Board Topic: Need advise on purchasing a business
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Need advise on purchasing a business

Posted by: hpham Dec 16 2004, 01:35 PM
Hi:
I am planning to buy existing business in wholesale distribution. This will be my first business venture even though I did run a 3-million distribution few years back. The business is one of the distributors that sell products to convenience stores, Dollar stores etc. The asking price is $350K. I really do not know how much their business worth. I just signed the confidential agreement so that they can send me their financial information.

I would like your advise on the followings:
1. Can you refer to some services that can determine how much the business worth for a reasonable fees?

2. Assuming we have agreed on the price, I plan to make a $100K down payment. What options do I have to finance the balance without using my home as collateral (about another $100K equity)?

3. As for the due diligent, I checked a certain web site. They are asking about $5K-$10K. is it reasonable. What is the estimated costs to do the due diligent for this type of business?

4. My credit score is pretty good 750+ .. and I have very good experience to run this kind of business ... can I qualify for the SBA loan?

5. As for the business plan, is there any standard template out there that I can use without using the consultant. They ask for $5K to prepare one.

Thank you in advance
HP

Posted by: Rick Dec 16 2004, 02:40 PM
Just a couple of thoughts:

You will be able to make a far better determination of the value of this business if you do your own due dilligence. Ask for a listing of their suppliers, customers, creditors and ensure that everything is going as it should. Tear apart several years of their financial statements and ask them to explain any and all things that pop up.

I review several business plans every week and have found that the ones that hold the most value (whether written well or not) are those that are completed by the person who will be running the business. This is not to say that I would not value a BP from a 3rd party as long as the proponent understands single sentence written in the plan. I once asked a person to explain their BP projections to me and was told that they would have to go back to their accountant who prepared the plan to ask what they were basing the financials on.

Basically, the more work that you can do yourself while accessing the requisite advise from accountants, small business advisors, etc, the better position you will be in to assess the business venture.

Best of luck

Posted by: loanuniverse Dec 16 2004, 08:23 PM
”1. Can you refer to some services that can determine how much the business worth for a reasonable fees?” Nope, I personally do not know of any valuation services, and even if I knew I have a policy to not refer people to specific service providers.

If I were in your place I would do my own preliminary valuation based on the “discounted cash flow method”. It is kind of complicated, but in essence the present value of any investment is the value of the cash that is going to be received in the future. Doing this type of valuation requires that you do projections of performance for several years. The simplest way would be to assume no change from the last full year, but do not ignore any trends that the financials might show.

You will probably need a financing background to pull that off so it would be best that you prepare yourself to ask questions about the process from the people that you contact to do this for you. The need to understand how the valuator is going to perform the valuation is important.

”2. Assuming we have agreed on the price, I plan to make a $100K down payment. What options do I have to finance the balance without using my home as collateral (about another $100K equity)? ” The down payment is substantial, I would use it to request full or partial financing from the seller. Getting a loan might be a bit difficult right now, but it will not be the same a year from now if you prove yourself a capable manager. Push for seller financing now, and do not agree to prepayment penalties.

”3. As for the due diligent, I checked a certain web site. They are asking about $5K-$10K. is it reasonable. What is the estimated costs to do the due diligent for this type of business? ” You need to ask them what exactly they are going to do for that price, and request this explanation in writing. At the very least, I would expect the valuator to:

a- Go over the last three full years of financial information and the interim financial statements.
b- Go over the customer list to determine strengths and weaknesses (Evaluate the relationships)
c- Go over the vendor list to determine strengths and weaknesses (Evaluate the relationships)
d- Go over the A/R and test them
e- Go over the inventory and test them
f- Evaluate the industry and business environment.
g- Determine how dependent the business is on current management {probably a lot in this business}
h- Prepare projections {after all the present value has to be based on projections not on what already happened}
i- Give me figures of how much similar businesses have been sold for.

”4. My credit score is pretty good 750+ .. and I have very good experience to run this kind of business ... can I qualify for the SBA loan? ” The SBA does not usually give loans, when people talk about SBA loans they are usually talking about bank loans guaranteed by the SBA as such you will still have to meet the bank’s requirement and the bank will be more interested in the repayment. Not that the credit score is not a good thing, 750 is very nice.

”5. As for the business plan, is there any standard template out there that I can use without using the consultant. They ask for $5K to prepare one. ” I agree with Rick, the more you know about the business the better. You can probably find a couple of samples around. However, why would you need a business plan when you have historical financial information from an already established business?

As a lender, I would like to see:

1- Purchase contract
2- A full description of the business including product lines it sells, a vendor and customer list.
3- Financial information on the company being purchased {not just statements, A/R aging, A/P aging, Inventory listing, Equipment listing, etc}
4- Any contracts that the company has entered in
5- Your resume
6- Your personal financial information
7- Your projections and the assumptions they were based on.

I do not need half of the stuff that is in a business plan needed for startups, I do not need for the borrower to filter things through rose colored glasses, I will make my own judgment.

Good luck.

Posted by: hpham Dec 17 2004, 10:20 AM
Rick & Admin:
Thanks for your invaluable info and your insights .. I will digest them over the holidays .. happy Holidays to all
HP
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