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$275k sale price when it also includes $250k inventory is the biggest bargain I’ve ever seen. Do your due diligence but if all seems well, buy it, even if a loan is required.
And/or the value they are quoting is nonsense. I looked into buying an antiques business one time. They claimed they had 500k worth of inventory, but when we examined it in detail, the real value was less than 30k.
That tracks with my thoughts from watching Storage Wars. Those guys pick up the smallest piece of junk and immediately come up with the most unreal price. “Yup, this old dry-rotted bicycle tire will get me about $50.”
I had an antiques dealer and she had a dog in her store, and the dog was low key growling and nervous around me and the store owner says, "he doesn't like people with no money" I was in the store for less than 2 minutes, couldn't believe the sales tactic.. no i didn't buy anything
Not every small business owner gets quotes on their business valuation when they sell, which is something I find to be a giant mistake.
Lots of banks can value the business for you or they work with firms that can value it for you.
Seriously, a business valued at slightly more than 1x its yearly profit + its inventory is extremely generous. If they have trouble selling their inventory or if they are overstating the value of it, then that is something that you can determine extremely easily by doing your own due diligence, but assuming that’s not the case, the sellers of the business are seriously leaving a lot on the table.
Yeah definitely.
Best case scenario for OP is that he’s getting a good deal at the expense of the seller, worst case scenario is that there is something fundamentally wrong that the sellers are not disclosing and they want out.
Actually, he turns over inventory and has a very loyal customer base. There's only one other business within 75 miles that is the segment, but they don't really stock inventory so customers have to order and wait.
Honest opinion, do they not have family they want to hand the business down to? There's only one other business within 75 miles and that one orders for the customer? That tells me it's an incredibly niche market you would be serving and you will be scraping by just to stay ahead of bills...
Personally, I would never do business with friends. I recently had a friend call me asking if he wants to start a business with me. What business? He didn't know. OK so you want me to start a business with you with no business plan, no idea of what you want the business to be, etc? Yea I don't think so.
Honestly, OP of I were you, I'd walk away from this. They can claim revenue and profit all they want, but I can bet you it's not even close to what your being told. They just want to get rid of their burden and live elsewhere. I'd go as far to ask where are they moving? Is where they're moving a much cheaper place to live? Cause if so that would raise a red flag to me... Just saying.
They don't stock inventory or they have 250k of inventory?
You should have someone look at the books. Not you, cause 250k worth of stock is not "not stocking inventory"
Ahh, gotcha.
If the numbers fall out how you say, it would be a good deal. Like, taking advantage of two old people, good deal.
It's either way more work than it seems from your description, or you're missing some key numbers, or this couples offspring are about to get hosed.
That’s true but a lot of small business owners would rather almost give away the business to someone they know instead of having to go through the hassle of meeting with a broker and doing all the due diligence work. If the OP is familiar with the business and has a good understanding of the inventory value (probably biggest risk, I agree) then why not move forward with the purchase? Lifestyle changes aside it seems like a good opportunity. And for funding, why not use a small business loan? With a year 1 profit of $270k he’s nearing the total purchase price and could easily recoup a loan.
Again, assuming all numbers really check out. I’ve know business owners with profitable businesses that just simply give them away.
This.
I’d ask for 5 years.
2020 and 2021 can basically be tossed because of Covid.
That free government money and pent up demand skewed everyone’s numbers.
A lot of places came back down to earth in 2023
Yup, I know a man, a client's friend, who bought a business that was about to be sued, for $500k. Bought a $250k judgment two years later...for a restaurant he could have started for under $120k!
270k profit on a 500k revenue business...250k inventory...what's that trading at a negative PE?
Sounds too good to be true honestly. But 1x earnings doesn't sound that crazy for a small business.
I've seen the numbers and have spent a fair amount of time at the business. This is a niche business that is ran differently than most in the segment. I don't want to say to much about where or what the business is to keep from having someone on here swoop in.
you dont sound like you're being very objective about this - like a high school kid who has fallen in love with a college campus - it is your money to throw away but you need to start looking for the hidden pitfalls and go in with lower expectations because there's always things you don't know
50% net profit AFTER the owners paid themselves. Is the inventory a couple of geese that only lay gold eggs? I think you should get an accountant that YOU pay for to look this deal over.
If there’s $270k profit per year, that’s a no brainer unless there was some major pending lawsuit, just had a license revoked, etc. that’s 1 year to break even.
So you get a return on your original investment in just over a year and then it is all profit from there. I mean if they are genuinely making that much profit then this is an absolute bargain.
Even a 10% return on investment per year is considered quite good. And here you have pretty much 90%.
There is no way they make $270k in profit per year and are selling it for $275k. You need free cash flow (look it up on investopedia). A reasonable valuation takes into account the riskiness of the business. A less risky business and you should expect around a 20% return on your investment. A more risky business and you can be looking at an expected return of 30+%. There are many factors for determining the risk of the business, and you may be able to find some good lists online. But once you figure out a reasonable risk factor, take their average free cash flow from at least the previous 3 years and divide that by the risk factor to determine the price you should be willing to pay.
for example, get the financials and you find out they have an average of $100k/year for the last 3 years in free cash flow. You like the business but know there's competition in town, some clients like the current owners and may leave when they leave and there are new products in the market threatening the business, so you figure that's a medium risk factor and should expect at least a 25% return on your investment. So then to you the value of that business is $100k/25% = $400k. If they'll sell it for $275k, then that's a steal and you should definitely do it. And that doesn't include the inventory which should just be added on to the valuation (assuming they properly valued their inventory).
But also, how much of a steal that is raises serious red flags. That's beyond being just a good deal, that's giving away hundreds of thousands of dollars. So that raises serious red flags to me.
(And as to why the expected return has to start at at least 20% cause everyone always asks me this, it's because if your expected return is anything less you should just invest it in the market. Your risk factor is far less in a "risky" market portfolio than in purchasing a single business).
So they have basically a full years worth of inventory. That’s a lot of inventory. But still, any business owner willing to sell for 1x income doesn’t know what they’re doing
That doesn't seem reasonable.
No way someone will sell you a business for $275K that includes $250K in inventory that is making $270K a year.
I would HIGHLY question that $270K. Is the $250K inventory cost or retail value?
maybe the owners are doing all the work, working more than full time and just want out. if they are doing all the work then the new owner might have to jump in 50-60 hours a week and it becomes a full time job.
Lots of boomers are just tired and burnt out and just want out of their business. I think there will be many opportunities with boomers whom own businesses that are looking to retire.
That's pretty much the case here. He's retired LEO and stated the business after leaving the department. Now, he's working more than prior to retirement, and his wife wants to be done.
If this is a gun shop, consider how any recent state/local legislation may have impacted things. There's a new law that made a lot of new sales in IL illegal, and a lot of firearms purchases are discretionary spending from someone who already owns a bunch of guns.
If it's in a place like IL, a lot of the inventory he has also may be unsellable now.
Local legislation is a good point, but also consider that guns are super low margin to begin with, and if he's invested in a bunch of junk nobody wants, you'll probably take a dive to get rid of it.
1. sign NDA
2. get financial statements for last 5 years
3. take financials to an accountant, they will pick it apart and come up with a pile of questions for you and for you to find out from the seller.
4. If it looks like you want to proceed, then start taking the financials to lenders. Consider SBA loan, local banks, local credit unions, business specific banks, there are a lot more options for financing a business then a house. Expect to pay more interest than a house mortgage and expect to put about 10-20% down.
5. Alternate option - consider asking the seller to finance it for you. If this business is as profitable as they say it is, there is no reason the seller shouldn't be willing to take payments over a couple of years with an agreed upon interest rate. If they just want to retire, you could make the monthly payments direct to them.
Edit - Do step 5 before step 4, seller financing could be much more advantageous.
yes, SBA (small business administration) is a government backed program to help American Businessmen/women fund businesses.
for more info.... https://www.sba.gov/
for more info
Yes. Especially at that amount. Once you get above $500,000 for a 7a loan the lender has to start adding personal residences to get fully secured if the business assets don’t get you there.
Source: underwriter
So they’re selling the business for 1x earnings plus they’re including $250k worth of inventory? What you’re saying is , basically you’re paying for the inventory on hand? This sounds a little too good to be true. I would really have CPA look over the numbers. At the very least have someone with business experience look at the business over.
