How to buy this business

[eTyler19]

Hello everyone,

I found this forum through links on Rich Dads Forums.

I have a question.
I found a store for sale in my area.

Asking Price

$149,000Inventory

$40,000** Gross Income

$719,000Real Estate

$329,000** Cash Flow

$106,000Year Established1970FF&E

N/AEmployees1

The real estate is not included in asking price.

I do not have any experience evaluating deals. I am purely looking at this as a learning experience, practice you might say. My questions is for a asking price of 150K and its cash flowing 106K wouldn't this be an awesome buy? am I missing something?

My next question would be. I have no savings no money no cash nothing. How could I go about getting OPM to get a hold of this business?

Lets discuss
Thanks! :smxF:

 

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[Syphonius]

I have no experience evaluating deals so take this with a grain of salt.... here are a few things I see from the numbers you gave.

- Est. 1970 with 1 employee? This sounds like a sole proprietor wanting to retire/get out of business. Will the business continue to maintain these numbers if the one person behind it is no longer there? How much of the business is due this person's relationships with customers?

- Gross of 719K but cash flow is only 106K? Where is all the gross going? Possibly very expensive product with either (low margins/high volume) or (high margins/low volume). Feels uncomfortable to me.

- RE not included? Will you be a renter now? Who owns the RE? Or worse, will the business need to relocated? Depending on the cost, relocation may break the deal.

As for financing, I have nothing to give on that. I'm sure others here have a laundry list of ways to do it (which I will gladly make note of for future reference )

 

[eTyler19]

Its a liquor store so the state tax on that alone is 13.85% on top of the normal business taxes. The real estate is an optional buy the seller says. So the land can be scooped up as well. Its right on a main street in a busy area. Do sellers normally respond kindly to a request for a financial sheet showing where the monthly gross goes?

 

[kurtyordy]

first off, get 3 years tax returns at a minimum.

Second: typically in these cases that I have seen, the seller is not taking a rent expense, because the own the real estate, you however would have to factor that in which would lower the net. May not be the case in this one, but I have seen it a lot.

Good Luck

 

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[White8]

You may be able to get financials but should have to sign a non disclosure agreement first.

The fact that it sounds like the owner has been the sole employee brings up some questions as Syphonius mentioned. Also, considering this store is open 60-70+ hours a week, how long will you be willing to devote that much time to it with no sick days and no vacation if you intend to run it. If you hire someone, they will take a big bite out of your cash flow.

Regarding financing the business via seller financing, that all depends on your background and the relationship you can build with the seller. If you can convince the seller that you can run the business, can make enough to pay the mortgage, and he doesn't need the cash you have a shot.

 

[eTyler19]

Thanks for the info folks.
I plan on looking into the financials very deeply. I would purchase the land with the business because that only makes sense to me. It says the cashflow is 106K. I am wondering what all that includes. Would business taxes still need to be taken out of that or is that the left over cash after all expenses have been paid?

I spoke with the man today and he said his father owns it he is 69 and wants to move back to India.

lets say all financial check out okay and it really cashflows for 106K is this a good buy, what do you guys think?

480K and it includes the land.
150K and it doesn't include the land.

 

[mozola]

Thanks for the info folks.
It says the cashflow is 106K. I am wondering what all that includes. Would business taxes still need to be taken out of that or is that the left over cash after all expenses have been paid?

cash flow uses the net income (so after tax money)

 

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[phlgirl]

Actually, the cash flow stated in most business listings represents the EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).

 

[unicon]

Just verify the net of 8800 per month, allocate 3000 for real estate leaving you 5800. Take out any management salary (2000) leaves 3800 real cash flow. Take out your salary of 2000. That leaves $1800 per month cash flow profit it the original number is correct.

Don't be embarrassed to ask for all financials, etc. He stipulates to 60k sales per month - what is margin? The cash flow is 14% . Get the inventory turnover figure, 40 k may turnover twice a month.

You have 1800 per month to pay on debt service on the 149k price. This is a reasonable deal if 1) the business location and sq ft can expand in capacity, 2) If numbers are correct. At your age you are buying a job, but it includes the real estate.

Get all the info on the property assessed value and negotiate it down.

Typically a 3 year recovery of all your cash back would be an excellent deal. The numbers are way to sparse to give any advice as buying a business is fraught with hazzards. Get it all down on a business plan complete with financial statements and strengths and weakesses backed up by worst case senario.

