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Should I buy this business?

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Besides Amazon, a given, how else do you see improving the revenue? Are there any other things you could see doing that dramatically improve the business? What is your time committment like for this income?
He has been trying to transition from selling to dealers to selling online. The dealer network needs some work too. There is also a licensing side of the business that has been neglected. I can go into more detail on that and really the whole business if I buy it. Their products are proprietary so I won't be worried too much about discretion once I do it. And the owner said he works about 4 hours a day. My time commitment would depend on what employees I keep
What kind of multiple are they looking for?
3X of SDE
In regards to Amazon, how confident are you that there's a market there?
90% confident but don't really have the experience to say for sure
If you add on Amazon, how much additional revenue/profit can you add on?
I don't know how to forecast that. Any tips?
What about offline?
  • How many dealers do you have?
  • How many potential dealers are there in the U.S.?
  • How did the company acquire those dealers?
  • Are there tradeshows in that industry that would make it easy to add on more dealers?
Thanks for all the challenging questions. I don't know how many dealers, I am waiting for a complete list from the broker. I'd say there are thousands of potential dealers. They go to one trade show a year and there should be a lot more they could go to.
An easy way to eliminate a lot of risk is to get an option to buy the business from the owner for let's say 1 month (your due diligence period).

During that time, hit the phones. Call as many potential dealers in the U.S. as you can. Send as many emails as you can. Figure out how difficult it will be for you to grow the market. What the actual reception is from clients.
I like that
 

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Walter Hay

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Looks good to me.

Walter
 
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Go to Amazon and type in the search terms for the product. Then just see how many listings come and see how many reviews the listings have.
That's what I did, but I didn't know if there was a more in-depth method. Thanks

So, discussions with the broker and owner are going good and moving forward on this deal. About to really dissect the numbers and work on an LOI. Also, it might work out to rent the current warehouse space from the current owner because he also owns the building it's in. And I would keep the girl that's working for him because she handles pretty much everything and she enjoys it and has been doing it for a long time. It's in a small town and rent would almost definitely be cheaper than where I'm located.

And the deal structure is probably going to look like this: 20% equity down payment on my end, 20% seller financing over 5 or 7 years, and 60% SBA loan over 10 years. And I might even finance my 20% from a family members' line of credit so that I wouldn't have to come out of pocket at all for this deal.
 

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An easy way to eliminate a lot of risk is to get an option to buy the business from the owner for let's say 1 month (your due diligence period).
Curious if you could elaborate on this.

Is there actually a type of deal where you literally own the business for a trial period?

If so, I'd be curious to see what's in it for the old owner to hand off the business for a trial period. Wasn't sure if you're speaking figuratively.
 
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Curious if you could elaborate on this.

Is there actually a type of deal where you literally own the business for a trial period?

If so, I'd be curious to see what's in it for the old owner to hand off the business for a trial period. Wasn't sure if you're speaking figuratively.
It just means you're under contract with an option to buy the business in 30 days giving you time to do due diligence. It doesn't mean you're running the business during that time by any means. It just means the current owner can't sell it to someone else during that time.
 

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An easy way to eliminate a lot of risk is to get an option to buy the business from the owner for let's say 1 month (your due diligence period).

During that time, hit the phones. Call as many potential dealers in the U.S. as you can. Send as many emails as you can. Figure out how difficult it will be for you to grow the market. What the actual reception is from clients.
I’ve never heard of this either. Have you done this thorough experience? Are you talking about a letter of intent? I don’t see how this would be allowed.

You can’t call dealers or customers posing as the potential business. Most don’t allow you to disclose the business is for sale.

As a seller, I don’t see how you could even structure this where the seller would be OK with it.
 
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It just means you're under contract with an option to buy the business in 30 days giving you time to do due diligence. It doesn't mean you're running the business during that time by any means. It just means the current owner can't sell it to someone else during that time.
Yes, but isn’t this how all business sales are done? You sign a LOI or contract and then put through the books. During this time you can talk to vendors and clients to confirm numbers and in place contracts.
 
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Yes, but isn’t this how all business sales are done? You sign a LOI or contract and then put through the books. During this time you can talk to vendors and clients to confirm numbers and in place contracts.
Ya, that's my understanding just from this experience so far. I should be sending them an LOI tomorrow, and the broker told me I could talk to their current dealers and licensees as well as potential future dealers. I will also be talking to their manufacturer. Not acting like I'm the current owner, but just being upfront about the situation. The seller might not want me to do this until the end of the due diligence period pretty close to closing though.

That is also how we will be handling talking to a key employee who I will be trying to keep on to run the warehouse and customer service.
 
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I have a question as I'm still trying to value this business. They want a 3X multiple of SDE for it, but that doesn't include inventory, which will be around $200-250K. What's y'all's opinion on inventory being included or not?
@Vigilante @biophase @amp0193 @AgainstAllOdds @Kak @MJ DeMarco
 
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I have a question as I'm still trying to value this business. They want a 3X multiple of SDE for it, but that doesn't include inventory, which will be around $200-250K. What's y'all's opinion on inventory being included or not?
@Vigilante @biophase @amp0193 @AgainstAllOdds @Kak @MJ DeMarco
Inventory is not included in valuation calculation. It's separate.
 