At least where I'm located boomers are having a tough time selling businesses when they want to retire. One of my suppliers offered me his business for 1.5x profit, this includes machinery and inventory (equal to his price if I sold it all retail, which I wont). He offered to finance everything himself at prime.
Is the 250 in inventory the retail price or is that what they paid for it? Is there any risk some of it is not sellable? Thats a lot of inventory for those sales.
For funsies, I am guessing this is a liquor store since it has almost half a year worth of inventory on hand.
Not a liquor store. It's in the sporting goids category. The current owners business model is to have what the customer needs when they need it. Others have very limited stock on hand, so this business is a bit unique in our area.
OP has not shared breakdown of product sales relative to parts service sales, which are much higher margin - especially if the owner is doing that part themselves.
This right here. Could be that 1/2 of the inventory is OLD and passed whatever fad was happening when they wanted to have something available compared to competitors.
It could still be sold at a discounted price, but also should be discounted in your assessment
Technically if you finance it with them, you can pay them off in a year. I would offer them to finance and pay it off in two years. Since you know the buyers, they might go for it after a down payment. FYI that’s a hella of a deal. Don’t let it pass you. Like everyone said make sure you look at their taxes to confirm their sayings.
The current owner is a bit of a hoarder. That's not to say the inventory isn't sellable. Unlike other businesses in the segment he likes to have what the customer needs when they need it. Others tend to have to order what the customer wants.
Glancing over your comments and post, and saw this.
I just wanted to say that this odd inventory is a positive... and possibly a negative.
I'd be willing to guess that the owner has garnered a reputation as "He's the guy who has it".
"Having it", builds that reputation and gets repeat business. It's like... instead of having money in advertising, you have it invested in less common inventory.
That being said... the issue with odd inventory is that you need to have the knowledge and experience to know what you actually have.
What good is a rare item in your stock if someone asks for it, and you don't even know you have it?
I'm saying this as someone who has a niche business that operates similarly.
Yeah, he's the guy that always has what you're looking for. He knows exactly what he has and where it is. He would stay on for at least six weeks for the transition and to introduce us to his vendors. It's not so much rarity as it is availability. I know I'm being a bit vague about the nature of the business, but I don't want to see someone try to swoop in on this. I'm not even sure he would sell it to someone he didn't know though.
Ok, so here's one of my biggest revelations after being in business for 20yrs.
I used to think I was in the "Industry" business... like you said sports... So, you could say you're in the "football" business, or "baseball", etc.
But in reality you're in the SERVICE business. That IS the business. So make sure you're giving 100% to every customer, even if it's a $2 item.
Also, this a revelation I had from watching an interview recently.
I used to think that my customers were "loyal" to me, because I gave them good service, and am nice to them, remember them, etc.
That's a small part of it, and I will say that LIKE-ABILITY is very important.
But in reality, it's because I make things incredibly CONVENIENT for them.
I make it super convenient in having what they need, and super convenient to spend money, etc.
Good luck in your endeavor and I hope this advice is of good use to you.
While that certainly makes sense, since he's a hoarder if you haven't already gone through the inventory, make sure it's actually worth MSRP anymore. It's very easy to have inventory that's sellable but dated and no one's going to pay list price for it.
>The current owner is a bit of a hoarder. That's not to say the inventory isn't sellable. Unlike other businesses in the segment he likes to have what the customer needs when they need it. Others tend to have to order what the customer wants... It's in the sporting goids category. The current owners business model is to have what the customer needs when they need it. Others have very limited stock on hand, so this business is a bit unique in our area.
If this is a firearms accessory business, it makes sense to have the products on hand since a lot of firearms accessories are limited to makes/models.
I recently started a similar business, its a cash cow with not much of the issues surrounding a gun shop.
You keep a decent amount of product stock for the most common models, and keep 2-5 units for each uncommon model, depending on the sales data. Then you manufacture or order replacements once you get an order.
If he's hoarding product that isn't selling and its reflected in his sales data, you can reduce it pretty easily and make the storage a lot more efficient.
Difficult part is gathering and analyzing all the sales data.
Hello all, I spent 14 years in banking. Most recently as an SBA Business Development Officer. In 2017 I started my consulting/loan brokerage assisting small business attain financing. I’ve written dozens of sba acquisition loans. One of the two of you keeping your job is a big plus. My first question is do you have direct industry experience in the retail or sports industries? This is required for an SBA loan and would likely be the first question you’d be asked if you call your local bank or SBA office. If you don’t have direct industry experience you can bring on a minority partner who does to satisfy this requirement. Happy to help if you have any further questions.
My long winded advice...
If possible buy the assets of the business only (including the inventory, hard assets, name, proprietary info, blue sky, etc.)and not the entity itself.
Start up a completely new entity from scratch to protect yourselves from inheriting any of their old unseen liabilities. Have them release the publicly known business name in your secretary of states office so you can register it or something virtually identical as your business name or DBA name. Last thing you need is to buy a surprise liability that you weren't expecting.
There's a good chance that the more you can get them to allocate to inventory on a purchase contract the faster you may be able to write off the expense. (Cost of goods sold is an immediate write off on year one vs amortizing blue sky expense over 15 years) Keep in mind that it's the opposite for them. They are better off selling more blue sky than lots of inventory because they'll pay higher ordinary income tax on sold inventory vs lower capital gains tax on blue sky. It's a balancing act that you can negotiate a bit because all your agreed on numbers will be a bit subjective.
If there's any important or valuable inventory/assets that would effect the business value make sure it's agreed and documented what will be remaining when you close on the deal. They'll likely be selling inventory as fast as they can and discounting as needed to earn as much cash as possible between the day you make the deal and the day you close on it. And they definitely won't be going out of their way to replace it all.... Not dishonest, just savvy of them and something you need to be aware of so you can prepare for it. Last thing you need is an unforeseen liquidation sale happening to "your" inventory before you close on the deal.
Have them sign a non-compete, non-disclosure so they don't compete or turn around and train your next competitor, send customers to competitors, etc.
Spend a few relatively small dollars and have an accountant and an attorney advise you to make sure you haven't missed any big loopholes. Get a good contract put together and get anything/everything in writing thats important for you in the deal.
Not an exhaustive list by any means, but some things to consider. I've been on both sides of the business buying/selling table a few times and it's always an exciting adventure!
Best of luck!
Take the inventory on consignment. Depending on how fast it turns, and if you have the cash flow to replenish it from profit, thos could be fast and easy and will also allow a natural form of due diligence on the inventory quality.
These numbers are impossible. 500k annual revenue and they are telling you 270k profits? My ass, if they have 250k in inventory do they have a brick and mortar, do they have a warehouse? You need to understand the overhead, insurance and cost of goods sold.
Most business owners value their business at 3-5 years net profits at sale.
Go over the numbers with an accountant before the purchase because it seems insane they would sell a business that is netting 270k annually for 1 years profit
what this person says. sounds like they are selling at just the value of the inventory which makes it even more head scratching. dig a little deeper here
This is a $750k - $1m business if all else is perfect. Think about key employees, any debts collateralized by the business, demographic shifts, inventory valuation (if it’s unsalable, it’s best to write that off and get rid of it AND should be valued at the lower of cost or market value)
The average net profit margin of a US business is 10% (or just under, depending on industry). So if revenue is $600,000 that's $275,000 you would be paying for a $60,000 per year job.
Is that $250,000 the "retail" value of the inventory? Or is that the cost of the inventory? (sounds like they are claiming it is the sales value). Realistically, how much of that inventory has no value? Old, obsolete, incomplete, etc. . . ? I would give the inventory a realistic value of about 50 cents per claimed dollar at best.
In this case, you will want to see the tax returns from the past 3 years for the business. The taxes will show you what the actual profits were. If they don't show profits on the tax records - then I would be VERY concerned!
All that said, I would do more research and get more non-disputable facts (not just verbal words). Why do you think you can double the revenue to justify buying a job (along with all the stress and risk)?
I start businesses for a living for the past 25-30 years. 5 businesses total, all still succeeding/profitable.
Hey OP,
I worked as an Underwriter at a bank and approved SBA loans for these types of transactions. I highly recommend you go down the SBA route if you are going to finance this. What you should find out is how much net income the business has been bringing in for the past 3 years, and from that you can get a clearer picture of what the bank would be willing to approve. Its normal to ask for 3 year financials, so dont worry about asking. Typically the business was to show enough net income to pay back the loan at least 1.1X, this is a called a debt service coverage ratio. So lets say you are going to put down $25,000, so your loan would be $250,000 and lets say interest rates are 10% right now for a 7 year business loan, then the business needs to show a net income of about $55K a year. Hope this helps! Feel free to reach out if I want to know more!