Finally you are buying a balance sheet, if the price is 149k less inventory of 40k, you are really paying 109k net

inventory 40 k debt 149k
real estate 329k re 329
good will 109k
assets 478k Liability 478

* allocate 5000 per month to cover debt

* you only have a max of 8800 a month cash flow assuming correct numbers

Is inventory worth 40 k ?? Lots of room to negotiate and structure

 

[fanocks2003]

Hello everyone,

I found this forum through links on Rich Dads Forums.

I have a question.
I found a store for sale in my area.

Asking Price

$149,000Inventory

$40,000** Gross Income

$719,000Real Estate

$329,000** Cash Flow

$106,000Year Established1970FF&E

N/AEmployees1

The real estate is not included in asking price.

I do not have any experience evaluating deals. I am purely looking at this as a learning experience, practice you might say. My questions is for a asking price of 150K and its cash flowing 106K wouldn't this be an awesome buy? am I missing something?

My next question would be. I have no savings no money no cash nothing. How could I go about getting OPM to get a hold of this business?

Lets discuss
Thanks! :smxF:

Very interesting thread. Just let me show you how I would have encountered this situation without a penny in my pocket to do this.

1) I would find a partner who could finance the bank charges and the costs of using a business lawyer and a CPA (they are very much needed to secure the deal).
2) I would find someone to run the place for me. After acquisition.
3) I would go to the bank and ask for a loan for the whole purchase. Seriously. Let me explain why this is:

If the seller wants: $149,000
The cashflow (I pressume this is after fixed expenses and before taxes?) is: $329,000

Let us say you can secure a 60% LTV loan at a fixed cap rate of 10%. With this setting you should be able to get a loan of $1,974,000. Out of this loan you pay the seller $149,000 and pocket non-taxable income of $1,825,000.

In order to get the money from the partner (mentioned in the beginning of this answer) you would, probably, offer a cut of the non-tax income. I would have structured it in a way where the partner would make say 500% on his money. Just for helping out. You would still walk out of the deal richer than when you went into the deal (when you started out you where totally starved for cash).

The important variables are:
-Experienced manager running the place for you.
-Someone willing to pay for the bank charges and the advisors.
-Have the bank finance the deal (negotiating skills are required because the bank doesn't always see the value you deliver to them. Sadly. But the only way to learn those skills is by practice).

 

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[fanocks2003]

Hehe.. thanks for the correction JScott. I totally looked at this example the wrong way. The question marks totally confused me. My bad.

Let's take it again (now the correct one):

As JScott so correctly stated the cashflow in this case was only $106,000 (talk about selling the business cheaply otherwise) and the selling price/asking price was $149,000.

So, ones again we get a 60% LTV loan (in this example) at a cap rate of 10% annually. This gives us a loan (if we want to) at: $106,000 X 0,6 = $63,600 / 10% = $636,000. From this loan you pay the seller $149,000 and pocket non-tax income of $487,000 in your pocket.

Debt service annually (with annuity loan. Interest loan only) would be $636,000 X 10% = $63,600. That would give a positive earnings annually of $106,000 - $63,600 = $42,400.

JScott this should be a more correct calculation, right?

Sorry, for the bad post above. Bad eyesight is my excuse...hehe.

 

[unicon]

A bank would probably only loan 60% on inventory and 70% on building. For a small business store. A 636k loan would not be likely, even for a private lendor as they deal in guarantees. Especially on a purchase with no seasoning, it would be suicidal for a bank without some grarantee of certainty.

I am one to never say never but this is unrealistic in its pure form.

 

[fanocks2003]

A bank would probably only loan 60% on inventory and 70% on building. For a small business store. A 636k loan would not be likely, even for a private lendor as they deal in guarantees. Especially on a purchase with no seasoning, it would be suicidal for a bank without some grarantee of certainty.

I am one to never say never but this is unrealistic in its pure form.

The earnings in itself is a value. Banks are in the business of lending money in order to recieve an interest. If you then take away the cashflow then you will have to secure the loan against your on personal income. The earning ability of the company should be pretty stable after 3 years and above. You can then see a history.

Commercial real estate is bought this way by professional investors. Not everyone I might add, some people hate debt financing and want to keep it at a minimum. Everyone do as they please of course.

But earning ability is the only thing banks want to have secured. Collateral may be a extra safety net of course. I don't argue with that. But collateral in itself is not of interest for the bank, they are not in the asset selling business. They are in the interest business.

Have you bought businesses or commerical real estate? Just curious.

 

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[fanocks2003]

A bank would probably only loan 60% on inventory and 70% on building. For a small business store. A 636k loan would not be likely, even for a private lendor as they deal in guarantees. Especially on a purchase with no seasoning, it would be suicidal for a bank without some grarantee of certainty.

I am one to never say never but this is unrealistic in its pure form.

