Board Topic: Existing Business Purchase loan
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Existing Business Purchase loan

Posted by: Mike Oct 25 2004, 02:34 PM
I am interested in purchasing an established(6 year old) pool and spa company. This would be my first purchase of a company and would like some ideas as to the best resources for securing money to make the purchase. I have excellent credit and a good amount of equity in my home. There is an opportunity to grow the business immediately by adding a service that works well with the current business offering. Any and all thoughts welcome.

Posted by: loanuniverse Oct 25 2004, 04:01 PM
It is kind of difficult to determine what a good level of equity will be without knowing more or less the actual numbers. Borrowing $100,000 and ending up with a business having a 1:1 debt to worth ratio by providing $100,000 worth of equity sounds good. However, $100,000 equity would not be sufficient if borrowings need to be $900,000.

Potential is good, but what is better in this situation is the track record of the business. Your lender wants to see that existing business even allowing for a slight drop due to the change in management will be enough to repay the debt.

You will need financial information on the business {at least three years }. It would help if you provided some background information about yourself {emphasize business experience}.

In your case, I would go with a commercial bank. The amount of interest that the banks will express will depend on the leverage and the cash flow of the business as well as your experience and credit history. The trick here is to approach more than one institution at once. You should get at least two bankers to look at the deal, and by this I donít mean sit down for a chat. I mean leaving the package of financial information behind so that they can go over it and give you an answer, which means be prepared by creating complete packages of information that you can leave behind.

Information is your friend, the more that you give the better especially if you want an answer and do not want to be spinning your wheels.

Good luck

Posted by: Mike Oct 28 2004, 07:51 AM
The purchase price is $245000. 20% down payment. the seller is willing to finance $100000 for 10 years with a balloon at the end of the 3rd year. The downpayment is not a problem. Suggestions for the additional funding needed?

Posted by: loanuniverse Oct 28 2004, 10:13 AM
Assuming that the capital structure of the company is going to be comprised of the numbers that you gave me, I am looking at a highly leveraged business, which would probably not qualify for regular bank financing.

Loan 1) $96,000
Loan 2) $100,000
Total Debt = $196,000

Your equity = $49,000

Debt to Worth = 4:00 Too high, a lot of lenders are looking for a maximum of 3:00

You also need to take into consideration that the business itself is going to have to repay both loans, and that without the presence of real estate, the lender is going to want to see an amortization of 5 to 7 years tops.

As mentioned before, the presence of a track record when purchasing an existing business is a big plus, but personally I think that you probably need a bit more capital to get this past most lenders. Therefore, I would suggest either providing more equity or something tangible such as a mortgage on your house or looking for an equity partner.

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