Do *not* pay for "blue sky"

Yes... we are absolutely interested in your $50,000 bar for sale with 3 stools and no customers.
Dangerous Dave
Expatriate
Posts: 256
Joined: Mon Jun 12, 2017 8:22 am
Reputation: 61
United States of America

Do *not* pay for "blue sky"

Post by Dangerous Dave » Thu May 17, 2018 4:59 pm

Someone in a thread I started with a question recently asked why anyone should continue to answer all of my questions if I was never going to offer anything else. So here goes. Before moving to Cambodia I was a professor of Economics for fifteen years and, before that, I worked in the field of Economic Development for ten. This is the career field within which persons are tasked with attracting new business to a town, retaining and expanding the businesses the town already has, and getting people started with their business ideas -- in which capacity I had many opportunities to counsel individuals who wanted to buy someone else's existing business.

And here's the thing I learned about that: Effectively nobody who owns and operates a business is capable of fairly assessing its resale value, for the understandable reason that they are far too intimately invested in that very question. In particular, business owners *always* expect a prospective buyer to pay for not just the assets of the business, but for the "fact" of the existing customer base as well. "I've built this dingy little storefront into a $700/day retail trade," so the logic goes, "so now someone has to pay me for that accomplishment."

In my former profession this is known as "blue sky" and, as hard as it may be for some folks to accept or believe, it is *utterly* valueless.

If you are thinking of acquiring a business, you must never, ever, *ever* pay for blue sky. The value of any business takes the form of the assets being offered, net of unpaid liabilities. And in the rented-storefront-retail space, that amount is, I'm sorry to say, almost, *always* zero.

For starters, note that the existing owner is asking you to pay for his or her expertise -- *but*, hang on a minute, the whole *point* of the sale is that his or her expertise is disappearing, right? I mean, it's not like the seller is planning to sign on as an employee after you've bought them out. So in order to believe that the existing customer base is actually worth money, a person would have to cynically view the general public as so blinded by the logo on the sign that they don't even notice that the place is under new management. That might be true if we were talking about a McDonald's franchise, but it ain't even remotely true if we're talking about a sole-proprietor restaurant, retail boutique, or bar. No, in those cases, as soon as the present owner is gone, the value of the existing customer base drops to zero, precisely because there's no rule that says they ever have to come back.

But it's even worse than that, because the idea that a buyer should pay for someone else's blue sky ignores the alternate strategy available to any aspiring entrepreneur -- namely to open the exact-same business right next door. If the existing entrepreneur really was successful in building up a trade, that trade would be geographically centered on that location, but NOT beholden to that specific front door (again, excepting cases of franchise-driven brand loyalty). All the prospective buyer would have to do is say, "Oh, okay, thanks for your time," shake hands with the seller, walk right next door and rent the storefront that shares a long wall with the one for sale, and the customers would all be right there anyway.

I had this lesson remembered to me by the very nice and personable owner/operator of "The Flicks" movie theaters. As many of you know, he's been trying to sell the theaters for quite some time now, and part of his rehearsed presentation is to offer to "show you all of his books for the past three years." And that's just the perfect example of someone expecting you to pay him for his blue sky: The books mean *n*o*t*h*i*n*g*, at least on the revenue side, the instant the seller flies back to his outfitters' business in Nairobi. They might be useful for drawing up your own cash-flow projections and budgeting for your debt service, but as an actor on the fair value of the theaters they are useless. And once you strip that aspect of his presentation, all you're left with is three leases (fair purchase price by someone else = $0 by the way), three projectors (pretty close to ditto), a movie collection, an outdoor sign or three, and a couple of popcorn machines. You could open right next door to the guy and call it "Flicks 4" for less than $3,000 in start-up costs. You could even use the exact same typefaces and color scheme in your signs and promotion materials. And there wouldn't be a thing he could do about it.

Do, not, pay, for, someone, else's, blue, sky, ever, period.
User avatar
StroppyChops
The Missionary Man
Posts: 10598
Joined: Tue May 06, 2014 11:24 am
Reputation: 1015
Australia

Re: Do *not* pay for "blue sky"

Post by StroppyChops » Thu May 17, 2018 5:07 pm

Some utterly useless and unsolicited information - my wife and I once convinced close friends to name their yacht Blue Sky.
Bodge: This ain't Kansas, and the neighbours ate Toto!
Dangerous Dave
Expatriate
Posts: 256
Joined: Mon Jun 12, 2017 8:22 am
Reputation: 61
United States of America

Re: Do *not* pay for "blue sky"

Post by Dangerous Dave » Thu May 17, 2018 5:08 pm

An even better story if (a) the yacht had been acquired for cash and (b) the cash so generated came from your friends' success at palming off a business at an inflated value.

You should tell the story that way from now on, whether that's how it happened or not. :-)
User avatar
StroppyChops
The Missionary Man
Posts: 10598
Joined: Tue May 06, 2014 11:24 am
Reputation: 1015
Australia

Re: Do *not* pay for "blue sky"

Post by StroppyChops » Thu May 17, 2018 5:19 pm

Dangerous Dave wrote:
Thu May 17, 2018 5:08 pm
An even better story if (a) the yacht had been acquired for cash and (b) the cash so generated came from your friends' success at palming off a business at an inflated value.

You should tell the story that way from now on, whether that's how it happened or not. :-)
Happily, a) is true, however b) is not... perhaps you're right, I should tell it that way!

