7.
Re: Question for the group Aug 11, 2008 10:24 AM
in response to:
Basket_Guy
There are a lot of important things to cover when buying a business (and how to determine if its possible to buy it without using your own money). I've written a whole book on that subject but it is not practical to put all of that info here in reply to your question. But I will list here some high points that you should look at first:
- Why are they selling? Is the owner selling because he "wants" to do something else with is life or he "needs" to because he sees the business not doing as well in the future as it has in the past. The real reason for selling is very important to determine early on as best you can.
- What is the revenue and net income of the business for the past 3 to 5 years? Check their financials for the last 3 years and see how sales and profits are trending. Are they going up, flat or declining?
- What do they forecast for the next 3 to 5 years?
- How strong is the balance sheet ... i.e. are there assets with value and is the business carrying debt?
- Do they have appraisals to prove the value they are putting on the assets? Can any debt on the books be assumed?
- Will the owner carry back any financing?
- Have they established an asking price? Do you know what they are basing their asking price on? Is that a fair and acceptable price?
- Can the financials be realistically re-cast to roll more to the bottom line; to more clearly show investors or funding sources the businesses ability to pay them back?
There are many more questions but the above will be critical when it comes to putting together a plan to line up deal structure to create cash and arrange a financing package to buy the business. Putting other due diligence questions aside for now,
it is possible for funding to be created for many types of acquisitions, using the assets from the deal itself and by crafting suitable deal structure with the business owner.
Most small business sellers want cash; but in reality, in 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. The compelling reason to have the seller have some sort of "skin" remaining in the deal is "what does it tell you about their faith in the business if they won't carry back financing?"
Conventional bank funding can be difficult to get unless you have a business record for them to rely on, great credit, provide personal guarantees and collateral. So you have to look at the acquisition from all angles to make maximize use of whats there to work with not only with your own resources but what the business can bring to the table itself. By doing that kind of work, evalution & analysis of the deal and by being prepared you greatly increase the odds of arranging funding to buy the business.
That are many ways to create cash to buy a business or stretch any cash you have on hand so that you can buy more of a business. Determing what can be done starts with finding out what you have to work with and then using it in the right way. You might want to consult a professional with experience to help you with that or do some studying to get more knowledge about how to buy businesses under your belt.
Keep this in mind about the viablity of using other people's money to help you buy a business:
- Asset based and collateralized lending has been around for hundreds and thousands of years.
- Using the assets and cash flow of a business to help you buy it is something that's commonly accepted in the financial community.
- There is a whole industry of lenders and investors who focus just on that very thing.
- There are literally hundreds and thousands of investors and lenders that put money into businesses based on the assets of the business and its cash flow and ability to pay the money back.
- You do NOT have to create (or take on) a risky situation where to do the deal requires over-paying for or over-leveraging the business.
All of the above, are the reasons that leveraged transactions have worked in the past, they work today and will work in the future.
But remember, sometimes it is better to pass on a deal if it is the wrong one. I discuss that in detail in my my book I mentioned above on 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. So it is very important to make sure that you have established that price and terms of the deal are fair and that it is the right business for you and that it meets and passes all of your due diligence.
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.
