Buying a business without real estate collateral

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Buying a business without real estate collateral
Posted by: Christopher Aug 8 2004, 04:57 PM
I have a contract to purchase a very successful floral business with sales of just over 1 million dollars. The business is over twenty years old and built from scratch. It is located in a tremendous metropolitan growth area. It’s potential is 2 million dollars in annual sales. The owner, a lifelong friend and competitor is in failing health. Because of capital gains considerations the owner wants to sell the business operation now and give me an option to buy the property in three years. Initially the bank was willing to finance 75% of the million $ purchase price. I had a group of investors willing to loan me the balance, $250,000.00. The bank after reviewing the deal decided that there was to much goodwill for them to cover alone and offered me a SBA 7 years loan deal. My private investors don’t want to deal with the SBA. I have worked in the floral industry over 25 years as a manager for the same company. I have a broad ranging background, with an expertise on building sales growth, my currrent operation has sales of over 1.8 million. Buying this operation will allow me to provide security for my family. 13 years ago my son was born with catostophic medical problems, the insurance paid in excess of 1 million but left us with bills of 400,000.00. we felt it was our obligation to pay these bills we mortaged our house, cashed out life insurnace and retirement funds and stuggled for 11 years, we paid off all but 60,000.00 and had to go into bankruptcy. My son is now a healthy 13 year old and we are without any funds.
Our bankruptcy was discharged in May of 2003. The bank has been very supportive of our situation in trying to help make it work, but I need my investor friends who don’t want the SBA. I have been very creative in thinking outside the box all my life for solutions, but financiing is new to me and I’m learning as fast as I can. Any suggestions???
Posted by: loanuniverse Aug 8 2004, 10:17 PM

What kind of flower business is it? A retail operation or a wholesaler? I am asking these questions because the 1.00 multiple of sales valuation seems a little pricey. As a matter of fact, I had the opportunity to go over the book’s of a flower wholesaler recently and if I remember correctly, the net profit as a percentage of revenues was around 4% with a similar level of cash flow. I would not pay 25 times cash flow for a business.

Going over what you wrote, it seems to me that the bank does not think there will be enough tangible equity in the company after buying this competing business.

The thing that I don’t understand is the private investors’ reluctance at dealing with the SBA. If what you are saying is right ” investors willing to loan me the balance…”, these investors are lenders in a junior position, and they really would not have to deal with the SBA at all. If on the other hand, they are coming in as equity participants, then that is another matter and they would have to be involved.

There is no property involved here so we are probably talking about a “Basic 7(a) Loan Program”, which means that the SBA is not the actual lender, but is a guarantor of the loan in case you default for the benefit of the bank.

Assuming that you are going to use your current company to purchase this one, you could have the private investors give a loan to your company and then tell the bank that the loan will be subordinated. This would allow the bank to count the subordinated debt as tangible net worth. This would also mean that the private investors would not have to deal with the SBA at all, but you will still have to as the bank does not seem to feel comfortable enough with the deal to do it without an SBA guarantee.

I still can’t get pass the investors not wanting the SBA to be involved. Even if it wasn’t, they would have been in a junior position to the bank so this does not make sense.

If you want more feedback, you will need to provide more detail on the situation. Also make sure to read the disclaimer in this site.
Posted by: Christopher Aug 15 2004, 04:32 PM
Thank you for the information. I’ll look deeper into the questions you raised and get back to you.
Author: Commercial Loan Underwriter