I wanted to add one more thing to Unicon. When you purchase a company, you almost always purchase it at a great premium in relation to the liquidation value of the business (on the private market that is). And the bank always lends money on the business far in excess (ones again, not always, but most of the time) of this liquidation value. That would mean you would almost in all business acquisitions be forced to put up the majority of the selling price out of your own pocket if you where to be correct in your statement.

If you where to purchase a company solely on the basis of liquidating the company then I absolutly agree with you that banks will ask you to purchase the company for much less than the liquidation value less taxes and other expenses related to that deal. Absolutly agree with you. Who wouldn't? But we aren't talking about liquidating the purchased company are we?

The same goes with income real estate. You almost always purchase income real estate far in excess of the building value. People want to make a profit so there is a premium on the building value. The only place I find undervalued properties is in distressed situations. Otherwise premium is really the norm.

 

[unicon]

Life is a balance, again cash flow and collateral are both important. To get to the bottom line what you are looking for is the permanentcy of cash flow. However that is more of an illusion than the permanentcy of a fixed asset.

If you want to look at it the true criteria is character. Buffet can probably borrow anything he wants on a signature.

If you are to value a business with some sort of standard you would take assets plus 2 or 3 times annual net income or cash flow to start. This keeps it simple.

Buying a business you go down the asset column and negotiate each line item, the same thing on the liability side. You are buying a balance sheet. The value I put on the business might be totally different than yours based upon the plan.

Negotiation is the hierarchael skill, I put together a manufacturing business and it was doing a million and a half in a couple of years from a $40k investment. I bought another business for a million with 250k down and it barely hit a million and a half in revenue. However both business start with the standard valuation format which never stays the same as you get into the detail. No two deals are the same.

Parameters come before detail, context before content, big picture first - that is why I like to talk in concepts here. To take a detail to prove a point is not the big picture it is only a reconciling item. Nothing is excluded.

We come back full circle, and the prioritizing of cash flow and assets will fluctuate based upon the deal. But the standard valuation remains.

 

[fanocks2003]

Life is a balance, again cash flow and collateral are both important. To get to the bottom line what you are looking for is the permanentcy of cash flow. However that is more of an illusion than the permanentcy of a fixed asset.

I don't argue with the fact that cashflow and collateral are examined in a lending process. I am just saying that without cashflow it would be insane for a lender to lend anything. I would not lend money to someone who couldn't support the amortization amount and the interest every month. No way.

If you want to look at it the true criteria is character. Buffet can probably borrow anything he wants on a signature.

I highly doubt it. The only way Buffet and any other businessman will get a loan from a bank or any smart lender is through showing where money will come from to support the financing costs (amortization and interest). Without it it doesn't matter if you are the King of England. Buffet may very well so get investors to invest in him. Investors and lenders are to different kinds of financiers in terms of how they get their return on investment.

If you are to value a business with some sort of standard you would take assets plus 2 or 3 times annual net income or cash flow to start. This keeps it simple.

If you go to a bank they will give you a value based on annual earnings divided by a cap rate they are willing to give you. That is how they value a business. Where do these 2-3 times annual net income scenarios come from? I don't follow.

Buying a business you go down the asset column and negotiate each line item, the same thing on the liability side. You are buying a balance sheet. The value I put on the business might be totally different than yours based upon the plan.

Yes, the bank does that, but the bank also study your P/L statement very carefully. You can't argue with that fact. Anyone on this forum would agree with me on this point. Anyone who has gone to the bank to purchase a private resident know this. The bank will ask you to supply this statement (if you are an employee they will even, sometimes, verify the income statement with your employer). And if you do not, then it doesn't matter if the house is worth "so much" in collateral. The banks are "business people" not fools.

Negotiation is the hierarchael skill, I put together a manufacturing business and it was doing a million and a half in a couple of years from a $40k investment. I bought another business for a million with 250k down and it barely hit a million and a half in revenue. However both business start with the standard valuation format which never stays the same as you get into the detail. No two deals are the same.

If you have put a business together then you of all people would know what I am talking about. A bank lending money without studying a P/L statement you gotta be kidding me?

Parameters come before detail, context before content, big picture first - that is why I like to talk in concepts here. To take a detail to prove a point is not the big picture it is only a reconciling item. Nothing is excluded.

Details come before lending money, Unicon. Banks are one of the most detailed companies I have ever encountered. Details is what they are working with. Also, details gives you a closer look at the way things works. It is very hard when speaking in big concepts. I like speaking about creating new companies in big concepts, but not financial details.

We come back full circle, and the prioritizing of cash flow and assets will fluctuate based upon the deal. But the standard valuation remains.

