Home: Message List - Seeking Funds to Purchase Well Established Business

Re: Seeking Funds to Purchase Well Established Business

coolmom30 — Mon, 15 Sep 2008 16:11:57 GMT

Wow, I'm glad I ran into this thread. Thank you everyone for all the good information.

We're kind of on the same boat. We're in the process of doing our due diligence to purchase a well established (and profitable) daycare center. The business is booming, and parents are demanding that the center increase its enrollment capacity to accomodate more children. Enrollment is averaging at about 95-100% and net income for 2008 is expected to be $100k ($50k for the first 6 months). The owners want to retire and that's why they are selling. We negotiated a selling price of $294k. The downside is the owner doesn't want to do seller financing since they want to move out of state and just retire.

The business is very viable, and there is enough unused space in the center that will allow us to construct 2 additional rooms that will allow us to increase capacity. After renovations, we expect to increase capacity from the current 66 to 110. Once we average about 100 enrollments, our expected annual net income will be $175k, and we project to achieve that in about 2 years. My business partner and I are putting 20% and are looking to finance the remaining 80%. And that is where we're having problems. Due to the current economic climate, the banks have been very tight and it's been difficult for us to get lender financing. A poster here mentioned that the SBA loan route is not that rosy either. Only about 10% of loans are getting approved, and the requirements are getting much tougher. For a typical commercial loan, they are requiring our business to have 2 years of history, even though the business we are purchasing has been in business for more than 4 years. We are seeking some angel investors - friends, families, etc. but we don't think we'll be able to raise the amount even though we are offering good return rates for the investment.

The Letter of Intent we signed did stipulate that the transaction will not push through if we can't raise the capital to purchase. We're a bit desperate now. We think we can make the business continue to be successful, but if we don't get the needed capital, we'll have to let it go. When the seller first posted the ad in June, he was trying to gauge how much interest is going to be generated, and that he was pretty firm with his asking price. He wasn't willing to lower it since he figured if no one was willing to buy it for the price which he thinks is reasonable, he can just keep the center say another 6 months and earn the $50k net that he expected to receive at the end of the year. He'd keep on doing that until a party would come and offer him the right price.

So should I say that we are pretty much hosed here and not even have a chance at an LBO? Since we're at a point where we're running out of options, we're thinking of just risking asking the seller if he'd do an LBO for whatever amount we cannot raise to pay the selling price. If he doesn't like it, then we would have to drop off the race.

Re: Seeking Funds to Purchase Well Established Business

DealReal — Mon, 15 Sep 2008 15:57:34 GMT

Required Documentation for Business Loans

Sole Proprietorship

Required Documents:

Fictitious Business Name Statement, Certified by the County Clerk
Proof of Publication

Supplemental Documentation:

Business License

General Partnerships

(All Partners must execute the signature card)

Required Documents:

Partnership Agreement
Fictitious Business Name Statement, Certified by the County Clerk
Proof of Publication

Supplemental Documentation:

Business License

Limited Partnership:

(Generally only General Partners should execute the signature card)

Required Documents:

Certificate of Limited Partnership (Form LP-1)
Fictitious Business Name Statement, Certified by the County Clerk
Proof of Publication

Supplemental Documentation:

Business License

Limited Liability Partnership

(Generally only General Partners should execute the signature card)

Required Documents:

Registration Filing (Form LLP-1)
Fictitious Business Name Statement, Certified by the County Clerk
Proof of Publication

Supplemental Documentation:

Business License

Corporate Accounts

Required Documents:

• Articles of Incorporation

• Corporate Resolution

• Bylaws (If Adopted)

If dba: Fictitious Business Name Statement, Certified by the County Clerk

Supplemental Documentation:

Certificate of Corporate Status or Good Standing
Business License

Foreign Corporations Engaged in Intrastate Business

Required Documents:

Certificate of Qualification or Exemption
Biennial Statement

Supplemental Documentation:

Certificate of Corporate Status or Good Standing
Business License

Foreign Corporations NOT Engaged in Intrastate Business

Required Documents:

• Registration of Corporate Name

• Certificate of Good Standing

Supplemental Documentation:

Certificate of Corporate Status
Business License

Limited Liability Company

Required Documents:

Articles of Organization
Operating Agreement
Limited Liability Company Statement of Information (form LLC-12)

Supplemental Documentation:

Business License
Note: If Foreign LLC, we require a Limited Liability Company Application for Registration to the Secretary of State.

Joint Ventures*

Required Documents:

Joint Venture Agreement
Fictitious Business Name Statement, Certified by the County Clerk
Proof of Publication

Supplemental Documentation:

Business License

Unincorporated Association

Required Documents:

A Letter signed by two or more Officers of the Organization designating individuals to open an account.
Charter, Bylaws or Governing Rules of the Association.

