By: Jack Findaro, Product Development Director at Visa Franchise
As the preferred advisory firm for foreign nationals looking to move to the U.S. through a business investment that would qualify them for an investor visa, we have been able to help our clients find suitable investments. Many of our clients initially inquire regarding the option of investing in an existing business in order to obtain their E-2 or L-1 investor visa. While purchasing an existing business has the potential to qualify for an E-2 visa, there are many issues that are unique to investing in an existing business that can be avoided when investing in a new franchise business, distributorship or joint-venture (JV) opportunity. While in the past we have explored in details the benefits to investing in a franchise, here we will look into the issues that accompany investments for existing businesses.
Difficulty in Finding a Successful Existing Business for Sale
The most difficult aspect of investing in a successful existing business is finding truly successful existing businesses that are for sale. Finding existing businesses that are for sale is a rather simple task. When a business owner wants to sell his business, he can utilize any number of resources to list the business for sale. There are large networks of business brokers, real estate agents, and online databases that help the owner sell the business.
However, sorting through the many businesses listed for sale to find profitable investment opportunities can prove quite difficult. The reason for this is that many business owners that have successful existing businesses tend to want to continue owning those businesses. A good question to keep in mind here is, “why is the owner looking to sell the business if it is doing well and generating profits?”. If the business is going that well, should not the profits be reflected in the sales price?
There are certainly occasions when a business owner may decide they no longer want to be a part of the business. However, if an owner does decide they no longer want to manage or own a successful, profitable business, then they will usually gift it to a family member or hire a general manager to continue to manage the business for them. In the cases when the business is a franchise, then another franchisee or even the franchisor might purchase the unit for themselves in order to expand at a quicker pace. For these reasons, the vast majority of the businesses that a prospective investor will come across are weak businesses that likely have little to no profit.
Fraudulent Financial Statements
The primary reason an individual may find interesting in investing in an existing business. Is the belief that the investment will be less risky than compared to a new business due to the historical financial results available to them. As mentioned above, finding successful, profitable businesses for sale tends to be extremely difficult. Furthermore, many of the existing businesses do look profitable or successful on paper are not actually profitable in reality.
We at Visa Franchise have heard numerous cases where our clients had previously attempted to purchase an existing business. But found that the business’s owner lied about the financial results they presented. This is a common theme. Especially in South Florida where many businesses accept cash transactions that are not easily accounted for by a point-of-sale system or cash register. A common tactic might be to increase sales figures or show that costs are significantly lower than they truly are. Additionally, many business owners selling their businesses have been known to hide liabilities that are tied to the business. If something looks too good to be true when it comes to an existing business for sale, then it usually is just that – too good to be true.
Due Diligence – Costly and Time Intensive
Conducting due diligence is the next step once we find a promising existing business investment opportunity. A potential investor must hire a forensic accountant or trained professional to review all of the different financial statements, tax returns, lease agreement, contracts, and liabilities of the business. This in order to truly understand the business before deciding to invest. This is done to ensure that the worst-case scenario where the financials of the business are not what the owner had presented to the potential investor does not occur. The majority of the time, this is the stage where the potential investor finds out that they were lied to.
However, the potential investor will not find this out. Until they have spent significant time and money hiring an accountant to conduct the due diligence. No one wants to waste months of their time pursuing a potential investment opportunity that leads to nowhere. Especially if they are looking to quickly obtain their L-1 or E-2 investor visa. Typical due diligence costs $1000 to $2000 in accounting fees and 10-30 hours of the investor’s time.
Independent, non-franchise businesses have no support structure in place. This is an important factor to keep in mind as it pertains to non-franchise existing businesses. Once you purchase the existing business then the success or failure of the business now relies solely on the new owner of the business. Unlikefranchises, many existing businesses by their very nature do not have proper processes in place that would allow for a new owner to begin managing the business without any sort of loss in sales, drop in quality, or increase costs. While some experienced entrepreneurs might be the exception, this is what tends to occur in most cases. This is a particularly relevant point for foreign nationals moving to the U.S. through an L-1 or E-2 business investment. As many times they are unfamiliar with the competitive U.S. market.
The absolute worst-case scenario. When an individual with an investor visa purchases a business that ends up failing. And must then make a new investment in order to retain the investor visa for themselves and their family. We at Visa Franchise have had numerous clients experience this exact scenario before. Then coming to us to help them find a new franchise business investment that will qualify for the L-1 or E-2 investor visa.
Time is Valuable
A common misconception. Is that buying an existing business is a significantly faster process than investing in a new franchise business. It is important to keep in mind that the whole process of looking through existing businesses. Reaching out to the various business owners. Conducting due diligence. Negotiating the purchase terms can take months to complete.
A potential investor might not know about potential fraudulent numbers. Or unknown aspects of the business until late in the process. In contrast, the process of investing in a new franchise business tends to be much more transparent due to how franchises are regulated by theFederal Trade Commission (FTC). The FTC mandates what information a franchisor can and cannot share to a potential franchisee investor. This enables a potential franchise investor to find out a wealth of information on the initial consultation phone call with the franchisor. That will allow them to decide early in the process. As to whether they would like to continue with the evaluation process.
The Few Strong Existing Business Investment Opportunities
It is important to note that we have come across circumstances. As cases where an existing business for sale can be a strong investment opportunity. Cases, where the franchisor is selling existing corporate units, are an exception to the above. As the FTC regulates franchises, franchisors tend to be very transparent and forthcoming when it comes to financial statements. As the information, they provide to a potential franchisee interested in purchasing one of their existing units. For example, the good franchises tend to err on the conservative side when they communicate financials for existing units for sale.
Additionally, we have seen that large, professional franchisee operators are more transparent in their dealings with existing units. As they have much more to lose if they are sued than compared to a single unit business owner. Also, they are the ones that will have to deal with an unhappy franchisee. Even if it does not progress to a lawsuit! We at Visa Franchise are always on the lookout for strong cases. Where you can find an existing business investment opportunity.
For individuals looking to invest in an existing business. We hope that the information covered here helps to make them aware of the potential pitfalls that come with investing in an existing business. While there are some strong investment opportunities for existing businesses. The vast majority that a potential investor will come across are poor investment opportunities. Much time and money may be wasted before it is discovered that the business opportunity was not what it seemed. For all the reasons we outlined. The vast majority of clients at Visa Franchise elect to invest in a new franchise unit. As it can save them significant time and money.
About the Author:
Jack Findaro is the Product Development Director at Visa Franchise. He and his team focus on the research, analysis, due diligence, and ongoing relationships. This for the different franchises and businesses in Visa Franchise’s portfolio. Before Visa Franchise, Jack worked at Miami-based global franchise company Restaurant Brands International. Parent company of global iconic brands such as Burger King, Tim Hortons, and Popeyes. He worked within various departments, including Global Finance, Investor Relations, and Global Development. His experience at Restaurant Brands International has enabled Visa Franchise to provide deep insights to their foreign national clients. Many of whom are interested in investing in a franchise. In order to obtain their investor visa for themselves and their family.