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    10 Replies Latest reply on May 26, 2008 11:49 AM by Adducent

    Acquisition-Merger Assistance

    Watchful Newbie
      God has blessed me with a very successful group daycare home with 16 children grossing over $103K per year. We have a waiting list of children, and we continue to turn children away. Business expansion is absolutely necessary.

      We recently made an offer on a turn-key daycare center that has 32 children, and is grossing approximately $225K per year. The acquisition-merger includes a commercial mixed-used building in excellent condition, goodwill, equipment, vendor lists, etc. The owner is asking $550K. I've made an offer of $500, which is under consideration, along with 25% seller financing. I have a credit mid-score of 682, and have appx. 2 - 3% cash for the deal. The businesses have excellent cash flow.

      How can this deal be effectively packaged, and can anyone help, or recommend someone who can?

      Thanks for your help -- and hello to all the community!! I'm a first-timer.
        • Re: Acquisition-Merger Assistance
          Lighthouse24 Ranger
          Welcome to the community and congratulations on your business success. Can you explain what you mean by "effectively packaged" regarding the deal you described? (Are you talking about describing the proposed deal for potential lenders/investors -- or something else?) Thanks . . .
          • Re: Acquisition-Merger Assistance
            LUCKIEST Guide
            Watchful, You have a very successful group daycare home.
            how long have you been in business??
            Every business person should have an Accountant, A Lawyer and an
            Insurance Agent.. They should be able to help package a deal.
            If they can not, try SCORE.
            SCORE is FREE.
            Good luck, LUCKIEST
            • Re: Acquisition-Merger Assistance
              Lighthouse24 Ranger
              I'm not sure if this is the input you're looking for, but the viability of the deal would seem to hinge in part on the building, equipment, and other capital assets. Are they free of all liabilities? Could they be used to secure a portion of the financing, or even be financed separately?

              As far a "packaging" the proposal, my suggestion is to have a well-written executive summary (1 - 2 pages) and a ten minute verbal presentation prepared, both of which cover the following:

              1. Summarize the qualifications of the principle participants who are seeking funding. (The lender is betting on you to make this work, so be sure to impress them with how well you know the day care business.)

              2. Itemize the tangible and capital assets associated with the deal (including the answers to the questions about liabilities and the possibility of using these assets as security).

              3. List any relevant facility certifications and staff member licensing/credentials that might be considered intangible assets, and the steps you have taken (or will take) to retain or enhance those elements of the operation.

              4. Provide cash flow and cost/revenue projections through the life cycle of the requested funding. (Be sure these are detailed and thorough, that they reflect realistic increases in things in like utility costs, taxes, and insurance, and that they show an ample cushion for repayment.)

              5. Clearly describe your competitive advantage in the marketplace -- what separates you from other day care centers and what will ensure that you remain filled to capacity in the future? (What if the economy or a local event like a mass layoff at a large employer resulted in people having to pull their children out of day care? What it is about your facility would cause parents to move their children from somewhere else to fill any openings you had? Your competitive advantage should help address that.)

              6. Outline the specific components of your operation (and/or the other operation) that are already efficient and poised for expansion, such that combining the two facilities will actually decrease total operating costs. (For example, if one facility currently has state-of-the-art integrated business management software and the other has a hodgepodge of manual systems, ad-hoc tools, and outsourced services, then highlight how using the integrated software solution for both will likely lower costs and increase efficiency.)

              7. Explain why the timing of this deal is perfect -- why this is the ideal moment to expand your operation in this way. If possible, provide market research, local surveys, or parent interviews as evidence that a significant business expansion opportunity will be missed if you cannot obtain funding to close the deal.

              Hope this was along the lines of what you were seeking. Best wishes.
                • Re: Acquisition-Merger Assistance
                  Watchful Newbie
                  Lighthouse24:

                  Thank you very much for your input. It was very helpful in capturing the elements necessary to properly package from a lender's perspective. It was very thorough input. Thanks again! Also, since the cash I have to put in the deal is only 2 - 3 %, what impact if any could that play? Do you have any recommendations for a lender for this type of deal? Again thanks!
                    • Re: Acquisition-Merger Assistance
                      Lighthouse24 Ranger
                      Whether or not you can make this happen with only 2 - 3 percent in cash probably depends on the status and value of the capital assets that are part of the deal, on any other assets you can use as security, and on how well you present the points we've discussed. Basically, the evidence you present has to make it easier for the lender to say "yes," than it is to say "no" -- all you can do is put together the best case possible and present it.

                      I don't have any specific recommendations or insights about lenders. If your regional economy is healthy and you have a locally-owned bank that does commercial lending, you might find that they are the most receptive.
                      • Re: Acquisition-Merger Assistance
                        dublincpa Scout
                        Having that little cash to put in is definitely a strike, but it doesn't mean you're out. This assumes that you are doing an asset purchase. If you and the seller are thinking stock purchase, there is almost no way to finance it in a conventional way. As Lighthouse24, pointed out cash flow projections will be critical. Definitely try a local bank, but SBA might work to. You need to be able to demonstrate that after all of the other bills are paid, there is enough left over to pay an owner's draw or salary, the loan payments and have some cushion, usually about 25% of the owner's draw and loan payments combined. There is a range for different lenders of 10-50% though.

                        The lender decides the necessary owner's draw by looking at your personal finances to determine what you need to pay your own bills. They add your total personal monthly payments and expenses and subtract what is contributed by other sources of income sucha as investments, spouse's wages, alimony, child support. The loan payments are what they are. Your net cash flow will need to be great than 1.25 times the sum of those numbers. Be sure to make an allowance for taxes. Whether you operate as a C Corp, S Corp, LLC or Sole Prop, the principal part of the loan is not a deduction for taxes. Your deductions come from depreciation/amortization of the underlying assets in an asset purchase. Your loan will probably be amortized over a shorter life than the assets are depreciated. This means that the difference between the principal you pay and the total depreciation/amortization deductions will create income in the first several years or longer.

                        If you will continue to operate both locations or at least keep the prior customers and consolidate expenses, the existing business has a value in the transaction to the lender, especially if the existing business has little to no debt. This can help a lot with little cash available.

                        What kind of entity are you? How about the seller? Are the real estate and business in the same or separate entities currently? The SBA would likely require you to purchase the business and real estate in the same entity even though, your lawyer and accountant would like them to be separate. If you can't get conventional financing, there may be other ways around it. Depending on both parties desire to complete a transaction and the availability of other buyers to the seller, there is almost always a solution.

                        If you or your accountant/attorney want to discuss anything, feel free to email me at dublincpa@gmail.com. I won't be looking to bill you for pointing your transaction in the right direction. I have a fair amount of experience on the structuring of transactions, though I don't have a lot of experience with the lending aspects.

                        I hope all works out for the best even if that means the deal doesn't go through. Sometimes the best deal in the long run is no deal even when you really want it badly. Better to miss a good deal than get stuck in a bad one. I know from my personal experience. Good luck.
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                    • Re: Acquisition-Merger Assistance
                      Tracker

                      Hi and welcome to the community!

                      Congratulations on your successful business and the opportunity to expand that you described below.

                       


                      I can help you with some guidance on your mergers & acquisition and plan for expansion (including making it "investor-ready" for presentation to lenders/funding sources - I also may have some funding sources that can help you with the deal) but that would be too lengthy to get into in a "back and forth" forum reply. Please look at my profile, for information about me and my contact info, and other posts in this forum. I'm going to be out of the office shortly for the rest of Memorial Day but will be in the rest of this week if you would like to give me a call or email to set a time to talk.

                      Regards,
                      Dennis Lowery
                      Adducent, Inc.