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Steve
11-21-2007, 10:47 AM
The other day I was talking to an entrepreneur who had come to the conclusion his only way out of his 9-5 job was to take a second mortgage out on his home and buy a Sub Sandwich franchise that was already up and running.

The story goes, he bought the business and was going to work there and make all this money and quit his job.

Well what happened was something different. With no prior knowledge or experience buying into a franchise or running a business this is what happened and he asked me to pass this on to everyone to warn them of what can go wrong.

First off, the sub shop made a lot less money than the owner told him it made. The financial figures that were presented were inflated. The business actually was losing money.

Once he took control of the business and realized this, he came to the conclusion that he not only couldn't quit his full time job, he actually had to work more hours to make up for the loss the sub shop had created.

The only staff he can afford to hire have been teenagers and they have actually been making the situation worse.

Currently he can't sell the business and make anything near what he spent on it so he feels stuck with it.

This is going to be one heck of a battle. But it is a good example of how things can go badly.

The lesson to be learned from all this is:

Perform Due Diligence

What is Due Diligence?

1. Offers to purchase an asset are usually dependent on the results of due diligence analysis. This includes reviewing all financial records plus anything else deemed material to the sale. Sellers could also perform a due diligence analysis on the buyer. Items that may be considered are the buyer's ability to purchase, as well as other items that would affect the purchased entity or the seller after the sale has been completed.

2. Due diligence is essentially a way of preventing unnecessary harm to either party involved in a transaction.

http://www.investopedia.com/terms/d/duediligence.asp