Clayton James Online

While working for a pacific North West telecom company, I discovered my passion to be an Entrepreneur.  The pride and sense of accomplishment you feel when you become a small business owner can be such a liberating feeling.  Depending how your due diligence goes, you may not be feeling that liberating feeling for long, and in fact my turn into more of a nightmare.

When I went looking for my first business venture, I had no idea what I wanted. I thought I could invest in real estate: buy a property, fix it, and then sell it.  Or I could rent the property out for some years and watch the value climb.  Investing in Real Estate at first scared me because of the amounts of money involved; a house I looked at was $130k. I looked at that amount instead of the down payment amount which is what I was actually investing, not the whole $130k, the bank was taking care of the rest. Nevertheless, I decided a small business in Coffee was best because it was simple, required little capital to start and is very popular in the region where Starbucks reigns supreme.

I started scouring Craig’s List for places that wanted to place a coffee shop or any coffee shops for sale. I found only a few businesses for sale that were close to my price range but one imparticular was a Coffee stand selling for 10k, including inventory and current employees.  

When I contacted the woman she was very nice, I asked her why she was selling and she said she wants to invest in a bakery business with her friend. She explained to me that she purchased it two years ago and the business has taken a hit pretty hard from local construction. the construction that was taking place was along a main street connecting two cities, a good location.  she told me that at times the construction was so bad that customers couldn't get into the parking lot to shop.  The Coffee stand was actually a "store within a store" type, inside of an Albertson's Grocery.  

I visited the site, after her telling me not to bother her employees while I’m there in fear of spooking them to quit for another job.  It seemed the construction was 95% complete and the store was quite busy.  I asked her about how much she made a month, and if she could show me deposits and or accountability to show the business is making money. Her input was that she was taking off the top ( Meaning to declare income to avoid taxes) and couldn't provide what I wanted.  

My deduction was that the price she was selling was good because the machine it's self was worth almost half what she wanted for the whole operation. I felt that with the construction coming to an end, business would pick up even more than it was. Plus it was summer; people buy cold-coffee drinks in the summer and hot drinks in the winter.

I told her I would purchase it. The day of the purchase she began to tell me not to make too much noise and ask too many questions with the corporate office. Just cut the checks and send them. The rent was only $400, and there was no Lease required.  She explained that the stand she bought was owned by a woman who had another location at another Albertsons. The person who purchased the other location notified Albertson’s of the change and the rent more than tripled. Makes sense I suppose.

We went to the bank, and she pulled out a hand written bill of sale for the business. The bill stated that I was purchasing her coffee equipment, complete with inventory. Alright, seems uniform; I signed it.

I hit the ground running when I took over. I purchased a new register, created an inventory system, retrained the employees (and hired some new ones), I designed a logo and purchased Aprons with our Logo "Bel Canto Espresso" which was the new name. I went all out to reinvent the business to make it a more professional, serious looking business with my stamp of approval.  What I didn’t do before purchasing the business lead to a huge problem though. I didn’t do complete due diligence to protect my investment.

I had about 3 months into the business when they announced they were going to close 3 Albertson’s stores, including the one I was doing business in. I was devastated.  I couldn’t believe it.  I talked to the store manager and asked why they didn’t mention the possibility of closing the Albertsons to the previous owner of the stand or to me. They said that she worked for Albertson’s at another location before and she knew about it. She had defrauded me by not telling me the whole truth.  Soon after the store closed and my business vanished, along with my dreams of being a business owner.

From "The ABC's of Real Estate Investing", a book from the series which create the best seller Rich Dad, Poor Dad, is a piece of information that I feel is something that would have prevented me some heartache:

Due Diligence!
"In Webster's dictionary, the definition of 'diligent' is 'prosecuted with careful attention and effort.' but it's really the synonyms for the word that reveal exactly what is expected during the due diligence period when purchasing investment real estate.  The synonyms for 'diligent' include 'conscientious, through, careful, thoughtful, attentive, and meticulous.'  And that's exactly how you need to behave when you do due diligence on a property. You need to conscientiously review every document pertaining to property operations.  You need to perform thorough walk-throughs of every apartment unit.  You need to pay careful attention to every detail.  You need to be thoughtful about how you can improve the property and cut expenses.  You need to be attentive to the tasks and deliver them on time and you need to be meticulous in your evaluation and reporting."

By not making sure that every last detail had been gone over, and shed light on every single aspect of the business I lost my entire investment, and then some.  If I had told her that I needed to see financials, felt I needed to interview her employees and made sure the corporate office was aware of the transaction, I would have come to find out that the Albertson’s was getting ready to close and I would have walked away. I also did not have a second pair of eyes with me to help me; I wanted to do it all myself from beginning to end, which was a mistake.

If you are going to purchase an existing business it is important to either have a lawyer’s advice or a good accountant who can look over records, and at the very least a good friend or family member that has nothing but your best interests in mind to smack the stars out of your eyes so you can see what’s really happening.