*Non* real estate investing finance question

2 Replies

I know this is a real estate investing forum but I didn't have any other relevant forums I'm a part of to ask and you're a smart bunch so here goes. 

Summary is DH manages 6 franchise locations of a business for a couple investors in our area. They are interested in selling and approached him about potentially buying them. Before we dive into the books and whether its a good deal (DH roughly knows the finances as that's part of what he oversees, we've just never looked at it from an investment standpoint before) I'm intrigued about whether we could even borrow that amount of money and what our options are for financing the purchase of an existing business. 

I briefly chatted with a traditional bank today. In summary they said no less than 15% down, loan has to be approved by the SBA, current seller has to give 10% backing to ensure they oversee a smooth transition. 10 year loan at 5.5%

We're potentially looking at a $400k purchase price (total ballpark at this time, they said to make them any offer). We have awesome credit scores but just having purchased our latest real estate investment, I don't have anywhere close to 15% down on that kind of loan. 

The current owners did bring up that they would consider financing for us; however, we'd need the means to pay off their existing loan which is around $150k. 

So my question is, are there creative financing options I could be exploring? If we took them up on seller financing, could we potentially borrow that $150k or would the bank never go for it because the other $250k is financed? I could put 15% down on $150k, I'm not working with $0 but I don't have $60k to put into it. 

Secondary question. Who do you turn to to help you evaluate a business investment? This is new territory and I don't feel like its a simple as evaluating a real estate deal. On the one hand I feel like I'm in over my head with this, but on the other, this could be a really great opportunity for us if the numbers make sense. 

That is exciting!  

There is a volunteer chapter of the SBA, called SCORE (service corps of retired executives) - they have chapters all across the US.  I think it would be worth your time to give them a call and see if they can meet with you - I found their experiences very helpful in my own business pursuits.

You will want to evaluate portions of the business differently.

Inventory

Real estate assoc(if any)

Financials and track record (last X years revenue/exp, trends, debts, etc)

Business "goodwill"

You will also want to make your own assessments as to 1) the value of the employees and training they've had and a forecast on how much turnover you will experience as a result of the sale (because you can count on there being *some*)

You will also want to assess the economic conditions and potential future of this business to see if the value will go up or down.

All of those factors should play into the price.

Also, sometimes - depends on the loan, but you can assume a loan in this scenario.  If that is the case here, then perhaps you can assume the $150K loan and borrow the rest from the sellers on some kind of owner carry deal...

Best of luck to you.

Good call on score! I've worked with them before and they're great.

Feeling so lost on this deal. I know what is a good rate of return on an investment property. How do I know what amount of profit makes a business a good deal? Is $5k a month worth it after all expenses? $10k?...Is there a formula for this?

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