Financing the purchase of an existing business

Board Topic: Buying an existing Business - printing/manufacturing
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Buying an existing Business

Posted by: Rob Jul 30 2004, 11:47 AM
Hi

I am considering buying an existing business. The business is in the printing/manufacturing sector. Sales have been steady over the lat 4 years at around $800K pa and net income has also been steady at around $200k pa. We are currently negotiating the selling price for the business which I believe will be around $750.
I will be able to scrape together around $100K cash as down payment. The difference will need to be financed. Questions -

1. Will $100K be enough down payment?

2. Will a bank consider me for a loan of around $650K based on the company's cash flow (the facilities are rented, and equipment mostly amortized down to nothing ...depeciation $29K last year) ? Other than the $100K, I do not have alot of other assets...maybe $90K in 401k fund...that is about it.

3. The existing owner may be willing to help with financing? What are your thoughts on this?

4. How does this "smell" to you? Am I over extending (even if the bank lends me the money etc)

Any advice would be VERY appreciated.

Posted by: loanuniverse Jul 30 2004, 02:44 PM
Rob:


” 1. Will $100K be enough down payment?”

My educated guess is that $100M in equity and $650M in debt is not going to cut it. Lets assume that currently the balance sheet looks like this.

Receivables: $100M
Inventory: $100M
Net Fixed Assets: $50M
Total Assets: $250M
Accounts Payable: $100M
Net Worth: $150M

Then your proforma balance sheet after the loan will look like this:

Receivables: $100M
Inventory: $100M
Net Fixed Assets: $50M
Total Assets: $250M
Accounts Payable: $100M
New Loan: $650M
Net Worth: negative $500M

There is something about lending to companies showing negative capitalization that does not appeal to lenders.

” 2. Will a bank consider me for a loan of around $650K based on the company's cash flow?”

Cash flow is good, but so far I have only seen income and depreciation mentioned. Those are two components of a cash flow calculation, but you really need to compute it. The problem that I see here is that the leverage is too high. There is no cushion for the lender.

” The existing owner may be willing to help with financing? What are your thoughts on this?”

I think that this is the only way that the deal can be pulled off. Either by getting the current owner to finance fully or act as a junior lender and subordinating the debt to the third party lender.

” 4. How does this "smell" to you? Am I over extending (even if the bank lends me the money etc)”

I don’t know…… From what you have said the company is making substantial profits. Assuming that cash flow is equal to profits then we are talking about a good cash flow stream being sold for what seems a fair value, but the valuation needs to be looked at deeper. You need to know how the business has been trending, you need to go over the cost structure, you need to compare financials with tax returns, and you need to look at other matters that may affect the business outlook.

Once you have done that, you can predict the future performance and figure out if:

1- the valuation is adequate.
2- The business can repay the loan and you are not overextending yourself.


Good luck.

Edit: I am not a business appraiser, and I don't play one on TV

Posted by: Guest Jul 30 2004, 03:09 PM
Thank you for the fast, insightful feedback. I am going to digest your answers over the weekend. Some of your estimates were a bit off but the general thrust that I am under capitilized for this deal rings true. It is a great opportunity and I have all of the detailed analysis you mentioned. The seller is 63 years old and wants to sit back and relax whereas I am a relative youngster and 38. I will be back next week with more questions.....

Posted by: Rob Aug 3 2004, 07:23 AM
Dear Mr Universe tongue.gif

Do you have any idea - from a bank's point of view - what amount of finance I would need to get from the seller to make this deal happen. (I am assuming he wants to minimize the amount he has to loan me.)

Thanks again
Rob

Posted by: loanuniverse Aug 3 2004, 07:55 AM
” Do you have any idea - from a bank's point of view - what amount of finance I would need to get from the seller to make this deal happen. (I am assuming he wants to minimize the amount he has to loan me.)”

I couldn’t even begin to guess without knowing the actual numbers. Not only would I need to figure out the existing leverage and cash flow, but there are so many other factors that will affect the level of comfort that a lender might have that the number would not be very useful.

For example,

What does the business do?
How long has the business been in business?
Is there any concentration in sales?
Who are these customers with the concentrations, and are they customers because of current ownership?
Are there long term contracts in place?

Etc, etc, etc,

I think the best thing to do would be to approach local lenders and figure out what they would like to see, and what they will be comfortable financing.

Good luck.

Posted by: The Fox Aug 4 2004, 04:18 PM
Agreed.

Another option would be to pursue this via a land contract (assuming your due dilligence shows no reason to abort).
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