Thinking of buying a business, but afraid of getting taken
September 10, 2017 7:03 AM   Subscribe

My wife and I are thinking of buying a functioning but neglected movie theater. We need advice on performing due diligence and negotiating the sale, so that we don't get taken.

My wife and I work part-time in an old-fashioned, single-screen movie theater. The theater has a digital projector but is otherwise outmoded and neglected (broken seats, pealing paint, dirty carpets, etc.). Rumor has it that it's been losing money for years. But we think it has great potential, and we're very excited about the prospect of running it.

The owner is largely absent, and I've only spoken with him briefly a handful of times. He doesn't pay much attention to the business, which might explain why it's losing money. He's quite wealthy, owns multiple businesses in the area, and has a reputation as being aggressive, if not outright ruthless. He's often involved in lawsuits and employs a high-priced law firm to represent him.

I've told the owner that I'm interested in buying the business, and he wants to meet this week for an initial discussion. My wife and I are afraid that we're way out of our league here. We want to buy the theater, but we don't want to be naïve about it.
posted by JD Sockinger to Work & Money (14 answers total)
If he already has a reputation for litigiousness, you will definitely end up in litigation with him. Avoid this transaction.

If you must proceed, hire a transactional lawyer who has done business acquisitions before. If you can't afford this, you can't afford to buy the theater.
posted by radicalawyer at 7:37 AM on September 10, 2017 [23 favorites]

Have you seen inside the books for this business? I'm asking because that is really what you need to do, but if he's aggressive you may have trouble getting an honest look into them. I definitely agree that you need professional legal advice here.
posted by warriorqueen at 7:43 AM on September 10, 2017 [8 favorites]

I read something once about buying existing businesses: what makes you think you can run it more profitably than the current owner? I don't see anything in your post to answer that question. Simply "spending more time on it" isn't magically going to make it profitable.

You have to figure out why the business is losing money. There are really only two possible reasons: either the expenses are too high or the revenue is too low. It doesn't sound like expenses are a factor. So why isn't it bringing in revenue? Maybe he's not programming correctly, or not charging enough for admission. You need to figure out what's wrong, and then devise a plan to change that.

At the very least, you're probably going to have to vary the programming. Movies are a declining industry, and that's probably even more true for theaters like yours because you won't have the technology (3D, IMAX, etc.) for blockbusters. And if you go nostalgic, you're competing against streaming and home theaters. I've seen theaters that simulcast sporting events or TV shows (e.g., the Game of Thrones finale), but you have to buy the rights. You could also do complementary programming (e.g., character appearances for showings of kids' movies), but again, that's capital-intensive.

The fact that you're already talking about repairs means you need to increase revenue significantly. Where is the money for new seats, paint, carpet going to come from? Nobody's going to loan money to a business that's going to continue losing money.

You also need to think about your financial situation. The current owner has a diversified portfolio; he can afford to lose money on one asset. You probably can't. If your plan to modernize the theater fails, you'll lose your investment. Can you afford that? The answer will partly depend on the price. If you can buy the theater for little more than the cost of the land and building, you can always sell it to a developer later.

Do you have any experience managing a business? It sounds easier than it is.

What I would do in your situation is to ask the current owner to let you manage the business with an increased budget. Show him your plans for renovation and new programming, and see if he'll commit to it. If he does, you can then buy the business later at a higher cost but lower risk.

There's also the possibility that you're independently wealthy and doing this as a hobby, in which case there are probably better uses of hundreds of thousands of dollars.
posted by kevinbelt at 7:50 AM on September 10, 2017 [16 favorites]

Response by poster: @warriorqueen: I have not seen the books. Would it be considered standard practice to ask for the past X years'-worth of Schedule C filings for the business, for example?
posted by JD Sockinger at 7:54 AM on September 10, 2017

Most movie theaters are losing money nowadays. Keep in mind the overall decline and dismal future projections for the industry when negotiating prices.
posted by halogen at 8:56 AM on September 10, 2017 [1 favorite]

Best answer: Cash flow, balance sheets, gross revenue, gross expenses, audited financials, accounts payable, accounts receivable, general ledger, payroll and other employee data, amortization schedules...going back at least three years. The list of stuff you should review is enormous.

There is no standard practice for due diligence. Ask for everything, and aggressively assume that anything he doesn't share contains information that would cause you to not go forward with the sale.

