PROBLEM SITUATION

A client tired of the corporate jungle in which he worked and dreaming of all the money to be made as an entrepreneur, decided to buy a retail sporting goods store located in the bucolic town in which he resided. The store owner gave him an income statement showing sales and expenses for the current year and was giving him the "deal" of his life. He could purchase the business for $75,000 plus the cost of inventory ($125,000). The $200,000.00 sales price had to be all cash at closing. The client decided he could use the cash accumulated in his 401(k) plan to purchase the business. A home equity loan could be used to provide him with the cash for six months of living expenses and working capital that the seller suggested he would need before he earned a profit. He called to engage us as his accountants and to decide whether he should incorporate the new business.

JOSEPH BOLAND, CPA, PC SOLUTION

We met with the client and explained that a nine month income statement was not adequate for a purchase decision. We needed to see at least 5 years of financial statements and tax returns. The seller and his broker balked but we advised our client to insist. Finally, they acquiesced and forwarded the financial statements and tax returns. We noticed that sales were declining and that inventory seemed to remain constant from year to year. We gave our client a list of additional information that we would need to further analyze the proposed purchase.

A few days later, the client called to say that the owner based the inventory on his records, not a physical count. The seller maintained that sales declined because he was losing interest in the business but the buyer would surely experience an increase once he brought his enthusiasm and energy to the store.
Our analysis showed that some of the inventory on the books was obsolete and worthless. Our research also led to an important discovery. A Wal-Mart was under construction within a few miles of the sporting goods store. Wal-Mart carried a full line of sporting goods and was known for discounting prices to drive out competition. We immediately met with the client and advised him to walk away from the purchase. We were able to show the reasons the owner was in a hurry, priced the business low, and insisted on an all cash sale.

RESULTS EXPERIENCED BY CLIENT

Our client realized that instead of the opportunity of a life time, this would be the mistake of a life time. Between the cost of the investment and the home equity loan we were able to prevent this client from losing over $225,000.00.

Success Story Two: Industry -  Manufacturing