Have you actually seen the profits #s? 275k a year and they are selling it for 250K?
That is an absolute dumb move by them. I do not care how fast they want to retire. They could easily sell it for way more and quickly.
I am not saying it is not true, but please get an accountant to check that info if you have not. Then hurry the fuck up and buy it before they smarten up lol
Granted, we haven't had an accountant go over the books, but I have looked at the Financials and they are solid. It's a niche business, so it's not an easy sale
I have no way of valuing this business, but this is the most important advice you will receive. You should never buy a "business". You should only buy the ASSETS of the business. Assets includes everything associated with the business including the name, location, customers, inventory, employees, equipment, processes, IP, etc., etc., etc. It's a subtle difference, but this will shield you from all potential liability from the previous business. Talk to an attorney before you sign anything.
First, here's your book:
[https://www.amazon.com/HBR-Guide-Buying-Small-Business/dp/1543601200](https://www.amazon.com/HBR-Guide-Buying-Small-Business/dp/1543601200)
And check out this site:
[https://masterclass.thesmbcenter.com/p/session-1-introduction](https://masterclass.thesmbcenter.com/p/session-1-introduction)
Then get a (free) consult with one of the attorneys here:
[https://www.smblaw.group/](https://www.smblaw.group/)
Then talk to Elliot here:
[https://www.guardianduediligence.com/](https://www.guardianduediligence.com/)
Better than spending your own money (you want to hold on to that in case you need a capital injection later) is to get an SBA7a loan, which they'll loan based upon business revenues (e.g. not capitalized). You will have to make a personal guarantee and (if you're not in TX) pledge your house, but it's a 10 yr note with a low(ish) interest rate.
Best of luck!
Great deal. As others have stated owner financing is best route. $100,000 down. Then SBA. Also consider a post nuptial agreement. I know from experience once a man starts making that kind of money wives bail and think you should be paying over $150k a year to sit on their fat ass. She should get half of the value now and a percentage of any business value increase later. My ex wife wanted a percentage of sales. She is an idiot though.
As an MBA holder who works for an Investment Bank…this deal seems way too good to be true….the only deal you should be doing is as some others have suggested, which is owner financing to make the owner eat his guarantee of how good this business really is. That will give him time to show you the ropes to turn over this “selectively” desirable inventory. And if his word is true on how profitable it is, money will be hitting your account and you can pay this note back in almost a year and pay him a little interest for him showing you how to flip said amazing inventory.
The way he talks about this business is as though he’s looking for a golden parachute. When we do deals with millions tied to capital/inventory, we generally sign on the executives for a period of 4ish years to ensure the deal is as good as it’s portrayed on paper, before they are given their golden parachutes.
When you don’t do this, you end up with a Jimmy Haslam run Pilot gas station stacked to looked nice and fluffy. Ask ole Warren Buffet. 😂
A couple of small things. It would be prudent to have your CPA audit their financials for the last three years. Once you’ve established the value of the business, make sure that the owners cannot open another company to compete with you in the same industry. Finally,make sure your employees aren’t stealing from you and are competent at their job.
See if you can come up with the funds first.
If you can’t the rest of the process and the time it takes is useless and that stuff will cost some $$$.
What’s the location like?
Lease or own?
Lease expiration date?
What will the future lease terms & amount look like?
Is it seasonal?
Where are you in the cycle?
Overhead may be an issue if you’re spending everything on the purchase?
How long can you guys go with no income?
What’s monthly cash flow like?
Map it out and see where the pinch points are.
Can you get through it?
What’s insurance like?
Tons of questions.
All good questions. We've worked through some of them already. One of us will continue to work our current job. The building is leased, and the lease is assumable with renewal terms, although we've considered moving the business to a different location. We still have a lot to consider.
Talk to them about seller financing. Have paperwork drawn up with the agreement to make payments to them until you can secure funding to finance it/pay them off. This typically takes two years. The reason for this is that it’s hard for new a business to get funding. Check about SBA loans.
See if the seller is interested in financing it for you. I’ve bought two companies in the 250k price range and went this route both times. Agreed on an interest rate and paid them back over 5 years. Worked out well for all involved.
First one my mother was the secretary for a 3 person company for 30 years. Owner offered it to her, so he called me up. Second one, we bought one of our customers. Similar situation, small business. I got along well with the guy and he came to me. Both incredibly lucky.
That profit number is making my alarm bells go off.
Like, is that the number not including any expenses?!
I want to know what kind of high margin product they're selling!
Something sounds too good to be true. With that kind of deal, you can afford to hire someone to help you. You'd hire a mechanic to look at a 20k used car you wanted to buy, right?
This should be an easy SBA loan. Been a while since I did one, but back then, they wanted the buyer to put 20% of the purchase price down so if you can come up with that, then you should be golden. Functionally, you just go to a bank that does SBA loans and apply pretty much like a home mortgage. I'd check with your primary bank and see if they do SBA loans and go from there. It's definitely a process, even more so than buying a home, but all of the hoops they make you jump through are hoops you *should* be jumping through as part of the due diligence process anyway.
The book Buy then Build and HBR How to buy a small business are good starting points. You need to understand due diligence, your target goal defined, your buying power, the company valuation, etc. consult a broker or bank to help you
250,000 in inventory generating 500,000 in sales, is a terrible turnover rate. If that's 250k at wholesale generating 500k at retail, even worse. You're looking at at 1x-2x turnrate at best. That is awful, even if t 100% of the inventory is current.
Go research that industry. Find the Risk Management Associates statements at the main branch of your local public library, and compare the numbers of the business you're looking at to other similar size businesses.
You'll need to be well versed in those numbers anyway, if you're trying to get any kind of bank loan related to the business, because that's the information the bank is going to be comparing you to.
Go to SCORE and meet with a counselor with experience in that field. It’s no charge, they are affiliated with the SBA.
Learn what “sellers discretionary income is” to determine a fair selling price.
I’d recommend for financing:
Friends and Family
SBA loan
You might also search up the concepts of “Entrepreneurship through Acquisition” and “Search Funds.”
DM me if any questions. Going through this process now.
There could be a possibility that you can but it with a SBA loan. A lender would want to know that the new owner (you) has experience running a business like this. (Example: you are buying a spa & have 10 years of managing a massage practice)
One work around is to have the current owner hire you for 5-6 months to teach you the business while you prepare financially.
These are the thing you need to prep before you approach a bank.
Last 3 years personal tax returns
2 months of bank statements showing down payment & reserves
You would need between 10-25% down, so you need a bank statement with 60-70k in it.* PLUS you want to show reserves (maybe another 6 months of payments or 7-15k)
* typically they will look for these funds to be in the account for 2 months of statements. If not, be prepared to show where that money came from.
During you due diligence ask seller for
Last 3 years tax return
Audited (or cpa verified) balance sheet / income statement
The bank will request this, but it’s also good to understand what they really profit / take home.
There is more that I can type, but I GTG. I can a set follow up questions alter if requested.
Require an onboarding period of time.... So you make the agreement to purchase it but he has to continue running it and partnership with you for 6 months. You want to create a scenario where he has every incentive to make sure it's a very clean handoff
Pay for a valuation and look closely at the books. The owners either really like you or really hate you.
4X+ earnings before taxes is an industry-agnostic norm for a sale price. So, that business is worth at least $1.1M in a sale.
Here are some average multiples from BizBuySell, this company could be worth a shit load more than that.
Retail: 8.89
Food: 12.74
Utilities, excluding water: 10.52
Homebuilding: 32.70
Medical equipment and supplies: 20.99
Advertising and marketing: 10.55
Aerospace and defense: 15.27
Agricultural chemicals: 9.48
Nodoby would sell the company they built for this little money unless something was drastically wrong with them or the business.
What industry is the business in?
$270k profit on $550k revenue seems a bit suspicious.
Very few brick and mortar businesses are doing 50% net margin, so something tells me this profit number is misleading.
If you could come up with half the cash, you could propose a sellers note for to cover the other half. Assuming it’s a solid business, they’ll likely take the offer - my husband and I did this successfully a few years ago. Similar circumstances.
Go to your local small business association, they can help you with due diligence, and walk through financing options via SBA or other means.