Supplemental Documentation:

Business License

e-mail duane@amerimaxcapital.com for application

Re: Seeking Funds to Purchase Well Established Business

1prosper — Sun, 14 Sep 2008 19:08:38 GMT

Gail, I wish you the best. My husband and I also purchased a business in Scottsdale, we live in Florida. Right now we are looking for working capital and it has been extremely difficult. We have excellent credit, but are over extended because we've had to carry the business. We had to fire the person managing the business because he robbed us blind. I refuse to lose our entire livelyhood just because we trusted the wrong person. We're strill trying..failure for us is not an option. I'm currently trying to get a loan so that I can move to Scottsdale and manage this business of ours. We seen to have some things in common, I'm also very driven and I also moved from New Jersey, but I love Florida, humidity and all. Wishing you the best.....Angie

Re: Seeking Funds to Purchase Well Established Business

Adducent — Tue, 17 Jun 2008 16:27:37 GMT

Hi Gail,

You're very welcome. Based on what you told me; I think you would be better off going back to your original business idea and focusing on it instead of taking what could be a risky chance of turning around the Art & Framing business.

In my opinion you should consider going with your area of expertise and proven ability and solutions that help people - that's a much easier business model for you to follow than to force a deal to buy a business that puts you at some financial risk. Like you said, with the current economic conditions and financial challenges and problems many people are faced with; you should be able to hit the ground running and create a low-overhead business that in all likelihood provide you a better income than you would get from the business you were considering buying.

You should also sit down and rough out an Executive Summary of your idea, that sets up further defining the business idea in a business plan for execution that lays the groundwork to launch. Your friend with the promotional experience will be a great resource for you so definitely include them in your planning process.

Leverage your experience and previous success with clients; use your book as a "calling card" (to give to clients or as a promotional piece for your services) or as a revenue stream by itself. Having a service business can be very profitable but you should always also consider developing products based on your experience and intellectual property (as you have with your book). This is something I have done in my businesses and if done correctly it can be very rewarding (both for you and the people who buy the book) and a great supplement to your service business.

When you get your executive summary roughed out; feel free to send to me and I'll review and give you some feedback that might help you with the business launch. At my profile you can see my contact info and web site so you can get in touch with me directly if you like.

Regards,

Dennis Lowery

Adducent, Inc.

Re: Seeking Funds to Purchase Well Established Business

driven — Tue, 17 Jun 2008 04:57:10 GMT

Hi Dennis,

You really know your stuff! Lucky for me!!! I was thinking alot about what you told me in your previous post and I have to tell you I am feeling pretty sure that what my gut has been telling me about the rent is an omen. It has been the one bone of contention for me all along stopping me from going forward even when he keeps sweetening the deal. I would need to have gross sales of $10,000.00 every month just to pay rent and expenses and that doesn't include a salary for myself.

I am thinking about going back to my original business idea.

I was a loan officer for 16 years and I counseled clients who I could not qualify for a Mortgage due to poor credit. Instead of telling them to re-apply when they fixed their credit problems (as my colleagues did) I worked with them - I created individualized structured plans they could follow easily to repair their credit themselves. This served as a valuable plan - because it was a time consuming task at the onset, it taught them how precious their credit rating was and by letting it decline only major effort could rectify it - they always came back to me and said..."I will never let that happen again"! Most of them urged me to write a book and/or start a business - (I wrote the book "Credit Repair Guide" which was released in Dec.07 and I have a website) because they hadn't a clue how to repair their credit. The plan worked like a charm!

In January I wanted to start an actual business structuring credit repair plans for a moderate cost. I was going to rent an office suite for around $400 - 500 a month which includes everything while keeping my costs low and concentrate on marketing. I have a friend who is a freelance writer who writes articles for TV, Radio and Newspapers, she knows many people in that venue. She said she would promote the business and the book by booking me on radio spots and writing not only press releases but do a feature on my company and book and would not charge me a cent until I started making money.

This business would require far less money and it is recession proof - actually, more people are in need of my services now that credit scores are even more critical. My fees are no where near what these bogus credit repair services charge and... my structured plans actually resolve the issue's by paying them off where as other companies write dispute letters to have the credit issue's removed. Believe me, if they don't pay the debt they find their way back on the customers credit report.

So what do you think of my original business idea? Maybe I should just move forward with this at least I wouldn't be in over my head with the rent & expenses.

If you could let me know what you think of this I would be appreciative - I thank you so much for all your insight & advice so far - it has really helped me define my position on the Art & Frame Shop. You and Luckiest and Bridge are amazing to help us all on this forum - Thank You so much!

