Board Topic: Existing Business
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Existing Business

Posted by: Donna Sep 6 2004, 04:02 PM
Hi, My husband and I are considering the purchase of an existing "general store" in our very much growing town. The existing store is very small town, country feel which we think we can really turn around to be very successful. Our township is booming with over 700 new homes coming within the next 3 years. The problem: when meeting with the owners, most of their information is on sheets of disorganized paper and their tax returns for the past 3 years has shown no profit. They claim to make a profit, but don't like to share all of the info with Uncle Sam. They also pay all their vendors (and themselves) right from the till, with cash, no credit at all. The business is apprased at 200K, and they are asking $350K. The location itself is worth that much, as our home has increased in value 150% since we moved just 5 years ago.

Questions:

The price, I realize we are buying the location, and not their business, but if it doesn't jive on paper with us, won't a lender feel the same way?

Can a small business be purchased with conventional lending? We have a lot of equity in our home, about 132K, but are not sure if that can be leveraged.

Can you suggest creative ways to purchase a business without a lot of money down?

Competition is slight, as this town is just starting to grow immensely, do you see success with these types of buisnesses?

I guess that is a good start, I have never used your sight before, but really enjoyed reading through your other inquirers. Donna




Posted by: loanuniverse Sep 6 2004, 09:23 PM
Donna:

Here is my feedback,

You said ”The business is apprased at 200K, and they are asking $350K. The location itself is worth that much….” What exactly was appraised here? This wasn’t a business valuation, right? I assume that the appraisal that you refer to is for the real estate property. If anything, there might have been a small value added for the “going concern”, which is the business itself, but the value is for the property. Also is a good thing that you take the “potential” into account. However, the value of the property is what it is appraised for.

”They claim to make a profit, but don't like to share all of the info with Uncle Sam.” Well, I personally got a problem with tax cheats, but looking at this from your point of view, if you believe that this is true, you can use this as a negotiating argument.

”Can a small business be purchased with conventional lending?” You could, if there were any numbers to back the transaction up, but you are telling me that they cooked the books.

”…….. We have a lot of equity in our home, about 132K, but are not sure if that can be leveraged…..” If the equity is there, a percentage can be tapped as long as you guys have sufficient income.

”Can you suggest creative ways to purchase a business without a lot of money down? “ I would approach this as two separate transactions. One for the real estate and another one for the business. I would try to get 100% seller financing for the business and possibly approach a bank for the property.

Some things to consider:

- The tangible collateral here is the property. Separating it from the business transaction might allow you to save the equity down payment for the property if you can’t keep up with the payments for the business. Avoid cross-collateralization and cross-default.

- You might believe the owners about their revenues and profit, but you can build in safeguards into your promissory note for the building in case those revenue figures are inflated. Something to the effect of “if revenues fail to reach $X for 2005, Buyers are allowed to take an $X deduction to principal” talk to an attorney”

- Keep straight books yourself from now on.

- Unless you know the town yourselves, you need the owners to stick around for a month or more.

- A bank would more than likely not be interested in doing this deal.


Good luck

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