. Run away!

chinto
Posts: 296
Joined: Wed Jan 04, 2017 7:39 pm

Re: Should I invest in this business?

Post by chinto » Mon Jul 10, 2017 5:12 pm

llama1963 wrote:Let me give you the secret code.....

If it is such a great business, why is he willing to give up 49%?

A. He wants to cash out and leave you holding the bag. Pardon the pun.
B. He needs a cash infusion to continue to operate the business.

Hell, no. Run away!
As a former serial entrepreneur I can say you may be correct but you may be wrong, as in very wrong. Starry eyed dreamers, con-men, incompetent losers, innovators, thrill seekers, builders, and competent businessmen all can be entrepreneurs and many are a hybrid of the types I listed.

I once gave up 80% control of a concept, just so I could get it off the ground. It was profitable and by selling my 20% three years later I was able to start a new concept with 100% equity and no debt off the sale of the 20% I had.

An I said, entrepreneurs often walk to the beat of a different drummer. I have bought businesses that were deep in the red for pennies on the dollar and turned them around within 3 months...think about that for a minute. What that tells you is the concept was not bad. the situs was correct, the demographics were spot on, the trouble was with the operational management and the marketing. How is it relevant, well, read your comments. In the case I mention, the guy needed to get out, but the business was not a bad deal for me. People who start businesses come from all walks of life.

That being said, as I posted before there is a lot to investigate here.

123
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Re: Should I invest in this business?

Post by 123 » Mon Jul 10, 2017 5:23 pm

To the OP:

There are lots of great comments in this thread. Time to put them in your pipe and smoke it!
The closest helping hand is at the end of your own arm.

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