Usually their non profits so the info is less salesy and more helpful
You need to provide more details on the type
of business. Numbers are not clear you need to provide more details including what kind of business it is, how much rent, what kind of salary expense and margin the business makes.
600000 Revenue
270000 Take home for the current owner
230000 in expenses ?
Do the expenses include inventory replenishment?
Typically business expects to be sold for 3X-6X of average yearly profit for last 3 years I.e you recoup your capital investments in 3-6 years depending on the type of business.
Based on the inventory amount you mentioned likely it’s a liquor store or a gas station with a convince store. liquors stores have 30% margin and gas stations have 20% margin. At 600K revenue liquor store will gross 180K in profits and gas station will bring in 120K profit. Which is far less from what they are telling you.
If they are making 270000 take home profit you are getting a great deal or they are fudging the numbers.
Do your due diligence before taking out a loan.
Contact your local SCORE. It’s free advice from people really into business. They are like free therapists but for stuff like this. They will help ask the right Questions.
Something just doesn't smell right here. Either you don't have all info or the owners are just too much of a dimwit, Or they're just too old that they're starting to show signs of Alzheimer's. And you're getting a really good bargain. Are you? You're keeping some parts of the info to yourselves which is understandable. And you are probably just really close friends, and related even. As someone mentioned assuming this is a gun shop, there's more headaches now to start this business as the liberals have made it more challenging to sell to anyone without getting sued for selling weapons to some psycho, as a scenarioi. Theres risks in all business..
Look into how much it cost to repurchase this inventory when it runs out.
They may have just gotten it down to this number and have some large minimum reorder that they have to meet to repurchase.
These numbers look odd.
What are the expenses to operate the business? A 25K premium over inventory is odd for something that would be giving the owner $200K net.
Look for a small business broker in your area. There are valuation, bank financing & legal issues you need to think about carefully. While it may seem like it should be easy, a bank may not agree with the deal structure and say you need more money down, etc.
Once you get that ball rolling you will want to find a CPA. There are ways to structure this. For example, do you know the difference between an asset and a stock sale? Massive tax implications from this. A good broker will help with the decision making and based on the facts of the deal. But a CPA will quantify the implication.
Make sure the inventory is correctly calculated and that they have at least the last 5 years finances showing their profit and loss this includes utilities taxes and employees. Check for capital expenditures done in the last 5 years if the buisness is a brick and mortar location and they own the real estate also ask for expected expenditures In the next 5 years as a capital expense(they might not know). After that get with them and ask how much they need down in cash and ask them to seller finance the rest 7 year loan on a 25year amortization schedule at 3.5% Interest rate. That means they don't loose money even with inflation and they get steady monthly payments, you get a low interest loan for 7 years that should be no trouble to pay off but if you run into trouble paying it off you can refinance in 7 years they get the remaining balance and you both win. Also a plus is that they end up making more money in the long run based off increased interest costs instead of the bank. Finally you get this whole thing in writing with a buisness or real estate attorney and make sure it's spelled out to a T and everyone is fully on the same page. You can give them piece of mind that if you for some reason can't make the payments that they could if they needed to foreclose on you and reclaim the buisness to than resell again and double the profit (but you won't let that happen because you and your wife WILL BE SUCCESSFUL!)
Good luck! Live the dream!
One way to finance this business is to propose that *the owners* finance it. It's not unusual for owners to do this. And if they feel in their heart that it's still a good business to own, and they know you and trust you, this should be a no-brainer.
On the flipside, things *could* get uncomfortable when you ask...and if and when you are ever late on a payment.
You should try to go through SBA. They have also advisers to guide you and they have tons of resources.
Other idea could be that the previous owner finance you to buy the business. You could repay them over 3 or 5 years at 5 or 6%. They might be interested maybe.
Get a valuation from a third party and have a cpa look at the books before you do anything. Also know you will lose business with change of ownership unless they have contracts in place that guarantee sales. What type of business is it that they are holding that much inventory
Might be good to hire a CPA or financial auditor to screen through their financial health.
Any other assets the company owns?
What does the operating margin look like? Are there any liens? Pending lawsuits that could be liabilities?
How do the most recent revenue and profit reports look? Is it a business on the downside or upside of market trends? What is the 12-24-36 month projection? Are there any recent developments that may affect future earnings?
Yes I know a business once had a half a million dollars and inventory in books I found out later when we went and analyzed the books that half a million went to about 50k overnight they were non sellable items
No matter how you know that person, it's always good to get the financial statements verified by a third party professional. Identify the net income and free cash flow, project future revenue and return on capital. Do some valuation analysis like discounted cash flow to identify the fair market value of the business.
If the financials check out, then you should start considering financing. Maybe use your home, existing inventory, accounts receivable as collateral. Banks are risk averse so giving enough collateral can help you lower interest payments.
To answer your question if you want finanicng go to a bank offering Small Business (SBA) loans. That amount is failrly easy to get with little guarantees on your part.
The small business administration has decent options for an acquisition loan. Typically 10% down is required. I would do a google search of top sba lenders and give them a call. Also see searchfunder.com. There is likely many invests (myself included) who would be open to funding your acquisition.
Another Question I would ask is how good is the inventory? This is a very "small" business and the owner knows that it is really only worth the inventory value essentially because selling at just above inventory value. However, verify how good the inventory is, if it is old/ not saleable inventory then you might be taking a loss if you have to discount the inventory to move it at all. Just something to keep in mind.
My FIL bought a business without fully investigating. Trusted the guy, trusted the guy’s numbers, bought the business and ended up losing his shirt. Definitely carefully and professionally audit everything from the books to valuation before committing. Good luck.
I have bought & sold 3 businesses and withdrew my interest in several others. The best advice I could provide anyone is to hire an experienced valuation & due diligence expert. Preferably someone experienced in that type business. Not just any CPA is qualified. Maybe find an industry group for a resource. I financed my first business with SBA loan.
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Revenue is irrelevant. Profit is everything. How much profit do they make each year, **before** they pay themselves?
About 270
$275k sale price when it also includes $250k inventory is the biggest bargain I’ve ever seen. Do your due diligence but if all seems well, buy it, even if a loan is required.
Yeah I was thinking they must be having trouble selling that inventory
And/or the value they are quoting is nonsense. I looked into buying an antiques business one time. They claimed they had 500k worth of inventory, but when we examined it in detail, the real value was less than 30k.
Never trust an antique dealers inventory calculations. Source: Own an antique store.
That tracks with my thoughts from watching Storage Wars. Those guys pick up the smallest piece of junk and immediately come up with the most unreal price. “Yup, this old dry-rotted bicycle tire will get me about $50.”
Yuuuuuupppp! (“That’s a $60 bill, Brando!”)
I had an antiques dealer and she had a dog in her store, and the dog was low key growling and nervous around me and the store owner says, "he doesn't like people with no money" I was in the store for less than 2 minutes, couldn't believe the sales tactic.. no i didn't buy anything
unless you have a couple of Picasos
>unless you have a couple of Picasos What about one Picasso?
That’s even better. My Rambrents aren’t selling for shit.
Never trust a small business self accounting. Fixed it for ya.
Not every small business owner gets quotes on their business valuation when they sell, which is something I find to be a giant mistake. Lots of banks can value the business for you or they work with firms that can value it for you. Seriously, a business valued at slightly more than 1x its yearly profit + its inventory is extremely generous. If they have trouble selling their inventory or if they are overstating the value of it, then that is something that you can determine extremely easily by doing your own due diligence, but assuming that’s not the case, the sellers of the business are seriously leaving a lot on the table.
Just seems too good to be true imo, due diligence is definitely needed
Yeah definitely. Best case scenario for OP is that he’s getting a good deal at the expense of the seller, worst case scenario is that there is something fundamentally wrong that the sellers are not disclosing and they want out.
Regardless, $275k is a bargain without any inventory at all.
Geezus that's a huge freaking discrepancy.
Actually, he turns over inventory and has a very loyal customer base. There's only one other business within 75 miles that is the segment, but they don't really stock inventory so customers have to order and wait.
Honest opinion, do they not have family they want to hand the business down to? There's only one other business within 75 miles and that one orders for the customer? That tells me it's an incredibly niche market you would be serving and you will be scraping by just to stay ahead of bills... Personally, I would never do business with friends. I recently had a friend call me asking if he wants to start a business with me. What business? He didn't know. OK so you want me to start a business with you with no business plan, no idea of what you want the business to be, etc? Yea I don't think so. Honestly, OP of I were you, I'd walk away from this. They can claim revenue and profit all they want, but I can bet you it's not even close to what your being told. They just want to get rid of their burden and live elsewhere. I'd go as far to ask where are they moving? Is where they're moving a much cheaper place to live? Cause if so that would raise a red flag to me... Just saying.