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Ronak

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Also, it might work out to rent the current warehouse space from the current owner because he also owns the building it's in.
Make sure to account for this in your calculations. If you have to pay $3000/mo to lease space that the owner didnt have to account for since he owns the property, that's a significant chunk of your cash flow. The offer should be based on a multiple of your number, not the seller's.

Re: inventory, it's all a negotiation on what's included and what's not. Personally, if I'm "buying" earnings, I would want everything needed to generate those earnings to be included in my calculations. Also make sure you're not buying "dead" inventory or too much more than you reasonably need.
You also have to add that cost to the loan or get a separate line of credit, all of which can throw the deal from doable to impossible.


Finally, dont just stick with 1 lender. Shop the deal and initiate the process with multiple lenders, even if you have to pay a little more. The people you deal with on the front end and the actual decision makers are completely different and it's not uncommon to have something derailed at the last minute, even if your point person keeps on saying, "yeah, it's all good, no problems." Some underwriters are looking for reasons to cover themselves, ie reasons to say no rather than say yes. Find lenders that have done loans in your specific industry.

Finally, good for you for thinking bigger than the initial sign deal. But what if you went even bigger? Where a few thousand a month in extra costs doesn't make or break the deal? The SBA limit is 5 million, why not try to max it out?
 

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I have a question as I'm still trying to value this business. They want a 3X multiple of SDE for it, but that doesn't include inventory, which will be around $200-250K. What's y'all's opinion on inventory being included or not?
@Vigilante @biophase @amp0193 @AgainstAllOdds @Kak @MJ DeMarco
It makes sense, but it is also one of the easiest things to overhype.

Just make sure you are getting what you think you are getting for the money.

Just methodically pick it apart, piece by piece. I like a lot of what @Ronak said too.
 

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I’ve never heard of this either. Have you done this thorough experience? Are you talking about a letter of intent? I don’t see how this would be allowed.

You can’t call dealers or customers posing as the potential business. Most don’t allow you to disclose the business is for sale.

As a seller, I don’t see how you could even structure this where the seller would be OK with it.
You could certainly do a little legwork in the option period... But calling around posing as a representative of the company is not going to work out well.

Going into this, you probably have a plan and the people you intend to work with to get you there. It would never hurt to get their take. Likewise a buyer that you might already have a relationship with. Things of that nature. It wouldn’t hurt to have discussions like that with honesty about where you are in the process of buying the company... And whether they would be interested should you close the deal.
 
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Finally, good for you for thinking bigger than the initial sign deal. But what if you went even bigger? Where a few thousand a month in extra costs doesn't make or break the deal? The SBA limit is 5 million, why not try to max it out?
I agree with you. But, what I like about this deal is that I can get it today for mid 6 figures and, if I can do with it what I think I can, can sell it for 7 figures in a few years
 

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I agree with you. But, what I like about this deal is that I can get it today for mid 6 figures and, if I can do with it what I think I can, can sell it for 7 figures in a few years
Amazon is a unique animal. You say "if" you can do what you think.

I'm not trying to doubt your abilities, but rather, shed light on what could happen.

Will it actually sell on Amazon? Can you throw up some listings and test it? Offer the current owner to do it as a benefit to them.

Let's say it does sell. Will it end up cannibalizing your other sales and alienating existing dealers? I've personally had this happen on numerous occasions. It can be a double edged sword. On one hand, you get a bigger chunk of the margin, and before you know it, Amazon becomes 30, 40, 50% of your business. On the other hand, do you really want to take on debt and risk for Amazon to have that much control over you?

SBA can have amazing terms, but read the fine print. In the event of a default they take EVERYTHING. You're having the pledge ALL your assets for the loan, including your house. Wouldn't you rather risk it for a much higher return if you're going to take the risk anyway? And can you find another business where you can do the same thing, but with a larger base, so amazon can add to your bottom line without cannibalization?
 

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What they've told you about the due diligence process is accurate. It works with a LOI or with other agreements as well. Misrepresentation is a big thing so you ahould know which questions to ask and whick papers and books to have open and if you do so, you most likely be safe. Make sure you get what you are buying and don't let enthusiasm or emotion mekae you overlook inportant stuff.

Good luck!
 

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I’ve never heard of this either. Have you done this thorough experience? Are you talking about a letter of intent? I don’t see how this would be allowed.

You can’t call dealers or customers posing as the potential business. Most don’t allow you to disclose the business is for sale.

As a seller, I don’t see how you could even structure this where the seller would be OK with it.
Did it for a business I invested in.

Most sellers should be ok with it if you structure it the right way: "I'm going to increase your sales to get a better understanding for the opportunity." Anything is doable if structured as a win-win.
 

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Make sure to account for this in your calculations. If you have to pay $3000/mo to lease space that the owner didnt have to account for since he owns the property, that's a significant chunk of your cash flow. The offer should be based on a multiple of your number, not the seller's.
And to add to this:

Whatever he says the profit is, subtract out a "real" salary for what the owner pay should be. If he's not paying himself, or underpaying himself, take that into account.
 

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