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DADof3
12-11-2013, 12:53 PM
Hello,

I am the VP of a small-medium sized commercial laundry company in the very early stages of talking with the owners about the possibility of purchasing the business. It was not on the market when I came to the owners with my interest in buying and it is not now. My questions are (And im sure I can find the exact answers with a little more searching of the site, but wanted a little more specifics)

1: I will need to be financing close to $800k, I have heard but not confirmed that I will need close to 20% down. So basically im looking at what are the avenues for financing?

2: Good value of the company? I know there is going to be a estimator coming through to give value of assets on things like equipment and inventory, but Im interested to see how close I can come with my own evaluation. Its convenient that I already know the financial position the company is in. What are some ways I can estimate value using gross income or total revenue using our P&L statements?

3: Should I consider looking for a partner? Why and Why Not?

4: Private business loans from individuals? Should I consider getting a business plan together to present to individuals for Private Funding? I have a few people in mind that i think may be interested in investing.

I do have many more questions but this is a good start, any advise will be appreciated.

Thanks!

Freelancier
12-11-2013, 02:32 PM
There's a few ways to look at this. You have the assets less secured and unsecured debt + "reliable" accounts receivables - short-term accounts payables. That gives you an idea of the underlying asset value of the company. Then you have the income stream (not the revenue stream, but what you're left with at the end of each month to put in your pocket), that's gotta not only pay any A/P, but also the loans you plan to take + any profit you want to have to live off of.

Also look at an owner-financed arrangement, so that instead of a lump sum, you're paying him a monthly amount (including reasonable interest) in addition to a smaller lump sum.

Only look for a partner if there's something about the business you can't do (e.g., raise a ton of cash). Everything else you can hire someone.

Twhansbury
12-30-2013, 03:45 PM
Great advise from Freelancier.
Also adding
-review the assets make sure you agree with the value. Cost to replace is not always right neither is current book value if its been completely depreciated. Look at liquid value.

DADof3
01-04-2014, 03:57 PM
Great info thank you! Ok here's the latest, still looking at options but were talking about around 100k down and the rest owner financed at 7% for 7 years. 7% sure seems high when CDs are at around a quarter percent if I'm not mistaken. The business can handle the payment easily but the things I'm concerned about are: the owner of the building we are in is about to pass away leaving his finances to be looked after by his wife, I'm not sure exactly when our lease comes due there. The equipment is aging and no one knows it better than me, our largest single account contract is also coming due within the next few months, and the part that really gets me thinking if the amount we have been talking about (nothing's final) is quite a bit more than I expected, meaning I can go and startup another business just like this one with newer equipment and build the accounts for less than I would be paying here... Just makes me really think about it.

Harold Mansfield
01-04-2014, 05:40 PM
wife, I'm not sure exactly when our lease comes due there. The equipment is aging and no one knows it better than me, our largest single account contract is also coming due within the next few months, and the part that really gets me thinking if the amount we have been talking about (nothing's final) is quite a bit more than I expected, meaning I can go and startup another business just like this one with newer equipment and build the accounts for less than I would be paying here... Just makes me really think about it.

I'm no expert in this area, but common sense tells me that if you can do the same thing, cheaper, with less expense and overhead and get the same or better results...why buy an aging business with an uncertain future?

Fulcrum
01-04-2014, 05:46 PM
7% is actually a fairly good interest rate for a business loan. It can also be used as a negotiating point when trying to bring the final selling price down or setting other terms. One thing you should have included in the owner financing is a "right of first refusal" in the event the business seller ever decides to sell off the financing note.

A couple of things that need to be finalized, or made a condition for sale, is the lease being extended at fair terms as well as getting the large account renewed. If both of these do not happen, it could be either a deal breaker or a point for you to renegotiate the final selling price and terms. One other thing, and it goes against everything entrepreneurs stand for, "Don't just do something, stand there".

Freelancier
01-05-2014, 08:49 AM
7% is a VERY good interest rate for a corporate loan. There's a reason a CD is at a 1/4%... there's NO RISK. You are a risk. A low-rated bond would be in the 6-8% range, junk-rated bond would be higher. Because you aren't rated, it could be much much worse.

As for the condition of the business, that's all part of the due diligence phase... any information you need to evaluate your deal needs to be out in the open. If you need to pay for people to come in to evaluate equipment or contracts, do that. Better to know now than to find out later when it's too late.

DADof3
01-06-2014, 10:29 AM
Well thats good to hear about the rate, Ive spoken with some who say its high (other business owners) The problem Im having now is if we made 140k in profit last year and have 175k in equipment and inventory should the asking price be near 1mil? We havent had an official appraisal yet so its a rough estimate. All I have been hearing for normal business sale is 3 years profit plus equipment and inventory...thats not anywhere near 1mil, which is what the current owners think its worth. They will most likely give me a number around 700k. Any thoughts are welcomed.

Freelancier
01-06-2014, 10:36 AM
Yes, each side should get an appraisal done by their own appraising team. I'd think 3x-5x profits plus actual asset value (instead of full asset value) minus debts would be about right for a going concern. You might kick in more for "goodwill", but often that turns out to be a bad idea, because no one really knows how to properly value existing customers and brand awareness except through the profits they bring you.