Board Topic: Getting Started
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Getting Started

Posted by: P. Aaron Nov 14 2003, 04:15 PM
If I wanted to buy an established family business (Party Store since 1951 in excellent nieghborhood), had considerable equity as a downpayment (Price is just under $300,000) what is the "bank" or lender going to require of me?

I own a home with a $135,000 loan and a market value of about $230-240,000. No other outstanding payments except mortgage & food & clothing(12-1400 @ month). Combined income is about 85,000 a year.

What do I do first?

Posted by: loanuniverse Nov 15 2003, 09:39 PM
Hello Aaron:

Sorry for taking more than 24 hours to respond, but I have been busy this weekend, and didn’t have time to check the site in the morning. Let me address your post in parts:

If I wanted to buy an established family business (Party Store since 1951 in excellent nieghborhood), The first question that comes to mind is: What kind of experience do you have running this type of business? A hint: The best answer would be something like I have been the general manager of the store for several years, and have been in charge of all operations for the passive owners. The worst answer would be something like “No experience in management, no experience in retail, no business experience”.

had considerable equity as a downpayment (Price is just under $300,000) While I do not want to completely discourage you there is a misconception regarding the definition of equity contribution in a business. First, lenders usually like to see at least 25% of the funding to come from net worth. In other words, the {liabilities and net worth} portion of the balance sheet equation should be made up of no more than three parts liabilities and one part equity. That is the famous debt to worth ratio, which should not exceed 3.00X

When talking about your case specifically, this translates into a $75,000 capital infusion. However, the money can not be sitting in the form of equity in your house. It should be in the company’s books. The loan would be for $225,000 giving you a debt to worth ratio of 3.00X { this assumes a current balance sheet of $300,000 in assets funded with $300,000 in equity } Probably not a very realistic case, but hey I am making it up as I go along.

I own a home with a $135,000 loan and a market value of about $230-240,000. No other outstanding payments except mortgage & food & clothing(12-1400 @ month). Combined income is about 85,000 a year. No debt other than the mortgage is good. Another thing to take into consideration is that the loan will be structured with the cash flow from operations as the primary source of repayment. Since you might have to quit your day job in order to run the business, your portion of the income can not be counted as a fallback or secondary source of repayment.

What do I do first? Since you are buying the business, the current owners should provide you with financial information so that you can properly assess it. Going over this information yourself is something that a cautious buyer would do. After that depending on your experience in the industry and your financial knowledge, you have to decide if the help of a business valuation professional is warranted. At the same time you could start consulting with a couple of banks Hint: Make copies of all the financial information and prepare a couple of packages since you will have to leave them with the lenders for analysis.

Hope this helps.
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