The real story is ... The lady of the house is an amazing lady, but is no Rhodes scholar. We were hunkered down during a cyclone, playing cards and waiting out the storm. She looked out a window (this being her first cyclone) and commented "I don't know what you're all on about, all I see is blue skies." After we stopped laughing we had a look - she was seeing the blue canvas tarpaulin that was covering the new yacht, which had been pulled up close beside the building on it's shipping base with bumpers between it and the walls of the building, and then anchored to some hold down points in the concrete. The couple hadn't settled on a name, and Blue Sky stuck.
Bodge: This ain't Kansas, and the neighbours ate Toto!
User avatar
dron
Expatriate
Posts: 335
Joined: Wed Feb 14, 2018 10:52 am
Reputation: 36
Cambodia

Re: Do *not* pay for "blue sky"

Post by dron » Thu May 17, 2018 5:23 pm

Easy and objective calculation for any business sale. Monthly profit multiplied by 10 to 24 depending on industry and reliability.

/thread
"The revolution did more than legally create the United States; it transformed American society... Far from remaining monarchical, hierarchy-ridden subjects on the margin of civilization, Americans had become, almost overnight, the most liberal, the most democratic, the most commercial minded, and the most modern people in the world." - Gordon S. Wood
User avatar
bolueeleh
Expatriate
Posts: 4440
Joined: Fri Jan 29, 2016 12:39 am
Reputation: 805
Location: anywhere with cheap bonks

Re: Do *not* pay for "blue sky"

Post by bolueeleh » Thu May 17, 2018 5:31 pm

:ROFL: :ROFL: :ROFL: that someone is me

btw the logic doesnt apply much here, in KoW, is based on a few rules
1 - what the neighbours are asking for im asking for more
2 - if i asked for that previously then now i must be asking more, if not
2A - if not i will lose face
2B - if not people will think i am an idiot
2C - everything must go up, why come down?
3 - if you dont like to buy you can fuck off
4 - dont haggle with me too much, dont waste my time im a big business man, coz im driving a
lexus 470
5 - my father is a general, or i know someone who knows someone is a general
Money is not the problem, the problem is no money
User avatar
StroppyChops
The Missionary Man
Posts: 10598
Joined: Tue May 06, 2014 11:24 am
Reputation: 1015
Australia

Re: Do *not* pay for "blue sky"

Post by StroppyChops » Thu May 17, 2018 5:43 pm

bolueeleh wrote:
Thu May 17, 2018 5:31 pm
:ROFL: :ROFL: :ROFL: that someone is me

btw the logic doesnt apply much here, in KoW, is based on a few rules
1 - what the neighbours are asking for im asking for more
2 - if i asked for that previously then now i must be asking more, if not
2A - if not i will lose face
2B - if not people will think i am an idiot
2C - everything must go up, why come down?
3 - if you dont like to buy you can fuck off
4 - dont haggle with me too much, dont waste my time im a big business man, coz im driving a
lexus 470
5 - my father is a general, or i know someone who knows someone is a general
One of the things that amazed me setting up business here is that it's considered rude to ask for a quote or a price on something. The team were and still are very reluctant to ask for quotes, and tell us that it's not really done here. We explain that we're not paying barang tax on absolutely everything, and they get that, but are still uncomfortable asking for prices.
Bodge: This ain't Kansas, and the neighbours ate Toto!
Dangerous Dave
Expatriate
Posts: 256
Joined: Mon Jun 12, 2017 8:22 am
Reputation: 61
United States of America

Re: Do *not* pay for "blue sky"

Post by Dangerous Dave » Thu May 17, 2018 6:29 pm

dron wrote:
Thu May 17, 2018 5:23 pm
Easy and objective calculation for any business sale. Monthly profit multiplied by 10 to 24 depending on industry and reliability.

/thread
Easy but foolish. The profitability of the sellers is blue sky. Don't pay for blue sky. Ever.

Open right next door for the cost of the lease and chattle property and skip paying for soneone else's profit.
LaudJohn
Expatriate
Posts: 500
Joined: Sun May 18, 2014 8:08 am
Reputation: 94

Re: Do *not* pay for "blue sky"

Post by LaudJohn » Thu May 17, 2018 6:43 pm

A question to the OP.

Have you ever bought, started or run or sold a small business anywhere?

Have you ever done the above in Cambodia?
Dangerous Dave
Expatriate
Posts: 256
Joined: Mon Jun 12, 2017 8:22 am
Reputation: 61
United States of America

Re: Do *not* pay for "blue sky"

Post by Dangerous Dave » Thu May 17, 2018 6:54 pm

Yes, a small radio station in northern New York, which I acquired with my former boss there and we more or less immediately flipped, when I was still majoring in this exact topic in college. In addition you might check out the OP itself for a reference to the ten years of relevant professional expertise on *counseling* persons planning to acquire businesses -- which you may have missed -- and in so doing you may consider the implicit data sets of those who've succeeded and those who have not.

But don't take my word for it, because you don't have to. GAAP demands that any goodwill over the net asset value (less depreciation) of any business balance sheet must be immediately charged off the balance sheet after the sale is finalized. So if you pay someone for their profit, it will reflect immediately on your balance sheet as a negative net worth.

It's a pretty concise microcosm of everything that's wrong with the internet when a guy can say, "Here's my expertise, and here's what it taught me, never pay for blue sky," and someone else can post, "A good rule of thumb is to pay for a crap-ton of blue sky." :D :D :D
Post Reply Previous topicNext topic
  • Similar Topics
    Replies
    Views
    Last post

Who is online

Users browsing this forum: No registered users and 15 guests