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    9 Replies Latest reply on Jul 8, 2008 8:54 AM by Adducent

    odds of getting loan to purchase existing business?

    smileycj1 Newbie

      My fiance (29) and I (25) live in Connecticut and are currently looking into buying an existing business. We are leaning toward purchasing a liquor store. One in particular is listed for sale at $90,000 with $55,000 net profit. The store is located in a mall area near large stores like Sears, etc.

      My question is whether we could qualify for a business loan. We have a lot of good things going for us - we are currently employed full time with good salaries (responsible), we own a home (with not much equity), have no debt beyond our mortgage, have excellent credit (mid-700's), and have a total of $46,000 we can invest into the business. The downside is that we are young and have no business management experience (though I have a lot of resources at my disposal - my grandfather started and ran a successful insurance claims adjusting business, and my father was a finance director for a multimillion dollar company for 20 years. Both are willing to provide advice and assistance).

      Is there any chance of us being approved for a business loan? What if we find a business that costs more than the $90,000 in the example above - would our chances be worse due to the higher dollar amount?

        • Re: odds of getting loan to purchase existing business?
          dtominus Wayfarer
          Please contact me , I can help you Get that store,


          David Tominus
          • Re: odds of getting loan to purchase existing business?
            LUCKIEST Guide
            Purchase existing business, Hello and Welcome

            *Try SCORE. SCORE is FREE, *SCORE "Counselors to America's Small Business" is a nonprofit
            *association dedicated to educating entrepreneurs and the formation,
            growth and success of small business*
            *nationwide. SCORE is a resource
            partner with the U.S. Small Business Administration (SBA).*

            SCORE can help you succeed in person or online

            Good luck, LUCKIEST
            • Re: odds of getting loan to purchase existing business?
              dtominus Wayfarer
              Applying for a sba loan , I would also consider you take a free business course , check out your local chamber of commerce , They have business training and some have meetings, you will meet with other business owners its all ways good to know the right people!! I think you shouldnt have a problem




              David Tominus
              • Re: odds of getting loan to purchase existing business?



                If you prepare properly I think your chances are good that you can arrange financing to buy this business even with your lack of management experience. But you'll need to structure things in the right way for that to happen. I'll break my feedback to you into two sections:


                1) Sources of funding to buy the business (a couple of things for you to consider in your situation):


                In many situations like this, there are ways to create cash to buy a business and that cash does not have to come out of your pocket. Depending on the details for this liquor store ... you should be able to structure something acceptable to the owner.

                • Most small businesses sell with some amount of owner financing (where the owner carries back a note that you make payments on ... like a real estate mortgage only this would be secured by the assets of the business). Usually in that scenario, the buyer makes a 25% down payment and the seller holds the 75% balance on the note payable to them. I would start with that as my first offer if you have not already gotten into deal structure and an offer to the owner. I would not pay the owner all cash for their business. A couple of reasons for this: it may not be necessary (again most businesses at this size carry some owner financing when they sell) and you want them to give you a transition period so that you have an opportunity to learn more about running the business (more on this shortly). If you cash them out they do not have much in the way of an incentive to provide you a good transition period to learn about the business. They can just take your cash and walk away and probably will not care about how well you do as the new owner. If they are receiving payments on their note ... they have a vested interest in your success with the business. That makes a big difference.
                • You may be able to leverage some of the inventory or furnishings/equipment value if it is free and clear (in other words ... there is not any money owed to the suppliers). Example: if the inventory is valued/appraised at $50,000 you could probably get an asset-based lender for $25,000 (50% of the inventory value). Another way to use that value is to let the owner retain ownership of the inventory at its stated (or real) value and then pay them as the inventory is worked off. That could create enough value to pay for a good part of the purchase price (assuming that inventory is included in their asking price). So you have some options with using inventory value if it is free and clear ... if it is encumbered (money is owed for it) then you do not have the use of that value.

                Your business plan and financial projections should clearly show to you, and to any prospective funding sources, that the business can afford to pay back any debt created by the above. That would be part of your evaluation of the deal to make sure that the numbers work for you.


                2) Management of the business once you own it:

                • Your offer to the owner should include a transition period so that you learn about the business directly from the owner. I would make that period no less than one month (included in the offering price) ... longer if you can get it and if possible pay (if the business can afford it) the owner for an extended transition/support period as a consultant so that you can get even more exposure to their knowledge base for the business. Just be sure that you make decisions on the business based on your judgment as the new owners and what is right for the business under your ownership.
                • As Luckiest said; meet with a SCORE representative and/or take classes in small business management (there are many SBA and SCORE related classes available online for free I believe). That will help you with some practical aspects of running a business.
                • Also in your business plan list your personal contacts with business experience as your "Board of Advisors" that will help establish that you do have those resources to draw upon to make up for any perceived weaknesses in your management experience.

                The above is applicable to any business that you look at and not just this liquor store. It's the details of course that will determine what you can do to create deal structure and financing to buy a good business without using a lot (or any) of your own money. But if you don't dig into it to see what options you have then it is very easy to spend money you don't need to or you even may not be able to do the deal if you think you do not have enough money of your own. Always look at at business acquistions from the viewpoint of "how can this business help create cash to buy itself".


                I hope the above helps you. If you have a specific question I can help with just let me know. Best of luck to you with your plans to buy a business.


                Dennis Lowery
                Adducent, Inc.
                  • Re: odds of getting loan to purchase existing business?
                    smileycj1 Newbie
                    Hi Dennis,

                    WOW!! Thank you so much for the thoughtful reply - I appreciate it. What a great point about not paying the owner 100% and trying to get some seller financing. That thought never occurred to me and I will definitely follow your advice there. It's encouraging to know I can put my contacts in my business plan - as far as I'm concerned they are valid strengths and would be assets to my business. I've got a lot to think about, and if I come up with any other questions I will post again and seek you out! Thank you again!