Bear in mind that this guy may be running the theater at a loss for tax purposes. This might make perfect sense for him, but it would be crazy for you.
posted by radicalawyer at 8:58 AM on September 10, 2017 [12 favorites]

Best answer: Schedule C is not enough; it's the view from 35,000 feet and depending on how the owner has structured his businesses it might include data from one or more other properties. Radicalawyer's list is good; you need as much detail as possible: all revenue streams and how they vary daily, weekly, with different movies, etc. and you need all expenses too, in the same detail, and then you need to put together ratios that speak to the business's productivity and profitability, and then compare them to industry standards. Then you need to take everything you've learned and use it to figure out what the business is worth. And also model what it will be like once you're running it, especially given the need to invest in seats, etc. Now test a bunch of scenarios, including that business drops off, that the renovation costs twice as much and takes three time longer, etc.

All of the above is, frankly, the tip of the iceberg vis-a-vis what you need to make an informed purchase offer. TBH, I think you need objective outside help looking at this opportunity; you've clearly fallen in love with the idea and that's not a good place to be for something like this.
posted by carmicha at 8:59 AM on September 10, 2017 [4 favorites]

Others have answered even better, but absolutely you need to see the books.

Because he has multiple businesses he could be losing his shirt and content to take the losses. You also need to understand where the revenue and expenses are. Movies are a declining business. It's possible, depending on your location and set up, that you could open some additional streams of revenue like event/meeting space but that all has costs associated with it.

This is one of those situations where you could ruin your financial future so please go slowly and make sure you really, really understand the business. If you have business owners in your family or friend circle please engage them in helping you to understand how small business financials work.

As an example, there was a coffee shop in my area that I thought was seriously underperforming, and the owner was retiring, and he opened the books to us. Everything looked good until we got to rent that wasn't even on the books - the new owner of the building was about to charge $9,000/mo in rent rather than $3k. So with $9k in rent to overcome before any other costs we noped out (even if we could get it up to speed we couldn't finance those costs while we were learning) - and it turned out that a Tim Horton's went in, so clearly it was indeed a great location but needed a business model that was stronger than no-name mom and pop shop, plus I'm betting there was a change in that rent somewhere.
posted by warriorqueen at 9:18 AM on September 10, 2017 [2 favorites]

Movie theaters lose money. The actual presentation of a film is generally a break-even business at best, with most theaters making money only on concessions. Many successful independent theaters are in cities with enough going on that they can rent out the space for corporate events, but you'd need to have renovated and be able to offer catering, either from a kitchen onsite or via a trusted caterer.

Are you in a market where that sounds like a viable business? Do you have enough capital to pay for the necessary renovation? Basically I'd say this is a way to turn a large fortune into a smaller fortune and (maybe) a business that breaks even on overhead, but you're not likely to turn a profit just because you have heart.
posted by fedward at 9:19 AM on September 10, 2017 [3 favorites]

So, I'm someone who saw a photo of a cute building, cute enough that I rented it the next day, having never seen it in person or the inside of it, moved the 300 miles to live next to the building, and opened up a shop, never having done brick and mortar retail before.

I also love the idea of having a movie theater.

And I don't think it's a good idea. Yet.

Maybe it's partly because your question is so brief and specific, so it doesn't show your research, plans, working of your numbers, etc.? But your followup is what mostly concerned me. You need a lot more education and knowledge before you move forward than what you are showing here.

At the very least meet with a lawyer/business expert before you have this meeting, so you even know what questions to ask.

I believe there may be possibility, but guessing with a very different model than a standard theater structure of old.
posted by Vaike at 9:47 AM on September 10, 2017 [2 favorites]

It sounds to me like you aren't buying a business. You are just buying (or leasing) a run down building that you might be able to turn into a business. Expect to spend a few hundred thousand dollars refurbishing on top of the cost of the real estate. Remodeling isn't cheap. Plumbing, electrical, roofing, heating and cooling, fixtures, drywall, paint, carpeting, audio system.

It sounds like the only thing of value in the deal might be the digital projector, but like most things electronic, it might be quickly out of date.

Depending on location, the property might be more valuable for other commercial uses than a single screen movie theater, making the price excessive.
posted by JackFlash at 10:33 AM on September 10, 2017 [3 favorites]

Here's a simple question to try and answer when you're going through the figures: Can you make this place pay you back its own purchase price, in the next five years (ok, maybe seven), plus the renovation costs, as well as a reasonable salary for your time?

What sort of turnover would you need to make that happen?

What sales would you need to make at what margins to achieve that turnover?

