Jordan West – You Must Pay Attention to Cash Flow When Buying a Business
WhenJordan West was 23, he decided to buy a Taco Del Mar restaurant. He knew he had made a huge mistake at 2 pm the first day when only three customers had walked in (and two of them were his parents). For five years, he worked hard to grow sales every way he could think of and, in the end, tripled his revenue, which still didn’t seem to matter on the profit side. (He lost a lot of money).
The one thing that he seemed to be the best at in his restaurant endeavor was marketing and getting people in the door. Fast forward to 2014, when his wonderful wife, Carmen, started a modest baby clothing line and was selling at craft markets. He asked Carmen if he could test running a few ads on Facebook, and the rest is history. He learned every up-and-coming strategy and tactic and helped grow her small start-up into a multi-million-dollar company. And it’s still growing to this day!
Over the years, he realized what he is good at and what he is not good at. What he’s good at is marketing and helping others scale their businesses, which leads us to now.
“That business idea you have will cost twice as much, and it is going to take four times as much time as you think.”
Worst investment ever
In 2010, Jordan started thinking about going into business. His family was in the milling business, and he wanted to join in, but his family wouldn’t let him. And because he did not want to go to business school, Jordan thought what better thing to do than to purchase some kind of business and learn on the go.
Buying a restaurant off Craigslist
In his pursuit to own a business, Jordan looked on Craigslist and found a Taco Del Mar restaurant. This was a Mexican chain restaurant that had had a lot of success in the past but was currently on a bit of a downward trajectory. But the restaurant itself was selling for about USD 25,000.
Jordan figured he could afford to lose $25,000 should the business fail. What he did not factor in was all the money he was going to put in to run the restaurant, plus all the time he would have to spend running it.
Getting into the real business of owning a restaurant
Running the restaurant was not as easy as Jordan had thought it would be. The biggest problem he faced was getting the restaurant to start making a profit. Year after year, the restaurant kept making losses.
Jordan had it so rough that he had to work 60 hours as a paramedic just to try to afford the payroll.
Time to call it quits
Jordan kept pushing, trying to turn around the restaurant. But when one day he gave his landlord a check of $56,000, and it bounced, Jordan figured it was time to rethink his business venture. He just could not continue living in so much debt because, at this point, he had borrowed so much to keep the restaurant afloat.
About six months before the end of the lease, Jordan went to the franchise headquarters and asked them to find someone to buy the restaurant. They found a buyer who could tell right off the bat that Jordan was desperate to sell. He ended up selling it for $25,000.
At the end of it all, Jordan had lost $150,000 and five years of his life. This was indeed his worst investment ever.
Make sure you scrutinize all financial reports before buying a business
When buying a business, make sure that you scrutinize all possible financial reports to get proper financial projections.
Learn how to read financial statements
Learn how to read a financial statement before you buy a business. This way, you will be able to see what the owners have been spending money on. When you can read and understand financial statements, you will see if there is any possible way to make money from that business.
Take a look at the cash flow statement as well
When making your financial projection, be sure to look at the cash flow statement as well. This will help you figure out how much money you are going to need to keep the business afloat until you can make money.
Marketing cannot save a sinking ship
Great marketing cannot save a business that does not have sound financials.
Be careful when investing in a restaurant because they are a very limited business
If you are thinking about buying a restaurant, just know that it is a very limited business, and it is tough to scale a restaurant.
Buying a small business is a trap
The biggest problem with investing in a small business is that you are limited in your revenue and resources. It takes a lot to get out of that trap.
Understand the concept of working capital versus cash flow
Several working capital items will come up when operating a business. So when you are making your financial projections to determine whether the company you want to buy will bring you enough cash flow, be sure to factor in operating losses as well.
Sometimes the best way out is to take get out
Sometimes, it is best to take the easy exit and get out, even though you make a loss. It may be humiliating, but sometimes it is just better to sell it and count your losses when a business is bleeding money.
Whatever you think it is going to take, just know that it will take longer, and whatever how much you think it is going to cost, it will cost more.
No. 1 goal for the next 12 months
Jordan’s number one goal for the next 12 months is to go mountain biking 100 times. So two times a week.