Buying a business with very low profit margins?

Hello! I was offered an opportunity to buy an existing business. It has a decent roster of loyal customers and I already have experience managing the entirety of the company's work (less the upper level financial aspects).

The issue I'm running into is that it BARELY makes enough money to cover labor costs. And I think this is going to be a long-running issue with the company due to the fact that labor costs will likely increase proportionately to new work acquisition.

The current owner of the company is proposing an indefinite gross-revenue-based percentage payout each year in lieu of a one-time lump sum purchase. Issue being: the percentage he's proposing is HIGHER than the annual net profit percentage he currently achieves under his own management.

Perhaps I'm misunderstanding how these types of deals work, but this sounds like I'm being scammed. Don't get me wrong; I appreciate the opportunity! But it sounds like I'm going to be expected to figure out how to not only correct the lack of a profit margin, but also figure out how to boost it to the point that there's a net profit AFTER the additional expense of his payout. So essentially I'd be doing more work for him now than I have been and he'd be getting paid more, which likely means I'd be taking the loss out of my own pocket to compensate.

Am I analyzing this situation correctly? Should I bail on this deal?

Thanks in advance for any guidance!


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