Like any community, Kona, Hawaii has a range of businesses for sale at any given time. Some are gems in the rough and some are close to closing and no amount of effort can save them. I like to think about Kona businesses for sale as falling into four categories:
1. Turnkey Profitable
2. Distressed – Avoid!
3. Distressed -Fixable
These are the dream businesses: they make money, and a new owner can take over and run successfully right away. An example might be a retail shop in a prime location with a history of strong cash flow. This type of business seldom stays on the market very long, as there are lots of people looking for this type of “dream-come-true” business.
Here are some things to look out for when you see a business listing for a Profitable Turnkey business:
1. Are the books clean? Have taxes been paid and do bank deposits match with the declared income? If the owner claims a lot of off-book revenue–cash–be wary of such claims as they are easily exaggerated. Look for professionally prepared books backed up by tax returns.
2. Is the owner claiming a salary? A business with $100,000 in free cash flow might not be so good if the owner, her husband, and children all have to work at no cost to keep the business going. Many small restaurants are only profitable because of “contributed labor”.
3. Check the lease of the property very carefully. It might not be transferable or might be expiring soon, which means the building owner will hold all the cards when negotiating a new lease.
4. Confirm suppliers and make sure they will provide like pricing and servicing going forward.
5. Be sure to check the business’ online reviews and overall online presence. I see a lot of restaurant and tourism businesses with only mediocre reviews online. This will affect the businesses’ ability to be profitable in the future.
Lastly, look a the price very carefully. Turnkey Profitable businesses are very rare, so they are often priced well above the actual value. A great company at a bad price is a bad deal!
Distressed – Avoid!
This describes a lot of businesses for sale in Kona, Hawaii. Tell-tale signs are a relatively low price, unfilled taxes (cash flow problems), a bad location and a significant amount of negative online reviews.
Here’s an old joke in Kona: How do you know a restaurant in Kona is about to close? It’s for sale!
There are three essential things to do when looking at any distressed business:
1. Look at the numbers. What are sales? What is the cost of goods sold? What is the monthly overhead? Is the owner working for free?
2. If sales are low, why? The reality might be that there is very little need for the products or services. If the market has already spoken; that is, the business has not been sufficiently profitable for some time, it will probably continue to do so into the future.
3. What can you possibly do that hasn’t already been done to change the game? Every entrepreneur I know if an optimist (and that’s why I love working with them). That said, if the business has been failing despite the efforts of the current owner, what can you do that will change the game? I have seen some restaurant locations change ownership and theme six times in the 17+ years I have been here. These areas, for lack of a better word, suck, and there is nothing that can be done to make them work.
Distressed – Fixable
Everyone who buys a “Distressed – Avoid!” business imagines that it is in the “Distressed – Fixable” category. If they just change the marketing, the business will succeed. The product selection was too wide/narrow, so they just fix that, the company will become profitable. A few new recipes and we’ll get people back to restaurant….The list can go on and on.
The truth is that a business in a terminal condition is unlikely to change–even with new ownership.
How do you know if a distressed business is fixable?
1. Look for a business that has had problems due to the owner’s personality or health issues. A new owner will solve those problems quickly. Likewise, if the problem is poor employee training or morale, this can change.
2. Look for good financial fundamentals. Are the products and services high margin? Is there room to put some of the profits into fixing outdated equipment, anemic marketing or automation? Can you implement efficiencies to expand the margins?
3. Talk to suppliers and customers and see what can be done to fix broken relationships and forge better service or product offerings in the future.
4. Most of all, be brutally honest with yourself: If others have failed, what can you do that hasn’t been done to change the underlying dynamics of the business?
Finally, if the business has a considerable number of negative reviews on websites like Yelp! and TripAdvisor, you will be buying the problems of the company, and worse yet, you will not be able to change this perception problem for a long time and without significant effort. Avoid!
These are often the best businesses on the island, as the owner has likely run the business fairly well and is a motivated seller. He will also have some emotional stake in the company, so there will be some incentive to help out the new owner and help her be successful.
A few issues in buying a business from someone who is retiring:
1. If it is the personality and connections of the owner that has made the business work, consider how much of that will transfer to the new owner.
2. Be sure to value the business properly. The value is what a reasonable person would pay for the business (assets, cash flow, contracts, reputation, etc) and not how much the current owner needs for retirement or her emotional attachment to the company.
3. You might be able to get creative financing from the owner.
4. Look at the books carefully. Numbers will not lie.
Buying a business in Kona, Hawaii can, of course, change your life. Living in paradise has a certain appeal. That said, knowledge of the business, its financials, and understanding where and how companies thrive in Kona are essential. A Realtor or business broker will seldom provide unbiased advice, as they only get paid when they make a sale.
Kona Impact has worked with more companies in Kona, Hawaii than probably any other business. We know Kona business and have been helping businesses owners start and grow their businesses. We are very attuned to the local business climate and have years of experience seeing what succeeds and fails. If you’d like to talk shop, give us a call. We can help.