Reference no: EM131384873

SITUATION
Marty Lane worked for a card company specializing in invitations and announcements. Every day for 25 years, he went to an office, sat at a desk, and took orders over the phone. He hated it. He was bored out of his mind. He didn't know what to do. So he began skimming the business opportunities section of the Sunday New York Times. He wasn't sure what he was looking for. At almost 50 years of age, he had few business skills. Accounting was a foreign language to him. He figured that if he ever bought a business, it would have to be one that didn't require much specialized knowledge-something that would be relatively easy to manage. He considered a franchise, but he found that the good ones were very expensive.

Then he came across an Italian-bread route for sale. He thought "How difficult could it be to run a delivery route?" He called the phone number in the ad and spoke with the business broker who was handling the sale. It turned out that the route was in Queens, New York, not far from where Lane and his wife, Annabelle, lived. It was a one-person operation. The individual who owned it had had the route for 20 years and took home about $65,000 a year. He wanted $200,000 for the business, but he was willing to help finance the deal. If Lane would put $60,000 down, he could pay the balance over five years at 10 percent interest, or about $35,000 a year. That would leave Lane with an annual income of $30,000 until the debt was paid.

Combined with Annabelle's salary, it would be enough to make ends meet. If he worked hard, moreover, he could expect his sales, and his income, to grow by 10 to 15 percent a year. It seemed perfect. Lane went to meet with the owner and returned sounding even more enthusiastic. "This is a can't-miss deal," he told his wife. "The guy has signed contracts with all the places he delivers to, and none of them is more than 25 miles from here. I could do the entire route in seven hours." However, Annabelle wasn't buying. "You're not quitting your job until you talk to an expert," she said. Lane agreed to meet with a broker. On the date of the meeting, Lane brought all his paperwork along. He laid out the terms of the deal in great detail. "What do you think?" he asked. The broker said, "Tell me something, Marty. Do you like this business?" He shrugged. "I can't really say. I haven't tried it yet." "What's involved in it besides picking up the bread and delivering it to the stores?"

I'm not sure," he said. "Whatever it is, it can't be that complicated." "What happens if the truck breaks down?" "I don't know," he said. "I guess I'll just work it out." After asking Lane a series of questions along those lines, the broker finally said, "Listen, Marty. You want to know if this deal makes sense from a financial standpoint. That's easy to check. The guy has an income tax return, and his sales are verifiable. This isn't a cash business, after all. He sells to delis and supermarkets. They pay by check. We can go over his expense figures and make sure they're realistic, but my guess is that the deal is OK.

If you're asking me whether I could negotiate him down a little, the answer is probably yes." Lane turned to his wife: "See, I told you he'd approve." The broker said, "I didn't approve anything. Only you can do that, and you're not ready to." "What do you mean?" he asked. "You haven't done your homework," the broker said. "You don't know what you're actually going to do in this business, and you don't know if you'll be happy doing it." "How am I going to find that out?" Lane asked.

Question 1 How would you suggest that Lane fi nd out if he would be happy in this business?

Question 2 Would you recommend that Lane buy the business, given the asking price and terms of the deal?

Question 3 Is Lane relying too much on nonquantitative factors?