What staff would you need to support those sales? What things would you yourselves need to do to facilitate the sales? What external factors would need to be in place for this to be feasible?

If you can't plausibly make this happen, are you completely comfortable about the idea of essentially spending a lot of your capital on an extremely difficult and stressful and financially risky job, that's quite difficult to escape from, and that you'll have to learn as you go along with no good example to work from?
posted by quacks like a duck at 11:21 AM on September 10, 2017 [2 favorites]

Best answer: A local beloved single-screen theatre in Jenkintown, PA (the HIWAY) was bought, refurbished, and is currently run by a group of people who made it nonprofit. It's been very successful as a go-to movie location, and offers first-run titles. There are two others. The Bryn Mawr Film Institute and the Ambler Theatre have both been a big part of revitalizing their communities in older suburban Philadelphia. The Bryn Mawr is an art house, not sure about the Ambler. They would probably be happy to answer your questions if you are thinking nonprofit might be the way to go.

This probably doesn't answer any of your specific questions about a difficult and potentially shady owner, but these groups might be delighted to help you traverse this minefield. Just ask!
posted by citygirl at 7:45 PM on September 10, 2017 [1 favorite]

My father worked as a small business broker for a while. He would advise you to spend a week with the person who runs the business on a day to day basis. Watch all the receipts, the ordering, read the contracts for movie rental, etc. A small movie theater is a cash business. I worked as an usher in HS. There are a lot of points of contact where cash may or may not be properly accounted for and for various reasons.

You work P-T in the theater now. Not sure what your role is, but I would bet that every ticket sold and every soda sold and every bucket of popcorn sold is not making its way to the IRS books. It may or may not be making its way to the owner. Perhaps it is stopping with the manager or even the seller themselves.

Buying a business that deals a lot in cash, the best thing to do it to look at their books and then watch the business run and compare notes. Sit with the ticket takers for a Friday and Saturday night. See if when you are there they ring up every sale. See if the totals from those nights are close to or inline with comparable periods on the books. Same with the concession stand. See if the projectionist is paid on the books and is a member of the union.

I would trust the books somewhat, but I would watch the operation in action for a long enough time period that if anyone is doing transactions that do not make the books you will know.

I do not know what the real estate is worth that the theater sits on. Would you be buying that or renting the theater? If renting, what are the terms and length of the lease? What will a renovation cost? Can it be financed? What are the deals with any suppliers? It is a small theater, does it buy its candy from Costco or have a vendor? What is the deal with the movie rentals? WHo takes the risk of a movie being a flop? Is the deal a rental fee or a share of every ticket sold?

Are there any debts on the books? Would you be buying the actual business, the existing company, or just the right to run the movie theater, essentially buying the property or the lease with any leasehold improvements staying? If you are buying the entire company, you will need to do an extensive search on any outstanding or potential liabilities.

Does the owner run any expenses through the theater that should be allocated to his other businesses or to him? Is there a car being paid for by the business? Are there any family members on the books being paid for show or no show jobs? Is he buying supplies from another company he owns at an inflated price? If so, is there a contract that you cannot get out of? Or the opposite? Does he have any sweetheart deals for supplies with friends that when he exits will suddenly increase to market value?

There are probably a hundred other things to look out for. But, having said that, this could be a great opportunity. Just go into it with full disclosure. I would meet with him this week and get a feel for a price range, what he says the business makes (or loses), establish a process for doing your due diligence, get a contact name and number for his attorney since you will be hiring one too if you decide to proceed, and ask if you can sit with various employees to learn more about the business.

If I were you, from the level of knowledge self described, I would look in your community for a person or firm that brokers small businesses and see if you can hire one to advise you. Maybe pay them by the hour or establish a flat fee. This could also be done by the right attorney. They can also help with due diligence.

Good luck.

(Before hitting post, I looked at your history. One other piece of unsolicited advice. At one point about 7 months ago you were hitting a bumpy patch in your marriage. Being a small business owner can be stressful. Being a small business owner with your spouse, spending all day with them can be even more stressful. Both of you should consider not just the purchase price of the theater and not just what your game plan is to improve the business, but you should both be considering how it will affect and maybe even stress your relationship. I know several couples who started working together bc they thought it would bring them closer together. It had just the opposite affect. One, is now divorced, one sold the business and the other still owns and runs the business.)

If this is The Strand in Old Forge NY, I LOVE that theater.
posted by AugustWest at 11:32 PM on September 10, 2017 [5 favorites]

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