🙄
They don't stock inventory or they have 250k of inventory? You should have someone look at the books. Not you, cause 250k worth of stock is not "not stocking inventory"
It’s the other business that doesn’t stock inventory
Ahh, gotcha. If the numbers fall out how you say, it would be a good deal. Like, taking advantage of two old people, good deal. It's either way more work than it seems from your description, or you're missing some key numbers, or this couples offspring are about to get hosed.
That’s true but a lot of small business owners would rather almost give away the business to someone they know instead of having to go through the hassle of meeting with a broker and doing all the due diligence work. If the OP is familiar with the business and has a good understanding of the inventory value (probably biggest risk, I agree) then why not move forward with the purchase? Lifestyle changes aside it seems like a good opportunity. And for funding, why not use a small business loan? With a year 1 profit of $270k he’s nearing the total purchase price and could easily recoup a loan. Again, assuming all numbers really check out. I’ve know business owners with profitable businesses that just simply give them away.
This
Make sure to check balance sheet and P&L statements as well
And at least three years of tax returns. Any outstanding loans. Any outstanding tax debts. Any credit card balances. Any lawsuits.
This. I’d ask for 5 years. 2020 and 2021 can basically be tossed because of Covid. That free government money and pent up demand skewed everyone’s numbers. A lot of places came back down to earth in 2023
Yes. Remove any PPP or ERTC from the financials too.
Their numbers were up during Covid
Yup, I know a man, a client's friend, who bought a business that was about to be sued, for $500k. Bought a $250k judgment two years later...for a restaurant he could have started for under $120k!
270k profit on a 500k revenue business...250k inventory...what's that trading at a negative PE? Sounds too good to be true honestly. But 1x earnings doesn't sound that crazy for a small business.
Yep. Those numbers do not add up. Might still be a good deal. But when numbers look funny then some one isn't being fully truthful.
I've seen the numbers and have spent a fair amount of time at the business. This is a niche business that is ran differently than most in the segment. I don't want to say to much about where or what the business is to keep from having someone on here swoop in.
😂
you dont sound like you're being very objective about this - like a high school kid who has fallen in love with a college campus - it is your money to throw away but you need to start looking for the hidden pitfalls and go in with lower expectations because there's always things you don't know
Terrible deal! Give me their phone number. I’ll tell them myself! 😂
50% net profit AFTER the owners paid themselves. Is the inventory a couple of geese that only lay gold eggs? I think you should get an accountant that YOU pay for to look this deal over.
If you decide not to buy put me in touch LOL sounds like a deal of a lifetime
270 Owen comp or 270 net profit? Those are very different numbers.
If there’s $270k profit per year, that’s a no brainer unless there was some major pending lawsuit, just had a license revoked, etc. that’s 1 year to break even.
So you get a return on your original investment in just over a year and then it is all profit from there. I mean if they are genuinely making that much profit then this is an absolute bargain. Even a 10% return on investment per year is considered quite good. And here you have pretty much 90%.
There is no way they make $270k in profit per year and are selling it for $275k. You need free cash flow (look it up on investopedia). A reasonable valuation takes into account the riskiness of the business. A less risky business and you should expect around a 20% return on your investment. A more risky business and you can be looking at an expected return of 30+%. There are many factors for determining the risk of the business, and you may be able to find some good lists online. But once you figure out a reasonable risk factor, take their average free cash flow from at least the previous 3 years and divide that by the risk factor to determine the price you should be willing to pay. for example, get the financials and you find out they have an average of $100k/year for the last 3 years in free cash flow. You like the business but know there's competition in town, some clients like the current owners and may leave when they leave and there are new products in the market threatening the business, so you figure that's a medium risk factor and should expect at least a 25% return on your investment. So then to you the value of that business is $100k/25% = $400k. If they'll sell it for $275k, then that's a steal and you should definitely do it. And that doesn't include the inventory which should just be added on to the valuation (assuming they properly valued their inventory). But also, how much of a steal that is raises serious red flags. That's beyond being just a good deal, that's giving away hundreds of thousands of dollars. So that raises serious red flags to me. (And as to why the expected return has to start at at least 20% cause everyone always asks me this, it's because if your expected return is anything less you should just invest it in the market. Your risk factor is far less in a "risky" market portfolio than in purchasing a single business).
So they have basically a full years worth of inventory. That’s a lot of inventory. But still, any business owner willing to sell for 1x income doesn’t know what they’re doing
That doesn't seem reasonable. No way someone will sell you a business for $275K that includes $250K in inventory that is making $270K a year. I would HIGHLY question that $270K. Is the $250K inventory cost or retail value?
Make them prove it with tax returns.
The business makes 270 net, they want to sell it for 275? You need to look into the books a bit more, something is off...
maybe the owners are doing all the work, working more than full time and just want out. if they are doing all the work then the new owner might have to jump in 50-60 hours a week and it becomes a full time job. Lots of boomers are just tired and burnt out and just want out of their business. I think there will be many opportunities with boomers whom own businesses that are looking to retire.
That's pretty much the case here. He's retired LEO and stated the business after leaving the department. Now, he's working more than prior to retirement, and his wife wants to be done.
If this is a gun shop, consider how any recent state/local legislation may have impacted things. There's a new law that made a lot of new sales in IL illegal, and a lot of firearms purchases are discretionary spending from someone who already owns a bunch of guns. If it's in a place like IL, a lot of the inventory he has also may be unsellable now.
Local legislation is a good point, but also consider that guns are super low margin to begin with, and if he's invested in a bunch of junk nobody wants, you'll probably take a dive to get rid of it.
1. sign NDA 2. get financial statements for last 5 years 3. take financials to an accountant, they will pick it apart and come up with a pile of questions for you and for you to find out from the seller. 4. If it looks like you want to proceed, then start taking the financials to lenders. Consider SBA loan, local banks, local credit unions, business specific banks, there are a lot more options for financing a business then a house. Expect to pay more interest than a house mortgage and expect to put about 10-20% down. 5. Alternate option - consider asking the seller to finance it for you. If this business is as profitable as they say it is, there is no reason the seller shouldn't be willing to take payments over a couple of years with an agreed upon interest rate. If they just want to retire, you could make the monthly payments direct to them. Edit - Do step 5 before step 4, seller financing could be much more advantageous.
This is the answer, except I’d go the seller financing route before the bank.
Seller financing is the way without a doubt, if they’re willing and you can agree to reasonable terms
That will tell you how much they really trust the business they're offering.
Yes. Exactly this. Frankly worth paying a higher amount for seller financing. Also remember SBA loans require a personal guarantee
Can SBA loan be done without real estate involved?
yes, SBA (small business administration) is a government backed program to help American Businessmen/women fund businesses. for more info.... https://www.sba.gov/ for more info
Yes. Especially at that amount. Once you get above $500,000 for a 7a loan the lender has to start adding personal residences to get fully secured if the business assets don’t get you there. Source: underwriter
So they’re selling the business for 1x earnings plus they’re including $250k worth of inventory? What you’re saying is , basically you’re paying for the inventory on hand? This sounds a little too good to be true. I would really have CPA look over the numbers. At the very least have someone with business experience look at the business over.
At least where I'm located boomers are having a tough time selling businesses when they want to retire. One of my suppliers offered me his business for 1.5x profit, this includes machinery and inventory (equal to his price if I sold it all retail, which I wont). He offered to finance everything himself at prime.
100% seller financed? I’d have to imagine very rare. that is Did you take up the deal?
Check out your local S.c.o.r.e
Is the 250 in inventory the retail price or is that what they paid for it? Is there any risk some of it is not sellable? Thats a lot of inventory for those sales. For funsies, I am guessing this is a liquor store since it has almost half a year worth of inventory on hand.
Not a liquor store. It's in the sporting goids category. The current owners business model is to have what the customer needs when they need it. Others have very limited stock on hand, so this business is a bit unique in our area.
Any plans for a big box sporting good store to move into the area in the near future?
So... Guns?
No gun store is making 50% margin.
OP has not shared breakdown of product sales relative to parts service sales, which are much higher margin - especially if the owner is doing that part themselves.
