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Jul 24
2017

Buying Other People’s Mistakes

Posted by: Steve Marr

Tagged in: Untagged 

Most business people want to start out with everything new:   new facilities, new equipment and new vehicles.  However, new is expensive.  For example, consider the difference between purchasing new clothing in a retail store and used clothing in a good thrift shop. While I understand why there is a reluctance to buy secondhand clothing, there should be no reluctance to buy secondhand business equipment.

The key is to focus on the need and how to fill it. One way is to acquire assets from a failed business at a low cost. 

“Ken” and “Martha” were opening a restaurant. They found a location with an estimate of $350,000 to build out the facility which included adding a kitchen. Estimates for tables and other furnishings came in at about $40,000 and other equipment including dishes and tableware were going to run around $60,000.  Ken and Martha would need to invest $450,000 in the property and equipment. I was concerned that this was too much money.  Instead I advised them to check real estate listings for closed restaurants. While the furnishings were not everything Ken and Martha wanted, the landlord agreed to a reasonable rent structure including all of the furnishings in the price of the rent. Ken and Martha needed to invest nothing for build out. Additionally they obtained the majority of the tableware, dishes and other equipment from other failed restaurants.  Ken and Martha were able to open for a total investment of about $50,000, a huge savings. This allowed them funds for marketing and cash reserves. 

Initially Ken and Martha resisted walking down this road that ultimately realized tremendous savings. Fifty thousand dollars was a lot better than their original target at $450,000. It was worth not getting everything they wanted. 

Another example was “Doug” who was starting a water damage restoration business. Doug located used equipment from a person who was not successful in the business and was selling off his equipment. The equipment, worth $30,000 if purchased new, was for sale. Doug was interested in about two thirds of the gear but offered $5,000 cash for everything.  At first the seller balked, but finally agreed saying; “I just want to be done with this so I’ll take the deal.” 

While it is sad for those going out of business, selling off products is a low cost option that helps the seller get rid of what they can’t use. It is also a good option for the buyer who gets equipment for a significant savings. 

Another asset to consider is the customer list of anybody going out of business. Most businesspeople don’t understand the value of a customer list nor how to effectively market former customers. Read my earlier article on buying customer lists: http://www.stevemarr.org/index.php/home/buying-customer-lists-.html

King Solomon wrote “The wise store up choice food and olive oil, but fools gulp theirs down.” (Proverbs 21:20, NIV) The key principle is to buy what you need while saving something for the future. John Wesley wrote, “Earn all you can, save all you can and give all you can.”  This is good advice, and saving by purchasing assets from failed businesses is a great first step.

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