I will wait to hear your take on this reply

Best Regards,

Gail

Re: Seeking Funds to Purchase Well Established Business

Adducent — Mon, 16 Jun 2008 19:46:09 GMT

Hi Gail,

You're welcome. That rent is pretty steep and would be a tough one to take on in a new business (for you) that is slipping. His continuing sales drop is probably primarily due to stopping advertising and not keeping good retail traffic hours. I'm somewhat familiar with some past retail ventures/clients in the Scottsdale / Biltmore area and I think that it is very important to maintain presence in those areas so that consumers know you are there and open; so much of retail, especially art, can be an "impulse buy" so you need to be there when the customer is ready. But even well-to-do affluent people I know, not really impacted by economic concerns, are starting to watch their discretionary spending. So that is something you have to take into account when looking at starting or buying a business right now that may be affected by that thinking.

If you move forward with this; when you structure your sub-lease ... I would not be shy about establishing a much lower rent payment to the current owner so that you have a period of time to see if you are going to have success in building the business back up. If they don't sell the business then they would apparently have to pay the lease anyway so your rent to them would defray some of their cost. As the new owner you are buying a shakey business that is not as profitable as it once was (which the current owner admits they are the cause of) and you should not have to pay that full rent until you get it turned around.

Do not frame this deal in the context of buying assets that are worth more than what you are paying. You have to view it as "long-term will those assets and my efforts generate enough revenue for me to cover all my debts and make it worthwhile for me to own the business". Structure the deal to your best advantage so you have a good shot at making it work to where you can afford to pay the rent and still do well in the business and keep it running and growing. That would serve best the interests of all the parties involved.

Regards,
Dennis Lowery
Adducent, Inc.

Re: Seeking Funds to Purchase Well Established Business

driven — Mon, 16 Jun 2008 19:16:18 GMT

Hi Dennis,

Thank so much for your reply - super insightful for me. You have asked some great questions. I put a call into the broker regarding the income and I am waiting for her to call me back. I have a feeling it would be his income added to the actual net and your right I need to know which it is.

As far as the $6800.00 rent - the landlord has already said that he is holding the seller to the lease until it expires in 2014 and that the seller will be responsible for the rent until then - so yes, the seller would have to give me a sub-lease. I have already informed the broker since a new lease can't be negotiated that the sub-lease with the seller will in no way make me responsible for his lease with the landlord.

The rent was a big issue for me, even though it is warranted in that town I felt in this economy (even in a wealthy area) that it might be too steep. And your right the seller may whole heartedly believe he is selling because he doesn't really like doing it anymore when in fact the slowing of business pushed him in that direction. He did call the business broker last week and told her to tell me that it has been slow - now, is it because he stopped advertising 9 months ago? Because he is closing early during the week and 1 to 2 Saturdays a month? Because he is closed on Sundays? or.... is it the economy even in a wealthly town like Scottsdale? or a mix of all?

I thought about moving the business I am just concerned how much it would cost to move the equipment and have it set up again (saw to cut framing, huge lighted matting box etc.) maybe it is more cost effective in the long run to do that considering the rent of $6800.00. I guess I need to get some estimates and look for vacant stores to come to a conclusion. I just don't have alot of time.

I will definitely write you when I know about the cash flow. You were a tremendous help, you gave me alot more to think about which I need to think about.

Best Best Regards,

Gail

Re: Seeking Funds to Purchase Well Established Business

Adducent — Mon, 16 Jun 2008 18:35:28 GMT

Hi Gail,

The owner may be sincere in what is telling you but keep in mind that a lot of small business owners whose business is dying lose heart after it starts to slide and not the other way around.

Did they define for you if the cash flow was net income, EBITDA or Seller's Discretionary Cash Flow (SCDF)? Usually SCDF is where they add back owners salary and benefits back into the bottom line number to show the owner's total compensation/profit from the business. Try to find out what the owners true margins are so you can run the numbers to see if you your self could survive while turning the business around.

Is that rent $6800 per month? That is a large monthly debt to support and in what for many is turning into a dicey economy ... taking on that could turn the current owners problem into a problem for you if you took over his lease.

Before doing that you should consider buying the assets of the business and moving it if possible to somewhere else in the area where a lower cost would help your bottom line and increase your ability to survive the drop in sales until you can build them back up. Another thing you could do is see if there are opportunities to co-locate the business with a complementary one; perhaps a fine furnishings store or even a camera store.

If moving the business is not viable and you decide to work a deal with the seller; I would not by any means let them off the lease. In other words; don't take on the lease obligation your self. Let the current owner retain it and you sub-lease from him for the net amount (gross rent less what he said he would contribute to rent). This is assuming that the landlord is willing to go along with this.

