How, Exactly, Do You Buy a Business?
 

We have an opportunity to buy an automotive related business. Buying it from someone who is a long time friend, a business associate, and who is retiring. This is the opportunity of a lifetime for us - on that will never come this way again.

I've got profit/loss statements, inventory/assets, tax info, etc., from the past 7 years. Basically, he gave me everything he thought I would need to get financial backing. Assets are significant but there is no real estate. Actually, maybe that's a good thing.

So, exactly how do I go about financing a business? I don't even know where to go for this type of thing. Do I just go down to a local bank? I would need to buy the assets and would need a line of credit in addition.

Oh Mighty Pelicans, please pour forth your knowledge! SmileWavy

angela

I've found banks to be extremely tight fisted lately. They've even been tough on real estate loans. If you can get them to loan you anything you will probably have to put your house up as collateral.
I would try the SBA first. Even if you don't get a loan from them, someone there should be able to explain the process and maybe recommend a lender.
What are the assets of the business? They might be useful as collateral, but lenders tend to be shy about the value of things they don't understand.

Can you borrow enough on your house? That's how my Dad did it.

Most businesses sold today are financed through the seller. Can you give the seller a good chunk of down payment and set up a contract with a balloon in 2-5 years?

I would think a business like that would sell for 2x assets and a small amount of blue sky.

Fat chance on that. Thanks to all the short sales in the neighborhood, the average sale of comps in our area has dropped from $325,000 to $105,000 over the last 3 years and we owe more than $105,000.

I'll look into SBA and try to talk the seller into some type of ballon-ish payment.

Other ideas?

angela

How about more info on the type of business?

Most SB's are built on personalities and persons. When Joe leaves Joe's and Mark takes over, Mark wonders why the business fell apart.

It is much better to take over while Joe is still around, earn the trust and 'friendships' with the customers and then start the ownership transfer.

Yeah, write some sort of transition period into the contract. He shows you around to pertinent people, lets customers know who you are and exactly how much ass you kick.

When I bought my practice, I put 10% down and he carried the note. Made payments over 5 years for balance at 6% as I recall.

Why is he selling the business and why is it you want to buy it?

Recalling my finance courses, one of the more interesting questions is how do you value a business. How do you determine a selling price. NPV of expected future cash flows is probably the best method. Net cash flows, which raises the question of expenses and investments in equipment. etc.

True most are seller financed 20 % down is what most Sellers expect expect. Have your CPA go over the numbers with you to find out if it will pay for it self and provide you a living. The futures bright for auto repair!

Employ an accountant to evaluate the worth of the business and to determine what investment is necessary to be able to manage debt. I'd pass on the bank. The SBA is active and can help. They will want you to attend some classes. They love good planning, so have the new business model ready to show along with the accountant's report.

Lastly, look for any grants or incentives from the local government and play the female owned business card. It you are really aggressive in attaining all the info, you will be ahead of the pack and get the loan.

Just make sure you can handle it. Financially and emotionally.

100% good info here!

the business is worth the assets, if the assets are useful to you. the goodwill established by the guy who built the biz goes out the door with him. no value in that.

My term for "Goodwill" or " Bluesky" money is "Go away money"

It's what you pay yhe owner to "Go Away" it's also money that goes AWAY from you!

Look at what the shop would cost you. Would the $40k in "Goaway" $$$ be better off being used to buy new tools, new fixtures atc.

The thought is 2x the years real profits is what the go away is.

Don't forget if you quit your jobs to run this new venture you now need a health insurance company.

My wife used to be a school teacher and we paid $135 a month for health insurance for 4 kids and us. NOW we pay $1,200 a month due to her going out on disability with MS.

don't they still cover her while she's on disability?

As others have said, get a good, trusted CPA to go over everything, think long and hard about the commitment, then check the SBA loans, and bring a lady, if you are listed as the primary owner, you can apply for "Minority" status, every little bit helps.
If you don't have any luck with banks (or as many shops do, Deep Pocketed Clients either hold the note or are silent partners) a friend of mine owns a business that finances new businesses, mostly doctors offices, but he can either help or point you in the right direction. The name is Aqua Capital LLC., PM me for the contact info. At least if there was real estate, and it was paid off, you could borrow against that, also check & see if there is any outstanding debt..
Good luck..

NOPE!

All of my toy $$$$ goes to health care.

And yes, I do not belive that health care is a "right"

You will also wish to have a clause that restricts the previous owner from opening X type business (or related businesses) inside a radius of Y miles/kilometers for Z amount of time with a penalty clause stated.

Venture capitalists????

It's very hard to determine the exact value of most businesses. The best place to start is to calculate what it would cost to establish a similar business from scratch. Buying a business can be better or worse than starting your own. If the biz comes with a bunch of baggage, it's worth less. If it's in a good location or has a good established clientele or something else you can't easily duplicate, it is worth more than the cost of starting from scratch.
You should have a non-compete clause (keeps the prev. owner from starting a similar business that would compete with you) and a non-disclosure clause (keeps the prev. owner from talking to anyone about the business after he's sold it).

You know what makes me nervous? When I call the local SBA office and the phone # is "no longer valid" and the forwarding # is a college where no one has called back at all for HOURS!!!! Gahh! The nerve!

This business is worth much more than it's price. I could not start from scratch for less than double and probably closer to triple the price. Seriously. I know what I'm looking at. Obviously can't disclose, but this is without question, the chance of a lifetime and I will roll every dice I have on it.

So I contacted a local bank who does SBA loans. It's a bank that we used for a construction loan, so we have history with them. Sure, it's real estate, but it is a solid history of making things ourselves (we were the general). Looks like an SBA 7a loan will fit the ticket.

They assured me it is a slow process. :rolleyes:

angela

"this is without question, the chance of a lifetime"

Angela my dear, there is your answer, only a question of price and financing