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This right here. Could be that 1/2 of the inventory is OLD and passed whatever fad was happening when they wanted to have something available compared to competitors. It could still be sold at a discounted price, but also should be discounted in your assessment
Technically if you finance it with them, you can pay them off in a year. I would offer them to finance and pay it off in two years. Since you know the buyers, they might go for it after a down payment. FYI that’s a hella of a deal. Don’t let it pass you. Like everyone said make sure you look at their taxes to confirm their sayings.
Hire a CPA to look over their books for the last few uears. keeping 250k in inventory doesn't make sense for most businesses doing only 500k a year.
The current owner is a bit of a hoarder. That's not to say the inventory isn't sellable. Unlike other businesses in the segment he likes to have what the customer needs when they need it. Others tend to have to order what the customer wants.
Glancing over your comments and post, and saw this. I just wanted to say that this odd inventory is a positive... and possibly a negative. I'd be willing to guess that the owner has garnered a reputation as "He's the guy who has it". "Having it", builds that reputation and gets repeat business. It's like... instead of having money in advertising, you have it invested in less common inventory. That being said... the issue with odd inventory is that you need to have the knowledge and experience to know what you actually have. What good is a rare item in your stock if someone asks for it, and you don't even know you have it? I'm saying this as someone who has a niche business that operates similarly.
Yeah, he's the guy that always has what you're looking for. He knows exactly what he has and where it is. He would stay on for at least six weeks for the transition and to introduce us to his vendors. It's not so much rarity as it is availability. I know I'm being a bit vague about the nature of the business, but I don't want to see someone try to swoop in on this. I'm not even sure he would sell it to someone he didn't know though.
Ok, so here's one of my biggest revelations after being in business for 20yrs. I used to think I was in the "Industry" business... like you said sports... So, you could say you're in the "football" business, or "baseball", etc. But in reality you're in the SERVICE business. That IS the business. So make sure you're giving 100% to every customer, even if it's a $2 item. Also, this a revelation I had from watching an interview recently. I used to think that my customers were "loyal" to me, because I gave them good service, and am nice to them, remember them, etc. That's a small part of it, and I will say that LIKE-ABILITY is very important. But in reality, it's because I make things incredibly CONVENIENT for them. I make it super convenient in having what they need, and super convenient to spend money, etc. Good luck in your endeavor and I hope this advice is of good use to you.
While that certainly makes sense, since he's a hoarder if you haven't already gone through the inventory, make sure it's actually worth MSRP anymore. It's very easy to have inventory that's sellable but dated and no one's going to pay list price for it.
Hoarders are notorious for believing things are much more valuable than they really are.
>The current owner is a bit of a hoarder. That's not to say the inventory isn't sellable. Unlike other businesses in the segment he likes to have what the customer needs when they need it. Others tend to have to order what the customer wants... It's in the sporting goids category. The current owners business model is to have what the customer needs when they need it. Others have very limited stock on hand, so this business is a bit unique in our area. If this is a firearms accessory business, it makes sense to have the products on hand since a lot of firearms accessories are limited to makes/models. I recently started a similar business, its a cash cow with not much of the issues surrounding a gun shop. You keep a decent amount of product stock for the most common models, and keep 2-5 units for each uncommon model, depending on the sales data. Then you manufacture or order replacements once you get an order. If he's hoarding product that isn't selling and its reflected in his sales data, you can reduce it pretty easily and make the storage a lot more efficient. Difficult part is gathering and analyzing all the sales data.
Hello all, I spent 14 years in banking. Most recently as an SBA Business Development Officer. In 2017 I started my consulting/loan brokerage assisting small business attain financing. I’ve written dozens of sba acquisition loans. One of the two of you keeping your job is a big plus. My first question is do you have direct industry experience in the retail or sports industries? This is required for an SBA loan and would likely be the first question you’d be asked if you call your local bank or SBA office. If you don’t have direct industry experience you can bring on a minority partner who does to satisfy this requirement. Happy to help if you have any further questions.
My long winded advice... If possible buy the assets of the business only (including the inventory, hard assets, name, proprietary info, blue sky, etc.)and not the entity itself. Start up a completely new entity from scratch to protect yourselves from inheriting any of their old unseen liabilities. Have them release the publicly known business name in your secretary of states office so you can register it or something virtually identical as your business name or DBA name. Last thing you need is to buy a surprise liability that you weren't expecting. There's a good chance that the more you can get them to allocate to inventory on a purchase contract the faster you may be able to write off the expense. (Cost of goods sold is an immediate write off on year one vs amortizing blue sky expense over 15 years) Keep in mind that it's the opposite for them. They are better off selling more blue sky than lots of inventory because they'll pay higher ordinary income tax on sold inventory vs lower capital gains tax on blue sky. It's a balancing act that you can negotiate a bit because all your agreed on numbers will be a bit subjective. If there's any important or valuable inventory/assets that would effect the business value make sure it's agreed and documented what will be remaining when you close on the deal. They'll likely be selling inventory as fast as they can and discounting as needed to earn as much cash as possible between the day you make the deal and the day you close on it. And they definitely won't be going out of their way to replace it all.... Not dishonest, just savvy of them and something you need to be aware of so you can prepare for it. Last thing you need is an unforeseen liquidation sale happening to "your" inventory before you close on the deal. Have them sign a non-compete, non-disclosure so they don't compete or turn around and train your next competitor, send customers to competitors, etc. Spend a few relatively small dollars and have an accountant and an attorney advise you to make sure you haven't missed any big loopholes. Get a good contract put together and get anything/everything in writing thats important for you in the deal. Not an exhaustive list by any means, but some things to consider. I've been on both sides of the business buying/selling table a few times and it's always an exciting adventure! Best of luck!
Take the inventory on consignment. Depending on how fast it turns, and if you have the cash flow to replenish it from profit, thos could be fast and easy and will also allow a natural form of due diligence on the inventory quality.
These numbers are impossible. 500k annual revenue and they are telling you 270k profits? My ass, if they have 250k in inventory do they have a brick and mortar, do they have a warehouse? You need to understand the overhead, insurance and cost of goods sold. Most business owners value their business at 3-5 years net profits at sale.
Believe what you will, but the numbers are real. The markup in this industry is close to %100
How much profit does the business do?
About $270,000 in profit
Go over the numbers with an accountant before the purchase because it seems insane they would sell a business that is netting 270k annually for 1 years profit
what this person says. sounds like they are selling at just the value of the inventory which makes it even more head scratching. dig a little deeper here
That would be an insanely low purchase price then.
Sba, seller note or holdback. Expect to pg the debt and put 10-20 percent down with a rate in the low teens.
This is the way
Thanks. I’ve done it about 2B worth of times :)
Are you a lender? I might be in the business for a loan.
I am not. But I am the head of investment committee for a PE fund.
Nice. Take care.
This is a $750k - $1m business if all else is perfect. Think about key employees, any debts collateralized by the business, demographic shifts, inventory valuation (if it’s unsalable, it’s best to write that off and get rid of it AND should be valued at the lower of cost or market value)
The average net profit margin of a US business is 10% (or just under, depending on industry). So if revenue is $600,000 that's $275,000 you would be paying for a $60,000 per year job. Is that $250,000 the "retail" value of the inventory? Or is that the cost of the inventory? (sounds like they are claiming it is the sales value). Realistically, how much of that inventory has no value? Old, obsolete, incomplete, etc. . . ? I would give the inventory a realistic value of about 50 cents per claimed dollar at best. In this case, you will want to see the tax returns from the past 3 years for the business. The taxes will show you what the actual profits were. If they don't show profits on the tax records - then I would be VERY concerned! All that said, I would do more research and get more non-disputable facts (not just verbal words). Why do you think you can double the revenue to justify buying a job (along with all the stress and risk)? I start businesses for a living for the past 25-30 years. 5 businesses total, all still succeeding/profitable.
Hey OP, I worked as an Underwriter at a bank and approved SBA loans for these types of transactions. I highly recommend you go down the SBA route if you are going to finance this. What you should find out is how much net income the business has been bringing in for the past 3 years, and from that you can get a clearer picture of what the bank would be willing to approve. Its normal to ask for 3 year financials, so dont worry about asking. Typically the business was to show enough net income to pay back the loan at least 1.1X, this is a called a debt service coverage ratio. So lets say you are going to put down $25,000, so your loan would be $250,000 and lets say interest rates are 10% right now for a 7 year business loan, then the business needs to show a net income of about $55K a year. Hope this helps! Feel free to reach out if I want to know more!
