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

Just a few things to add to the already excellent advice:

- Really take a deep dive with a CPA on his taxes...and compare them to his books. Not that he would cheat, etc., but you need to understand how his accountant set up depreciation schedules, what he wrote off for business expenses, etc. so you can get a true sense of your operating costs and financial liabilities.

- Business Plan. While you're waiting for the SBA, write a realistic business plan. The mental exercise is a perfect way to begin to see the risks and rewards from a different perspective.

- Cash flow is the king, the queen and the royal court. Really understand the administrative lag times for getting paid, reimbursed, etc. on sales as well as on purchases and inventory.

- Employees? Key.

- Other costs not related to the business: Will you lose your health coverage if you have to leave your current job to make the business a go? 401K and matching in your current job? Commute differences, etc. Again, in your business plan really wring out the money...cash flow is the shoal on which most businesses wreck.

I hope I didn't offend by being too simplistic in my post, but I've owned my own firm for over two years now and was glad I got the same advice.

I wish you the absolute best in this endeavor.

Lots of good info here. My two pence:

Just as good fences make for good neighbors, a clear term sheet (and then a good contract) makes for a good deal. It's easy to get lost in a multi-page purchase agreement, so I recommend you list the key things that are important to you in a transaction. Then when you review the final contract with your attorney, ask them to validate that those provisions are covered.

Business valuation is often overcomplicated. The value of a business is simple: it's what a willing buyer and a willing seller can agree upon. There are books of valuation practices, valuation departments in CPA and investment banking firms, even the practice of a "fairness (valuation) opinion" to validate that the value of the business was legitimate (often required by public boards in a transaction). While rule of thumb valuation metrics are useful in estimating the size of the deal, once you get into diligence, all bets are off.

As you have opined, the benefit of purchasing an existing business is the list of customers and reputation associated with the firm - classic "goodwill"; Assets are easy to value and easy to purchase/replicate on the open market. So you are paying for the cashflow that you are banking will come from that goodwill. Therefore protecting the value of the goodwill is the most important part of your term sheet.

A retiring owner should become your greatest ally. That's one of the benefits of a owner-carried loan is their motivation is to keep the sold business successful. They can say good things about you in the press, can continue to appear at public events, etc. Make them an ambassador to your business.

These are things your term sheet covers, aside from the boring price, financing, default, etc. provisions - how do you enlist the seller to protect the value of the goodwill that you are purchasing.

Deal structure and diligence are the final steps that often get clouded in the ambrosia of closing a deal. Are you purchasing assets or the legal entity. Both have tax and risk implications. What are you looking for during your due diligence? Not just asset impairments, but environmental, tax, city (think zoning, future restrictions), etc.

Happy to answer any questions.

Good luck - it sounds fantastic!

Great, sage advice.

Cash flow, cash flow, cash flow. Lack of cash flow is what kills/constrains most businesses.

Write a business plan - outstanding. SBA has good resources for this.

Inc. and other publications have stories about buying a business.

Fun stuff!

Regarding SBA...
 

Time management is one of the most challenging aspects of owning a business. The SBA and its ilk (e.g., SCORE) will suck up as much time as you care to give them. SBA's loan process is slow, cumbersome, and unresponsive to your individual needs. Sound familiar? Rates are higher, too.

While you will be revved up to get this deal going and pursue your dreams, you will be in limbo for 90-120 days, jumping through your butt to feed the paperwork machine and waiting for word from on high. In the meantime, bills still need to be paid and you are not focusing on the actual work of the business.

You'd be surprised at how many community bankers are looking to earn your business. Many of their loans or lines of credit only require extensive documentation over $100K. Under that, you may be able to get am unsecured credit line based on your personal credit score.

Since you're in Oregon, try Umpqua bank. Meet with the branch manager and see what it takes to qualify for their unsecured line of credit. I use them for personal banking, and they have been outstanding. You will get a quick and realistic answer, which may or may not mean you need to resort to SBA. Incidentally, you can access SBA lending through a bank - you don't need to resort to actually calling the place yourself.

Regarding goodwill: don't pay for any assets that can walk out the front door. Follow your dreams. Even in this horrible economy, change can result in opportunity.

Find a good business attorney. He/she will walk you thru the details of purchasing the assets or the business itself. Good luck.

Angela,

I am in a networking group in Portland that has a bunch of people who deal with selling / buying businesses. Lawyers, a business broker, bankers, accounts etc. I am happy to make a referral. I would think the business broker might be the guy for this.

Send me a pm with your email.

Good luck,
Larry

as for someone that has bought 2 seperate businesses, and has not learned his leasson, the goodwill may go out the door, but the bad rep lasts for ever, or at least a very very long time.

Man......................did you read my thread or fastfreds?

If you take the dive, get a business line of credit, do this before you need the dough.

Angela - see if the city or county will help you. Eugen has a special biz start-up loan pgm directly thru the City.

also, check with the state - I know we have some small biz help programs in the state govt. - may just be advice & not $$.