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    3 Replies Latest reply on Jun 11, 2012 11:18 PM by Jeri Quinn

    Looking to buy a business

    looking Wayfarer

      Requesting some advice form the forum on the following:

      I have found an automobile transport company that has been in business for 27+ years and the owner is ready to move on. I have reviewed the last 5 years tax returns and P&L and the company is pulling a sustained profit of 380K+ each year.

      The real estate is conservatively priced @ $550,000. The seller bought & developed this property specifically for this business & spent $684,000 on the acquisition. Recently, the adjacent land, which is very similar, sold for exactly what the seller paid 5 years ago. Regarding the price for the business, the trucks have recently had a certified appraisal by an appraiser recommended by TD Bank for $1,009,000.  If you strip the tangible assets of $550,000 (real estate) & ($1,016,650 (trucks & small assets) from the total price of $2,295,000, the intangible value of the business is priced at only $728,350. the owner would be willing to be somewhat flexible on price & terms, and will finance the business with only $600,000 down.  If I have him strip out the real estate he would only require 350-400 down and I could lease the land back. I have about a 100K but need to get the rest in order to make this work.

      With the information given does this look like a good opportunity? Any ideas on how to ge the rest of the money for the down payment?

       

      Thanks in advance for advice and input.

        • Re: Looking to buy a business
          Uncle Leon Tracker

          Please note that affer re-reading the details and re-figuring, I have made a slight adjustment to my opinion.

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          I was a business broker  for a couple years, riight before retiring.  My judgement (Opinion) indicates that (providing that the information is correct) this business is priced a bit high, but with, a  fair offer for financing.  This financing offer indicates that the current owner has great confidence in the business to continue to provide this profit. 

          _ _

          After adjusting for real estate, the business is priced at a 4.6 multiple of net profit.  (The assets of the business are not ad-ons.  They are necessary to conduct the business.  They are not assets that you would want to own if you did not need them to operate that business.  Therefore, The value of these assets should not be removed before figuring the multiple.)  In my opinion, a biz of that (financial) size would be reasonably valued at 3X on the lower side and 4X on the higher side, with 3.5X being a reasonable price.  The financing adds some value.  Having not figured the "profit after debt service", I am not in a position to evaluate the "common sense value".  After you work out the "profit after debt service", see if it makes sense to you.  If it does, it may be worth paying a premium for this biz.  Just understand from the start, that you ARE paying a premium.  But if the "common sense value" is comfortable for YOU, it might be worth the premium.  There are not many businesses with consistant profit backed by 27 years of operation.

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          This financing offer is a prime example of a "Win / Win" situation.  It's obviously good for you...but it's good for him, also.  In retiring, he doesn't need "assets" (bulk money), he needs cash flow.  The financing situation will provide that for him.  And, not the least consideration is that the tax situation is much more favorable for him by not receiving all funds at once.

          - -

          Naturally, consider the condition of the assets.  For example, if two transport trucks will need to be replaced within the next few years, an adjustment should be made for this.  Since you would need these funds soon, any adjustment should be, at least partially, made from the down pmt.

          - -

          You can negotiate the down pmt more ideally (not just in your favor, but for both of you)  if you find out what he will do with the Down pmt.  Obviously, he wants you to have a lot to loose if you default.  That's appropriate.  If he wants to buy a new airplane (boat,  etc.) he probably will not want to negotiate the down pmt.  If he just wants you to have a strong committment, he might be a little flexible.

          - -

          All things considered, I would suggest that you include the property in the purchase.  It adds considerable value to your purchase.

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          If Down payment is a problem, and if necessary;  this business transaction appears to be ideal for a "Small Business Administration" (SBA) Guaranteed loan.  You may wish to contact a local bank (SBA "Preferred" lender) to discuss it before proceeding.

          - -

          You may also negotiate with the seller to be available to you as a "Mentor" (at an agreed upon rate) after you pass your "Transition" date.  As the one holding the note (or if an SBA loan, holding a second position note), it is in HIS best interest to assure your success.

          - -

          A 27 year business with such firm business records matching the tax returns is a very precious find.  But, just because the current owner (with 27 years experience) earned $380 K / year, doesn't mean you (as a new owner), can.

          - -

          Let me also very strongly warn you:  The current owner has tried and true operational methods in place.  Even if you see things that can be changed for the better DON'T DO IT.  Like a tennis coach of mine once advised me: NEVER CHANGE A WINNING GAME.

          1 of 1 people found this helpful
            • Re: Looking to buy a business
              looking Wayfarer

              Thank you very very much. This was a very helpful and informative response.

                • Re: Looking to buy a business
                  Jeri Quinn Adventurer

                  Super reply from Uncle Leon. It's all about the tangible assets from the business. Have you looked at the intangible assets? Is the owner retiring? When you say 'moving on', is he going to start something new? If so, is he taking any employees with him? Or if he's retiring will some of those 27 year veterans retire also?

                   

                  Are there written operational procedures?  What's the culture like? Has the business been dominated by the owner so that it will not function easily without him?

                   

                  Does he hold the key to all the client accounts or is there a sales team that functions whether or not he's around to call the shots? Does he own the strategic relationships? Will he take the time to transfer those relationship to you? It's in his best interest to do so, so you keep the business profitable, But it's good to write it into the agreement.

                   

                  Are any of the vendor relationships dependent on the ownership of the company? Some vendors want to reassess service levels if ownership changes. Good to write that into the contract as well.

                   

                  Good luck if you decide to move forward.