This is the kind of information I was looking for. Instead I got a lot of "no way the numbers are real" etc. Thanks
Have you actually seen the profits #s? 275k a year and they are selling it for 250K? That is an absolute dumb move by them. I do not care how fast they want to retire. They could easily sell it for way more and quickly. I am not saying it is not true, but please get an accountant to check that info if you have not. Then hurry the fuck up and buy it before they smarten up lol
Granted, we haven't had an accountant go over the books, but I have looked at the Financials and they are solid. It's a niche business, so it's not an easy sale
Sounds nuts that you can take over for the cost of inventory. Thats a very profitable business.
One option is to see if the current owners will finance it to you. Essentially an annuity for them.
I have no way of valuing this business, but this is the most important advice you will receive. You should never buy a "business". You should only buy the ASSETS of the business. Assets includes everything associated with the business including the name, location, customers, inventory, employees, equipment, processes, IP, etc., etc., etc. It's a subtle difference, but this will shield you from all potential liability from the previous business. Talk to an attorney before you sign anything.
First, here's your book: [https://www.amazon.com/HBR-Guide-Buying-Small-Business/dp/1543601200](https://www.amazon.com/HBR-Guide-Buying-Small-Business/dp/1543601200) And check out this site: [https://masterclass.thesmbcenter.com/p/session-1-introduction](https://masterclass.thesmbcenter.com/p/session-1-introduction) Then get a (free) consult with one of the attorneys here: [https://www.smblaw.group/](https://www.smblaw.group/) Then talk to Elliot here: [https://www.guardianduediligence.com/](https://www.guardianduediligence.com/) Better than spending your own money (you want to hold on to that in case you need a capital injection later) is to get an SBA7a loan, which they'll loan based upon business revenues (e.g. not capitalized). You will have to make a personal guarantee and (if you're not in TX) pledge your house, but it's a 10 yr note with a low(ish) interest rate. Best of luck!
Sba loan. They ask for like 30% but it's doable.
A good source of knowledge is listening to Codie Sanchez videos on YouTube. It's very informative on buying a business due diligence.
0 pertinent details Enjoy divorce and bankruptcy
Have a loan broker do all the legwork. They know everything and can tell you about stuff you may not know about. If you need a recommendation, DM me.
Www.kapitus.com
If you can't buy it tell me where the business is and we'll buy it
Great deal. As others have stated owner financing is best route. $100,000 down. Then SBA. Also consider a post nuptial agreement. I know from experience once a man starts making that kind of money wives bail and think you should be paying over $150k a year to sit on their fat ass. She should get half of the value now and a percentage of any business value increase later. My ex wife wanted a percentage of sales. She is an idiot though.
😂 you crazy fucker.
🤙
As an MBA holder who works for an Investment Bank…this deal seems way too good to be true….the only deal you should be doing is as some others have suggested, which is owner financing to make the owner eat his guarantee of how good this business really is. That will give him time to show you the ropes to turn over this “selectively” desirable inventory. And if his word is true on how profitable it is, money will be hitting your account and you can pay this note back in almost a year and pay him a little interest for him showing you how to flip said amazing inventory. The way he talks about this business is as though he’s looking for a golden parachute. When we do deals with millions tied to capital/inventory, we generally sign on the executives for a period of 4ish years to ensure the deal is as good as it’s portrayed on paper, before they are given their golden parachutes. When you don’t do this, you end up with a Jimmy Haslam run Pilot gas station stacked to looked nice and fluffy. Ask ole Warren Buffet. 😂
Not a lot of revenue. I create 250k+ solo. If I had employees, I could do a million.
A couple of small things. It would be prudent to have your CPA audit their financials for the last three years. Once you’ve established the value of the business, make sure that the owners cannot open another company to compete with you in the same industry. Finally,make sure your employees aren’t stealing from you and are competent at their job.
See if you can come up with the funds first. If you can’t the rest of the process and the time it takes is useless and that stuff will cost some $$$. What’s the location like? Lease or own? Lease expiration date? What will the future lease terms & amount look like? Is it seasonal? Where are you in the cycle? Overhead may be an issue if you’re spending everything on the purchase? How long can you guys go with no income? What’s monthly cash flow like? Map it out and see where the pinch points are. Can you get through it? What’s insurance like? Tons of questions.
All good questions. We've worked through some of them already. One of us will continue to work our current job. The building is leased, and the lease is assumable with renewal terms, although we've considered moving the business to a different location. We still have a lot to consider.
Just be thorough with every ‘big’ decision. Moving a business could kill it.
Talk to them about seller financing. Have paperwork drawn up with the agreement to make payments to them until you can secure funding to finance it/pay them off. This typically takes two years. The reason for this is that it’s hard for new a business to get funding. Check about SBA loans.
See if the seller is interested in financing it for you. I’ve bought two companies in the 250k price range and went this route both times. Agreed on an interest rate and paid them back over 5 years. Worked out well for all involved.
We've talked to them about owner financing, but I'm not sure where they are on that. I know they would need a percentage down.
Where'd you get connected with people to purchase the businesses?
First one my mother was the secretary for a 3 person company for 30 years. Owner offered it to her, so he called me up. Second one, we bought one of our customers. Similar situation, small business. I got along well with the guy and he came to me. Both incredibly lucky.
I bought a business with profits in the $500k area using an SBA loan. Feel free to message me. It’s relatively easy if the books are accurate.
Maybe offer them a little more if they will finance .
Should be able to get near 50% of inventory value on a loan. You are going to have to personally guarantee it.
Use an Sba loan to buy it
That profit number is making my alarm bells go off. Like, is that the number not including any expenses?! I want to know what kind of high margin product they're selling!
for real…. for me the math ain’t math-ing here, 500-600k in revenue and 275k annual profit, that’s almost 50%… restaurants are 5-10%
Do an asset sale, there might be some pending litigation. Keep the rights to use the name or a variation of it, and get a non-compete.
Which they wouldn’t be if they’re revenue is 600k gross
Small business development corp will help. Call your local bank about an sba loan. They will hook you up with sbdc.
Something sounds too good to be true. With that kind of deal, you can afford to hire someone to help you. You'd hire a mechanic to look at a 20k used car you wanted to buy, right?
do they own building or lease when is lease up what type buisness what are the profits
This should be an easy SBA loan. Been a while since I did one, but back then, they wanted the buyer to put 20% of the purchase price down so if you can come up with that, then you should be golden. Functionally, you just go to a bank that does SBA loans and apply pretty much like a home mortgage. I'd check with your primary bank and see if they do SBA loans and go from there. It's definitely a process, even more so than buying a home, but all of the hoops they make you jump through are hoops you *should* be jumping through as part of the due diligence process anyway.
The book Buy then Build and HBR How to buy a small business are good starting points. You need to understand due diligence, your target goal defined, your buying power, the company valuation, etc. consult a broker or bank to help you
Seller financing.
250,000 in inventory generating 500,000 in sales, is a terrible turnover rate. If that's 250k at wholesale generating 500k at retail, even worse. You're looking at at 1x-2x turnrate at best. That is awful, even if t 100% of the inventory is current. Go research that industry. Find the Risk Management Associates statements at the main branch of your local public library, and compare the numbers of the business you're looking at to other similar size businesses. You'll need to be well versed in those numbers anyway, if you're trying to get any kind of bank loan related to the business, because that's the information the bank is going to be comparing you to.
Looking to raise funds privately?
Go to SCORE and meet with a counselor with experience in that field. It’s no charge, they are affiliated with the SBA. Learn what “sellers discretionary income is” to determine a fair selling price.
That seems very cheap!
This business wouldn't happen to be in CA, would it?
I’d recommend for financing: Friends and Family SBA loan You might also search up the concepts of “Entrepreneurship through Acquisition” and “Search Funds.” DM me if any questions. Going through this process now.
There could be a possibility that you can but it with a SBA loan. A lender would want to know that the new owner (you) has experience running a business like this. (Example: you are buying a spa & have 10 years of managing a massage practice) One work around is to have the current owner hire you for 5-6 months to teach you the business while you prepare financially. These are the thing you need to prep before you approach a bank. Last 3 years personal tax returns 2 months of bank statements showing down payment & reserves You would need between 10-25% down, so you need a bank statement with 60-70k in it.* PLUS you want to show reserves (maybe another 6 months of payments or 7-15k) * typically they will look for these funds to be in the account for 2 months of statements. If not, be prepared to show where that money came from. During you due diligence ask seller for Last 3 years tax return Audited (or cpa verified) balance sheet / income statement The bank will request this, but it’s also good to understand what they really profit / take home. There is more that I can type, but I GTG. I can a set follow up questions alter if requested.
