Board Topic: First time existing business loan
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First time existing business loan

Posted by: Seve Sep 17 2004, 04:12 PM
I have been looking and wanting a bar or lounge business for many years, but never thought it a reality because I don't have the money to buy. I have known a few people that have started a business that were in worse financial states than I.
I have sought and recieved a certificate from a lender recently to prequalify for a home loan for $140,000.
I have excellent credit. But I am far from being rich, I make a modest income 50's
The business would be sold as is, the owner wants $550,000 it includes a large building which has another existing business a flower shop and liquor and food liscenses for the bar which has a kitchen which will need renovating to bring to code, currently not in use. The bar is open for business and seems to do well. Noticebly there is potential to renovate and update and clean up inside for appeal.
What would be my first step into buying this business, how could I get a loan and will I need operating capital if the business is already operating.
I think what I would do is maintain what the owner has going and improve on it as I make the profit, although some things will require money right away to make things neat and clean, new furniture, renovate bathrooms and decor, and signage.
Who do I go to for the all the money and then just pay the bills thereafter.
Seve

Posted by: Commercial Lender Sep 18 2004, 03:50 PM
There are so many variable that i am hesitant to reco any one thing. I am familiar with the nightclub/lounge/bar business and that in itself is a whole book by itself.

Do you have any experience managing a bar? A lounge may or may not complicate your business. I.e. if you have a dance floor, however small, depending on your state you may need a different type of Liquor lic. Your bar may or may not not be promotion sensitive i.e having a steady flow of customers from a local corporate building or steel mill VS. being in a college town and relying on the latest 2-Fers promotion etc. The bar initself is an entity that can be made profitable enough to pay for you entire endeavor. If you can peg a few basics you may have a successful thing on you hands.

From the perspective of what i do; the key is the real estate value. We lend based on the value of the real estate. So if the real estate is worth say 480K, given great credit you will get a 70% LTV for a retail property. You can get a real estate only loan, getting the seller to hold a 2nd and contributing some of your funds conserving rest for operating capital. Legally you may want to separate the bar making it a tenant and a LLC as the owner of the entire property. There are a few pros and cons to that too. Feel free to give me a buzz if you would more info.

I think the admin would be best qualified to answer any question related to cash flow.

Posted by: loanuniverse Sep 18 2004, 05:38 PM
Seve:

Buying a business is pretty complicated, especially if you are an outsider with no experience in the industry. I don’t remember ever seeing one of these transactions where the buyer was not either a member of existing management or experienced in owning this type of business.

I think that most of the value here is in the real estate, and not so much in the business. If I were you, I would try to get owner financing for the business and approach the real estate transaction separately and with a mainstream lender. It will be easier to pull off if the third-party lender looks as this as a purely real estate based transaction.

The following are some thoughts off the top of my head about this situation.

- You need to get a business valuation. Just how profitable and how much cash does the bar produces?

- I am of the opinion of segregating the loans between real estate and business acquisition.

- You want to conserve cash, for those first few months. Try for 100% seller financing for the business. Unless the bar is a gold mine, I am sure that the amount will not be that much.

- Remember that if you borrow against your house, that lender is thinking of your current income, as the source of repayment and so should you. what will happen once you quit to run the bar?

- It is good that you have plans about making things better, but your calculations must be based on the existing cash flow, not on rosy scenarios about how much more revenue you are going to be able to get once you renovate. In fact, I would build in a decrease of 5% to 10% in revenue during the first year just to make sure I am not too optimistic.

- Make sure that the bar is paying market rents for the locale. Sometimes when business owners also own the real estate, they do not account for rental expense “opportunity cost”. This tends to inflate the profitability.


”… What would be my first step into buying this business…. I think that talking to the seller and requesting financial information for the last three years as well as information on the rental income for the building would be a good start. Talking to a commercial real estate broker and finding out how much a building like that is worth is a good second step.

That is it for now, good luck
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