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    11 Replies Latest reply on Aug 12, 2008 7:43 AM by Basket_Guy

    Question for the group

    Basket_Guy Adventurer
      I have run an e-commerce website since October 2003 (www. arcanabaskets.com) and have been looking for a physical location for a few years now with out any luck. I just recently paid off all the debts that I had. Well would you know it the business that I am very interested in has gone up for sale. This is an existing business and has been in business for 24 years and has an established clientele but has alot of room for growth. currently grosses about $600K. My question is:

      Is it possible to get a small business loan without money down using the business as collateral? I used my down payment that I had saved to pay off all debts.
        • Re: Question for the group
          LUCKIEST Guide
          Question for the group

          "Is it possible to get a small business loan without money down using the business as collateral"
          Good question. Do you have an accountant?? How about prior year tax returns??
          Have you developed a Business and Marketing Plan.

          Answer the above questions and then we can answer your.

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          LUCKIEST
          1 of 1 people found this helpful
            • Re: Question for the group
              Basket_Guy Adventurer

              Luckiest

              Thank for getting back to me, In answer to you questions.

              Do you have an accountant?? The business does currently have an accountant
              How about prior year tax returns?? I do have 2004 through 2007 tax returns.
              Have you developed a Business and Marketing Plan? I have done a Marketing and Business plan, 1 year Profit and loss projection and a loan proposal.
            • Re: Question for the group
              Milleisen Scout
              Generally speaking, no. Banks typically won't lend for a business acquisition if you don't have any funds of your own to put into the project. Especially these days, banks don't want to bear 100% of the risk, so they want you to have a significant equity in the business so you won't simply walk away if times get tough. The collateral you are speaking of typically isn't of great value to a bank since most banks don't have a strong handle on the value of the business assets (unless they are asset based lenders).

              Depending on the state of your existing business and personal finances, there may be options to acquire the business you are looking at.

              Jason Milleisen, Small Business Consultant
                • Re: Question for the group
                  Basket_Guy Adventurer
                  Milleisen Thank you for your response, The purchase would include land, building and existing business. That what I was looking at as collateral.
                    • Re: Question for the group
                      Milleisen Scout
                      Well that's a horse of a different color! If you are looking for a commercial mortgage, you'll need to come up with 20-25% for a down payment. When talking to bankers, it will serve you better to make a distinction between the purchase price of the real estate vs the price of the business. First, you need to find a down payment or the rest of my thoughts will be moot. Assuming you can come up with a down payment on the real estate, your best bet would be to have the existing owner hold a note for the business. If he is getting paid out on the real estate, he should be flexible about the getting paid out on the business over time. That note will need to be subordinate to the bank debt.

                      There are a lot of moving parts on a deal like this, but that's a general idea of how it could work.
                  • Re: Question for the group
                    Newbie

                    Answer to your question: Yes, depending.

                    The "depending is"

                    What is the curent and historical pre-tax net (as verificable, at least) by Corporate/business tax returns?

                     


                    How many customers exist in the assets of the company?

                     


                    What tangible assets will be acquired?

                     


                    • Re: Question for the group
                      Tracker

                      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:

                      1. 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.
                      2. 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?
                      3. What do they forecast for the next 3 to 5 years?
                      4. How strong is the balance sheet ... i.e. are there assets with value and is the business carrying debt?
                      5. Do they have appraisals to prove the value they are putting on the assets? Can any debt on the books be assumed?
                      6. Will the owner carry back any financing?
                      7. Have they established an asking price? Do you know what they are basing their asking price on? Is that a fair and acceptable price?
                      8. 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:

                      1. Asset based and collateralized lending has been around for hundreds and thousands of years.
                      2. Using the assets and cash flow of a business to help you buy it is something that's commonly accepted in the financial community.
                      3. There is a whole industry of lenders and investors who focus just on that very thing.
                      4. 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.
                      5. 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.
                        • Re: Question for the group
                          Basket_Guy Adventurer
                          Adducent Thank you for your reply, the answer to your questions are as follows:

