Sharing an experience – Beware of hidden traps in lucrative business offers

A couple of years ago, a friend called me, excited about what he believed was a highly profitable business opportunity, it was a tyre recycling operation in NSW, Australia. Owner was selling due to relocation. On the surface, everything looked promising. The business had the capacity to recycle 20,000 tonnes per annum, was generating solid revenue, and had recently invested in expansion. After expansion, it would be able to process additional 15,000 Tonnes. All indicators suggested a strong, growing operation. Government grant paid 50% of the expansion cost. I was invited to conduct due diligence. The financials appeared healthy at first glance—a positive P&L and a strong balance sheet. However, upon closer inspection, a different picture emerged. The business was not actually selling the processed tyres. Its entire revenue stream came from collection fees, being paid to take tyres. Once processed, the rubber had no established market. Because the raw material (waste tyres) was acquired at negative cost, after adding processing cost the Inventory cost was zero, and the processed output was recorded as having no inventory value on the balance sheet. Digging further, I found the business was leasing around 25 acres of land in regional areas, which was used to store the processed material. In simple terms, the new owner would have inherited over 180,000 tonnes of processed rubber… with no viable pathway to sell it. I would love to hear and learn from others, please share your experience.