4 Million Dollar Loan To Buy Business

Discussion in 'Growing and Managing a Business' started by Busi44, Apr 8, 2013.

  1. Busi44

    Busi44
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    Hello everyone.
    I want to introduce myself. My name is Tim and this is my first time on this forum. So this is my position: I am looking at purchasing a business. It is a well-established 5 acre Stone and Garden center that has been around for 40 years. The owner is putting the business up for sale because he is retiring. The asking price is 4.2 million dollars. My wife and I both have MBA's and feel like we could manage this business very well. So we figure we will need a loan for about 4 million dollars. I need advice as to how I go about acquiring a loan. Also, I need advice on anything to watch out for in general when going through the entire buying process. I am brand new at this so I need as much help as I can get.

    Thanks in advance,
    Tim
     
  2. TimeRider

    TimeRider
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    Hello Busi44. Welcome to BAF. Well If you are thinking to buying that business 5 acre Stone and Garden center. Then, you can go for it If you know how to do stuffs there. Well, you can try Bank or Finance LTD for the Loan. But It can be problem If you can't pay it time. Make sure you have friends, family or someone help you If you can't pay the Loan amount timely. This is quite risky and 4 Million Dollar is quite high amount.

    So, If you go for it. Be dedicated to the work and seek ways to make it more popular.
     
  3. StarBC

    StarBC
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    Hi Tim,
    Did you try to find outside investors?
    It's really hard to get a loan from financial institutions unless you have enough collateral such as your real estate, savings or even stocks.
     
  4. Busi44

    Busi44
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    Thanks for the replies! I do not have any outside investors. Our credit score is in the high 700's, about as good as you can have. As for collateral, we'd like to leave our home out of the collateral at all costs. How would we go about getting a loan like that? What different types are there? And what tips and tricks do you guys recommend? Do you think we will get accepted for a 4 million dollar loan?
     
  5. 2misi.com

    2misi.com
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    You can borrow from*banks or start looking for investors to be your partner in running the*business.
     
  6. Busi44

    Busi44
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    There will be no partners. I specifically need info on how we would go about the whole process of assessing the property for value and then applying for a loan. Also, with the loan, we want to put up as little collateral as possible. Thanks.
     
  7. StarBC

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    Try to call your local SBA. They have programs for start-up financing through banks and other financial institutions. Also they assist with all paperwork preparation for your loan application & can estimate your chances of actually getting a loan.
    Do you want to get a lump-sum loan from one bank or you can split it & borrow several smaller portions from different financial institutions, for example you borrow $1M in on bank, another $1M in another bank, etc?
     
  8. ArcSine

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    Greetings, Tim, and welcome to the forum! A few notions to consider...

    • Seller financing

    In the majority of small- and mid-sized deals, the seller receives only a portion of the price in the form of cash at closing, and takes an installment note for the balance. The rationales for that phenomenon, the different degrees to which it applies in any given scenario, and the various flavors the installment note can take on, is a discussion unto itself. But for your immediate questions, you'll need to give thought to what extent the purchase price can be provided in the form of seller paper. That in turn determines how much of the buyout price you'll need to scare up from outside. Hence this one needs to be addressed before approaching the bank.

    On this point, it might be that the inclusion of so-called "earnout" terms would make the deal more attractive to both you and the seller. Google the term for more info, but briefly it makes the final price somewhat open-ended, with the size of the future installment note payments being partially contingent on the magnitude of the operation's profits and cash flows, post-deal. You have a degree of downside protection (if the cash flows don't quite live up to the seller's rosy promises, your note payments are decreased accordingly) and the seller has some upside potential (if the business exceeds projections, he ends up getting more than he originally anticipated). This latter point especially carries weight if he has confidence that your managerial skill set will translate into profit growth, something to which you allude in your first post. One might argue that after 40 years, the business is already "all that it can be", but a counterargument is that after 4 decades in the trenches, a retirement-minded owner is just going through the motions, and hence is missing out on the growth opps that come from a fresh, aggressive mindset. Thus you might be able to obtain a smaller up-front cash payout in exchange for (at least the potential of) larger note payments to the seller down the road, via an earnout mechanism. This too will impact on how much external financial you'll need to secure.

    • Valuation and pricing

    The value of the biz--and hence the determination of a fair price, whether it's $4.2M or some other figure--is a function of the future cash flows. The assets' liquidation value (land, facilities, inventory, etc.) provides a lower bound on the value, but it's usually the case with a successful biz that the present value of the expected future cash flows exceeds this floor value. You'll need to run your own valuation calcs based on your own projections. It goes without saying that you'll want to rent an advisor for this exercise; presumably an accountant or valuation pro, but in particular one with expertise in small business pricing.

    On this point of advisors, you're probably also aware that you'll want an attorney to assist in vetting the arrangement and deal terms on your behalf. A well-drafted buyout contract contains dozens and dozens of provisions which most people never would've thought of, but in hindsight they're darn glad their attorney had 'em included in the docs.

    Best of success to you in this one, and keep the dialogue going here. Plenty of friendly folks roaming the virtual BAF hallways, with good ideas just for the asking.
     
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  9. Busi44

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    Thanks for the replies! I just sent a "more information request" to the broker so I'll update you guys once I call her back.
     

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