I hope the above helps or gives you some food for thought. Let me know how things progress for you.

Regards,

Dennis Lowery

Adducent, Inc.

Re: Seeking Funds to Purchase Well Established Business

driven — Sun, 15 Jun 2008 01:02:48 GMT

Hi Dennis,

I do agree with what you have said - I did receive the financial's for the business - 2005 he grossed $175,000 cash flow $71,000, 2006 he grossed around $180,000 with a $76,000 cash flow, 2007 he grossed 156,000 with a $38,000 cash flow and then for Jan thru May 2008 he dropped to a gross of $55,000 to date with a cash flow of 21,000. After 8 years he just lost interest in the business so he placed it for sale in October of 2007 for $125,000 (what the assets were worth) due to the high rent of 6800.00 it was hard to sell - so he kept dropping the price - it $40,000 and by May he dropped it to $20,000, many people have looked at it and loved it - just hated the rent. To be realistic the rent is right on target for an super upscale area - the mall itself is huge and is only 4 years old., The rent concerns me also in this market climate but it is what it is. The next closest Art & Frame shop is over a 1/4 mile away.

The landlord will not re-negotiate a new lease for me - he told the broker that the seller will remain responsible for the remainder of the lease which is 6 more years whether I buy the business or not. The seller sweetened the pot so to speak when he heard the landlord would not reduce the rent for me - seller said he would contribute 400.00 toward the rent for two years.? This shop has zero debt, light expenses except for the rent, all stock, artwork, including limited editions, machinery and equipment all included - really its....put the key in the door and do business nothing needs to be done or ordered to resume business.

He did start another business about a year ago (an Internet business) which is taking off for him so his head has been there the last several months to a year. He seemed very honest when I met him - he said the bus. had slowed down because his heart just wasn't in it anymore and that he started closing a couple of hrs early during the week and one saturday a month to do his other business which has hurt his sales.

Question one......Even though it is located in one of the richest towns in AZ could the market climate right now be affecting it more than the seller is saying? Could advertising help? (he also stopped advertising 9 months ago and that is when I noticed his monthly gross getting smaller each month to present) I know I could make it successful with my marketing and sales plans but can I do it in this economy..rich area or not I mean it is an Art and Frame shop and do people still buy art and frame prints when the economy is tight? Would being in a wealthy area dotted with tourists and resorts not affect business? I am in a quandary on what to do - if the rent wasn't so high it would be easier for me.

If you have any insight for me I sure would appreciate it.

Best Regards,

Gail

Re: Seeking Funds to Purchase Well Established Business

Adducent — Tue, 10 Jun 2008 14:28:51 GMT

Hi Gail,

The first thing that comes to mind is not so much about a source for the funding but rather; why is the owner selling it so cheaply if he has $125,000 to $150,000 in assets and makes a profit of at least $40,000 each year? There are a lot of due diligence questions you should get answered and things to look at. A couple of things: Do they have appraisals to prove the value they are putting on the assets? Also, check their financials for the last 3 years and see how sales and profits are trending.

It is possible for funding to be created for many types of acquisitions, from the deal itself, but sometimes it is better to pass on a deal if it is the wrong one. I discuss that in detail in one of my books on LBO's and buying businesses but simply put: "do not buy a business just because you can ... make sure it is the right business for you to buy before you do the deal".

Most small business sellers want cash; but in reality, order to sell they must be willing to take back financing. Rarely do small businesses sell for all cash ... and frankly a buyer would be making a mistake if they did pay all cash. There are better uses for their cash and there is compelling reasons to have the seller have some sort of "skin" remaining in the deal. What does it tell you about their faith in the business if they won't carry back financing? If they demand all cash and you can't negotiate other terms then you may want to look at whether the business is viable long-term. You don't want to buy a business that is fading or going down-hill.

Right now conventional bank funding can be difficult to line up unless you have a track record for them to rely on. But there are sources of funding that you can try that don't care about your track record or experience. Search online for asset-based lenders or hard money lenders. These lenders are interested in the value of the collateral only. The problem you are going to be faced with is that many do not like to do small transactions. So when you contact them see if they have a minimum transaction size and if they would have interest in your deal. You can also check your local paper for hard money lenders. Many wealthy or well capitalized individual investors put their money to use in that way and will do smaller transactions. of course you have to be sure that in your evaluation of the business that its cash flow will pay for debt service.

If the assets are worth what the owner claims then you should be able to find a source for the down-payment.

I hope the above helps you. Let me know how things progress; feel free to contact me if you'd like to discuss your deal or have other specific questions and I'll help you with what feedback I can give you.

Dennis Lowery

Adducent, Inc.