Should I buy this business?

[amp0193]

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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[tmb22]

Thanks for all the replies and good feedback, I really appreciate it. @Walter Hay it is not a franchise, and I have always had the rule that I will not buy a franchise. And I don't think I'd want to franchise this system. I'd rather tap out the local market and sell as much as possible online.

And to answer the other questions and give more of a backstory for the situation....

He comes from a wealthy family, bought this business when he was 27 and is 51 now, doesn't need the money probably as he has several other investments. Also, he has the business set up kinda weird. He doesn't do any of the printing himself. He shares a space with a direct competitor who does all his printing for him. So, he doesn't own any equipment. He orders the materials from his supplier, has this guy do the printing for him, and then he will put the signs together like on wooden posts or whatever it is and paint the posts if he needs to and then will go install the signs for the customer. He used to do all the printing, but his printer got wiped out by a tornado and he didn't want to buy a new one at the time for like 25k, so he started doing it this way and just loved it. He pays the competitor $200 a month in rent just to have a place to go and work on stuff. They have a great relationship and don't go after each other's clients. In the beginning, I will definitely need to keep that relationship going until I learn how to do all the printing myself or I can just keep it that way forever and focus more on sales and growth. But, to sell online I will definitely need my own printer to cut costs.

So, I would just be buying good will and no assets. But, his clients are mostly big commercial real estate development companies that he has had forever. He bought the business in like 1997 from somebody who had most of these same clients and that guy went on to build a huge real estate business too.

 

[Dramolion]

Why would you buy a business while you're busy with your own (unrelated) business ?
Even if the business you're buying is doing good, it would only mean you'd have to pay more (investment) for it.
More importantly, why isn't he selling to his direct competitor who's doing half his work anyhow ?? That guy is already in the same market and it would make sense for him to want to expand by buying up a competitor.

 

[Bigguns50]

@tmb22 So you know your situation better than anyone. If for example, your living expenses were only $1,000/mo and this is the best thing you've got right now, it might make perfect sense to work, bank, and do another biz. I haven't done research on the trend for b & m sign businesses, but my gut tells me they're not going away anytime soon...just doesn't make sense.

If you negotiate with this guy, keep in mind, the one that can walk away from the deal wins. Good luck and keep us posted.

 

[GB81]

Excellent. Due diligence. Due diligence. Due diligence.

On the area of due diligence I would also want to see the current debtor/creditor lists. Two reasons in this scenario 1) what % of the turnover is on certain key clients - risk they go elsewhere and risk if they cease trading 2) I don't know enough about the sign business to know payment terms, (i assume the £18k order isn't all up front). If it is an element up front and an element later you may be able to raise some finance on that debtor. Not the cheapest but a potential option.

Overall I would be cautious if you were paying anything but a fairly token price for this. Looks to be a lot of goodwill. I'd really want to know the vendor well.

The fact that a competitor actually produced the signs would appear a huge problem for the law of control.

 

[tmb22]

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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[biophase]

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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[tmb22]

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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[Kak]

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.

 

[tmb22]

Thanks @Bigguns50 sound advice and exactly how I see it too. And to update everyone, I am still waiting for him to send me all the numbers for the past 3 years. He did tell me that he's doing one job right now for 18k

 

[Bigguns50]

Excellent. Due diligence. Due diligence. Due diligence.

 

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[schazz]

I read this out of interest, but someone above had a great question. Why wouldn't his competitor buy the business (customer list)? It seems to me that it would more valuable to him than anyone else considering he already does the printing. Has your friend not offered it to his competitor for some reason? Or did he and he said no? I'd personally want to know what's going on there.

 

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[tmb22]

I read this out of interest, but someone above had a great question. Why wouldn't his competitor buy the business (customer list)? It seems to me that it would more valuable to him than anyone else considering he already does the printing. Has your friend not offered it to his competitor for some reason? Or did he and he said no? I'd personally want to know what's going on there.

That was one of the first things I asked him a couple weeks ago. He said the guy is a lazy piece and doesn’t care about growing

 

[GuestUser4aMPs1]

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.

 

[tmb22]

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.

 

[tmb22]

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

 

[Ronak]

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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[Lucky Lu]

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!

 

[AgainstAllOdds]

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.