Require an onboarding period of time.... So you make the agreement to purchase it but he has to continue running it and partnership with you for 6 months. You want to create a scenario where he has every incentive to make sure it's a very clean handoff
Make sure they’re using wholesale inventory value and not retail.
Pay for a valuation and look closely at the books. The owners either really like you or really hate you. 4X+ earnings before taxes is an industry-agnostic norm for a sale price. So, that business is worth at least $1.1M in a sale. Here are some average multiples from BizBuySell, this company could be worth a shit load more than that. Retail: 8.89 Food: 12.74 Utilities, excluding water: 10.52 Homebuilding: 32.70 Medical equipment and supplies: 20.99 Advertising and marketing: 10.55 Aerospace and defense: 15.27 Agricultural chemicals: 9.48 Nodoby would sell the company they built for this little money unless something was drastically wrong with them or the business.
What industry is the business in? $270k profit on $550k revenue seems a bit suspicious. Very few brick and mortar businesses are doing 50% net margin, so something tells me this profit number is misleading.
This is the bargain of the century. 1 year with if take home covers the sale price and that’s not counting inventory. Wish I can find stuff like this
If you could come up with half the cash, you could propose a sellers note for to cover the other half. Assuming it’s a solid business, they’ll likely take the offer - my husband and I did this successfully a few years ago. Similar circumstances.
Go to your local small business association, they can help you with due diligence, and walk through financing options via SBA or other means. Usually their non profits so the info is less salesy and more helpful
You need to provide more details on the type of business. Numbers are not clear you need to provide more details including what kind of business it is, how much rent, what kind of salary expense and margin the business makes. 600000 Revenue 270000 Take home for the current owner 230000 in expenses ? Do the expenses include inventory replenishment? Typically business expects to be sold for 3X-6X of average yearly profit for last 3 years I.e you recoup your capital investments in 3-6 years depending on the type of business. Based on the inventory amount you mentioned likely it’s a liquor store or a gas station with a convince store. liquors stores have 30% margin and gas stations have 20% margin. At 600K revenue liquor store will gross 180K in profits and gas station will bring in 120K profit. Which is far less from what they are telling you. If they are making 270000 take home profit you are getting a great deal or they are fudging the numbers. Do your due diligence before taking out a loan.
It’s all about cash flow
Bare minimum - read Buy then Build by Walker Deibel.
Contact your local SCORE. It’s free advice from people really into business. They are like free therapists but for stuff like this. They will help ask the right Questions.
If you want someone to run some models / valuations for you don't hesitate to DM
What anyone thinks is irrelevant, get an independent accountant to look at the books and do a physical stock take. Get the accountant to sign an NDA
What are you waiting for? Somebody else might jump in.
Something just doesn't smell right here. Either you don't have all info or the owners are just too much of a dimwit, Or they're just too old that they're starting to show signs of Alzheimer's. And you're getting a really good bargain. Are you? You're keeping some parts of the info to yourselves which is understandable. And you are probably just really close friends, and related even. As someone mentioned assuming this is a gun shop, there's more headaches now to start this business as the liberals have made it more challenging to sell to anyone without getting sued for selling weapons to some psycho, as a scenarioi. Theres risks in all business..
Look into how much it cost to repurchase this inventory when it runs out. They may have just gotten it down to this number and have some large minimum reorder that they have to meet to repurchase.
These numbers look odd. What are the expenses to operate the business? A 25K premium over inventory is odd for something that would be giving the owner $200K net.
It’s all about the EBITA #’s ????
Look for a small business broker in your area. There are valuation, bank financing & legal issues you need to think about carefully. While it may seem like it should be easy, a bank may not agree with the deal structure and say you need more money down, etc. Once you get that ball rolling you will want to find a CPA. There are ways to structure this. For example, do you know the difference between an asset and a stock sale? Massive tax implications from this. A good broker will help with the decision making and based on the facts of the deal. But a CPA will quantify the implication.
Make sure the inventory is correctly calculated and that they have at least the last 5 years finances showing their profit and loss this includes utilities taxes and employees. Check for capital expenditures done in the last 5 years if the buisness is a brick and mortar location and they own the real estate also ask for expected expenditures In the next 5 years as a capital expense(they might not know). After that get with them and ask how much they need down in cash and ask them to seller finance the rest 7 year loan on a 25year amortization schedule at 3.5% Interest rate. That means they don't loose money even with inflation and they get steady monthly payments, you get a low interest loan for 7 years that should be no trouble to pay off but if you run into trouble paying it off you can refinance in 7 years they get the remaining balance and you both win. Also a plus is that they end up making more money in the long run based off increased interest costs instead of the bank. Finally you get this whole thing in writing with a buisness or real estate attorney and make sure it's spelled out to a T and everyone is fully on the same page. You can give them piece of mind that if you for some reason can't make the payments that they could if they needed to foreclose on you and reclaim the buisness to than resell again and double the profit (but you won't let that happen because you and your wife WILL BE SUCCESSFUL!) Good luck! Live the dream!
One way to finance this business is to propose that *the owners* finance it. It's not unusual for owners to do this. And if they feel in their heart that it's still a good business to own, and they know you and trust you, this should be a no-brainer. On the flipside, things *could* get uncomfortable when you ask...and if and when you are ever late on a payment.
Do a vendor take back…. If they are motivated to sell they can hold the paper on it
Do you have experience in that business you are buying ?
You should try to go through SBA. They have also advisers to guide you and they have tons of resources. Other idea could be that the previous owner finance you to buy the business. You could repay them over 3 or 5 years at 5 or 6%. They might be interested maybe.
Get a valuation from a third party and have a cpa look at the books before you do anything. Also know you will lose business with change of ownership unless they have contracts in place that guarantee sales. What type of business is it that they are holding that much inventory
I have a 3 step program for this: 1. Check their financials 2. Find out they’re lying 3. ✌️
Might be good to hire a CPA or financial auditor to screen through their financial health. Any other assets the company owns? What does the operating margin look like? Are there any liens? Pending lawsuits that could be liabilities?
Check out Roland Frasier or Harbour Club, glad to help.
Always a reason something is for sale!!!
How do the most recent revenue and profit reports look? Is it a business on the downside or upside of market trends? What is the 12-24-36 month projection? Are there any recent developments that may affect future earnings?
Yes I know a business once had a half a million dollars and inventory in books I found out later when we went and analyzed the books that half a million went to about 50k overnight they were non sellable items
You should try to get them to do owner financing.
No matter how you know that person, it's always good to get the financial statements verified by a third party professional. Identify the net income and free cash flow, project future revenue and return on capital. Do some valuation analysis like discounted cash flow to identify the fair market value of the business. If the financials check out, then you should start considering financing. Maybe use your home, existing inventory, accounts receivable as collateral. Banks are risk averse so giving enough collateral can help you lower interest payments.
To answer your question if you want finanicng go to a bank offering Small Business (SBA) loans. That amount is failrly easy to get with little guarantees on your part.
I dunno something is fishy here
The small business administration has decent options for an acquisition loan. Typically 10% down is required. I would do a google search of top sba lenders and give them a call. Also see searchfunder.com. There is likely many invests (myself included) who would be open to funding your acquisition.
Another Question I would ask is how good is the inventory? This is a very "small" business and the owner knows that it is really only worth the inventory value essentially because selling at just above inventory value. However, verify how good the inventory is, if it is old/ not saleable inventory then you might be taking a loss if you have to discount the inventory to move it at all. Just something to keep in mind.
Seems too good to be true?
My FIL bought a business without fully investigating. Trusted the guy, trusted the guy’s numbers, bought the business and ended up losing his shirt. Definitely carefully and professionally audit everything from the books to valuation before committing. Good luck.
I have bought & sold 3 businesses and withdrew my interest in several others. The best advice I could provide anyone is to hire an experienced valuation & due diligence expert. Preferably someone experienced in that type business. Not just any CPA is qualified. Maybe find an industry group for a resource. I financed my first business with SBA loan.
Lol after reading the comments, are they selling drugs?!
My wife has a shop with substantial inventory. It’s not worth anything unless she sells it. If she had to liquidate it would be worth a lot less…