                           

                          1. "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." The seller is looking to retire, it is a husband and wife and they have been running this business for the 24 years.
                          2. "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?" Net profits took a dip in 2006 but have come back up to normal levels in 2007 and are trending upward in 2008.
                          3. "What do they forecast for the next 3 to 5 years?" I have forecast a strong growth for the future with the purchase of the business, in part due to the current owners do not use marketing and advertising and secondly we will be post presidential election. From the research that I have seen the economy tends to up swing post election.
                          4. "How strong is the balance sheet ... i.e. are there assets with value and is the business carrying debt?" It is carrying minimal debt and the assets include; merchandise, equipment, building and land
                          5. "Do they have appraisals to prove the value they are putting on the assets? Can any debt on the books be assumed?" I do not believe the have an appraisal to prove the value, and I am looking into what depts. would be assumed by me.
                          6. "Will the owner carry back any financing?" Because the owners are retiring they do not wish to assume and financing.
                          7. "Have they established an asking price? Do you know what they are basing their asking price on? Is that a fair and acceptable price?" They have established an asking price that is under double of their gross revenue. From what I have research and know about the business this seems to be a fair asking price. I believe the company has not even begun to reach its potential.
                          8. "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?" I am not sure what is meant by recasting the financials.
                            • Re: Question for the group
                              Milleisen Scout
                              I believe in #8, Adducent means can you look back at the historicals and identify any expenses that can be considered as either one time expenses or as expenses that were realistically belonging to the owners. Perhaps they purchased equipment that they "expensed" in that year that won't be repeated going forward, or maybe they had the business paying for their car. Stuff like that can make the cash flows look better, and if you can show that they are legitimately not going to recurr, it's a completely ethical thing to do. I have seen this many times when buyers are making their pitch to lenders.
                              • Re: Question for the group
                                Tracker

                                You're welcome here's some additional feedback based on your replies:

                                 


                                1) Retirement is always good motivation; just look hard that the reason for retirement isn't tied back to the health and future prospects for the business.

                                 


                                2) Obviously its cash flow and profits that keep you in business. Be sure that the business can cover any debt you take on to buy it based on historical performance and still give you a good Return On Investment ... don't pin your hopes on making significant improvements to justify buying the business.

                                 


                                3) Make sure that your projections are solid; have them looked at by someone familiar with that industry or better still discuss with the current owners (though you may get a biased opinion from them - after all they want to present the best picture to a buyer prospect).

                                 


                                4) I would ask for appraisals on any significant assets like real estate or equipment to show that it is worth what they are carrying on the balance sheet or if it is at a greater value.

                                 


                                5) See number 4 above.

                                 


                                6) In my opinion, unless you have a lot of cash that you want to put at risk ... you should not buy a business where the owner is unwilling to carry back a note for some of the financing. If they are concerned about security for the note there are ways to address that - but what does the reluctance to carry financing tell you about how they feel about the value of the business going forward?

                                 


                                7) Gross revenue does not pay for the business. Cash flow/bottom line profits do. Depending on the business and asset values included in the price ... you should be looking at paying between 3 and 6 times net income or EBITDA. And look real hard at justifying the higher multiple.

                                 


                                8) Re-cast means to look at the financials from the perspective of your ownership. Depreciation on equipment may be higher (more write-offs) some expenses may be lower (owner's can be very creative with what they bury in expenses). You want to look hard at their financials to determine what you really have to work with. Often the balance sheet and assets can help you buy the business but the income statement is what pays for it. Get a solid feel for the financial picture of the business as if you owned it.

                                 


                                I hope the above helps and gives you some tips on things that you need to give some thought to. Good luck with your plans to buy this business.

                                 


                                Dennis Lowery

                                 

                                Adducent, Inc.