Cashflow will always prevail. Collateral is a part of it. As well as creditworthiness (the character part you mentioned above). But cashflow rules the game when it comes to loans. Money from investors is another thing (investor financiers are also more open to alternative solutions. Lenders are seldom flexible).

 

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[unicon]

The Income statement and cash flow are part of the Balance Sheet. They are not separate as you seem to state. The balance sheet is the bigger picture. The cash flow is only part of retained earnings on the liability side of the balance sheet.

The balance sheet is not a function of the income statement. The income statement is a function of the balance sheet.

A bank follows the standard of character, capacity, and capital (3 C's)

Character is #1 - nothing is more important, if you can communicate it you will get all the money you want. Buffet qualifies.

 

[unicon]

In addition if I am buying a business the last institution I consult is a bank in the valuation of that business.

 

[fanocks2003]

The Income statement and cash flow are part of the Balance Sheet. They are not separate as you seem to state. The balance sheet is the bigger picture. The cash flow is only part of retained earnings on the liability side of the balance sheet.

The balance sheet is not a function of the income statement. The income statement is a function of the balance sheet.

A bank follows the standard of character, capacity, and capital (3 C's)

Character is #1 - nothing is more important, if you can communicate it you will get all the money you want. Buffet qualifies.

There is two types of loans also: Unsecured (no collateral loans, purely against P/L statement and your credit rating) and collateral loans (secured against balance sheet).

I agree with you that income statement and balance sheet correlates. The income from the income statement gives money to the balance sheet (if you are smart with money). But I have seen companies with no income statement (P/L statement), but a rather fat balance sheet.

In that case they may have had a lot of assets, cash and what have you, but you couldn't say the balance sheet produced cash that showed up in the income statement. I am not in the business of acquiring dead assets. I am not a liquidator. I am in the business of investing for future earnings (when I invest that is, not when I am making my money. I make my money building companies as mentioned). As is Warren Buffet.

Rich people know that income (or part of it) purchases assets that shows up in the balance sheet. The assets in the balance sheet then pay income to the income sheet and part of that income purchases more assets that put even more money to the income statement. A never ending circle. You know it too.

I have also stated that banks look at all the 3 C's you mention. I am not arguing against that. But income/cashflow is a big part of that decision. If there is no cashflow, then it would not matter who you where. You need to a have a repayment plan somewhere in the loan application (statement of where the cashflow will come from and how you secure it to the bank).

I am not making this up Unicon. This is done not only by me, but by professional real estate and business investors alike. I am not alone in my arguments.

 

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[fanocks2003]

In addition if I am buying a business the last institution I consult is a bank in the valuation of that business.

Everyone does what he chooses. Banks are just one out of many choices.

 

[eTyler19]

Thanks for your help guys. Fanhocks could you please respind to my PM. Is a bank really going to lend me that money without having any personal assets? Im passing up the liquer store but I will keep looking for other oppurtunitys.







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[fanocks2003]

Thanks for your help guys. Fanhocks could you please respind to my PM. Is a bank really going to lend me that money without having any personal assets? Im passing up the liquer store but I will keep looking for other oppurtunitys.







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I have sent you a private message.

 

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[eTyler19]

well I have a ways to go before I have the knowledge to actually purchase a business. I know for sure though I am going to have to find a deal that will offer some cretive fianacing to get the deal done. It might end up that I have to pay more for the business but that might be the way it has to go with no money down.

The weird thing is I dont really have a passion for any particular type of business. I would just love to own ANY business. :smx9:

 

[Luke12321]

Don't rush into buying a business....just for the sake of owning a business. That is the best I can give you. :smxF:

 

[PEERless]

I dont really have a passion for any particular type of business. I would just love to own ANY business. :smx9:

Don't rush into buying a business....just for the sake of owning a business. That is the best I can give you. :smxF:

:smx9:Agreed! There were PLENTY of people in my classes in college who wanted to own a business, ANY business, for all the wrong reasons. ...Namely, lighting cigars with $100s.

It has taken me too long to realize that the important thing is doing what you are passionate about and the money will come. A passion for money can only lead to heartache.

 

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[eTyler19]

I'll have to disagree with you guys. To each his own. I LOVE business that is my passion. Just because I may love owning a restaurant doesn't mean I wont look at other business opportunities as well. A good deal is a good deal.

 

[Luke12321]

If you find a good deal, go for it! I am saying though, don't buy a business beause you are bored and would like something to do. Buy a business to make money and better yourself.

 

[eTyler19]

I know what you mean Luke. Thanks for the advice. :iagree:

 

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