acquire a business

Discussion in 'Growing and Managing a Business' started by goose, Aug 13, 2013.

  1. goose

    goose
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    I have an idea for a way to acquire a business that is not probably new, but I don't know how realistic it is or how to go about it. Example below.

    Okay, say I find a medical billing company for sale for $1,500,000 that cash flows $700,000 per year. I only have access to approx. $100,000. Can I/How can I negotiate a seller financing at a much higher rate to accept a low down payment. e.g. $100k down and I live off of $150k per year from the biz and give the other $550k per year to the seller for 4 years to total $2,300,000 total payment for the business. That creates an increase in the sellers asking price of 64% over 4 years that is as guaranteed as their business is. It seems great for both parties, but I think I will have a hard sale (buy).

    Just wanted to bounce this off of some business minds. Let me know what you all think.

    Thank You.
     
  2. AnushaJain

    AnushaJain
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    You have to bring the ones who take the guarantee of you.Its the rule of the market.The one who have good image in your market you must talk to them and convince them for taking the guarantee . Apart from that you must have some thing equivalent to that amount like properties,jewellery in the case if you are unable to pay that amount.You have to give the papers of your wealth in their custody for the time period your all the debt has been paid.
    After that you may convince them that you are also getting a high profit out of this deal and you are having the safe deposit of my belongings,and if you are sure that you may pay that much of amount,then i don't think there may be any problem to the seller.
    Good luck :)
     
  3. ArcSine

    ArcSine
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    You'd be asking them to take a $1.4M note which pays off in the form of $550K x 4 years, which is a none-too-shabby 20.89% interest rate. Whether or not ≈21% is an appropriate rate depends on the risk of the business, an idea you've captured with...

    ...which is a key point, but to which you'd need to append, "...after they've sold it to me.". In other words, what counts are whatever uncertainties would exist with you at the helm. You'll have to convince them in some manner that (at least for 4 years) you'll be able to make the company generate enough cash flow to service the debt, in compliance with the note's terms. If the note payments fell behind, the sellers' 20.89% anticipated return could deteriorate quickly.

    With (at least initially) 1.4M of their wealth tied up in, and secured solely by, the cash flow and assets of the company, the sellers would likely be expected to...

    • Require evidence that you have the chops to run this particular type of business successfully (prior experience and track record, say);

    • Retain the right, by the terms of the note, to veto decisions re the business you might propose, if they feel such decisions to have a poor risk-to-payoff ratio. For example, you wouldn't be permitted to leverage the company's assets to the hilt and use the proceeds to branch out into some other unrelated venture. On the other hand, such veto rights are usually restricted to major decisions involving at least a certain specified level of money or %-age of corporate assets; you probably wouldn't have to get their approval on ordinary day-to-day decisions within the scope of the company's core business;

    • Insist that their note be senior to some 'excess' portion of your salary, and certainly senior to any owner perks. For example, they might allow that you could take $90K off the top each year as a base salary (after all, they have an economic interest in keeping you motivated and not living under a bridge in a cardboard box), but then the $550K note payment would have to met before you could take your remaining salary, as well as paying for a new company car, a club membership, etc.;

    • Require that you furnish them with financial statements and reports on some specified frequency, and likely prepared (if not audited) by an independent accounting firm. On that point the terms of the note would probably have specified ratio covenants you'd have to remain within while the note is outstanding, such as maintaining a certain level of net working capital.

    All that said, though, is a 21% return necessary to win the bid? If this company has a history of steady cash flow, a revenue base that's diversified (i.e., doesn't have a risky concentration in a small handful of large customers), a skilled and loyal staff who'll certainly stick around after the transition, and so on, then maybe you're coming out of the gate with terms that are overly generous in light of what might be a somewhat low-risk bet on the part of the sellers. Maybe, say, 4 payments of 500K, or 5 payments of 425K (representing interest rates in the neighborhood of 16%) would be sufficient to win the deal, while being a cheaper cost of funds for you.

    Consider too that if you structure a note with lower payments over a greater number of years, you've given yourself more of a safety cushion by which the company's cash flow could decline in a given year, without impairing your ability to make that year's note payment. With a "no prepayment penalty" feature in the note, you could still make higher-than-required payments in surplus years in order to wipe out the note sooner.

    Best of success with the investigation!
     
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  4. Business Attorney

    Business Attorney
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    Arcsine has noted the biggest issue for sellers in deals where they are expected to provide the biggest part of the financing. If the buyer is not able to run the business successfully, the seller has lost the business and only received a fraction of the purchase price.

    For that reason, while a large percentage of the business acquisitions I have worked on involve the seller providing some percentage of the financing, the deal usually requires a very substantial down payment. The reason for that is two fold. The first and most obvious reason is that if the seller gets more cash up front, it proportionately reduces his economic risk because the balance due is smaller. Almost as important, the second reason is that the larger investment by the buyer makes it more likely that the buyer will continue to try to save the business if it struggles through difficult times. A small investment by the buyer reduces the incentive for the buyer to expend the considerable time, effort and possibly injection of new capital, needed to keep the business afloat if it starts to flounder.

    Your example of $100,000 down on a purchase price of $1,400,000 represents only 7% of the purchase price which an extreme that I have never seen. Since a business generating $700,000 a year in cash flow would give the owner $100,000 in less than 8 weeks, it is hard to believe that many sellers would be willing to give a highly profitable business to a buyer for less cash than they would pocket over the next 2 months.

    Also, your example is probably unrealistic in its valuation assumption. Even though valuation multiples continue to be fairly low by recent historical standards, a multiple of 2 ($700K x 2 = $1.4M) is almost impossibly low. I haven't seen recent multiples for medical billing companies but I would expect that a multiple in the range of 4 to 6 is much more likely.
     
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  5. Rocky

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    Quite rightly so, either the assumption is flawed or you have been given false figures. Either way you should make sure that you will have steady income over the years if you were to buy this business and then repay the financed amount. Or else you may end up getting stuck with a debt and low earning business.
     
  6. jenifercredit

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    There are two things to keep in mind here 1st is the seller making profit in his business will you make the same amount of profit after acquisition, and also will the lender of money be able to provide you loans at the right rates.
     
  7. aronmatt3

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    This is a complicated situation, but I think the seller will ask for surety of the business for next some years to be able to provide you the rights and you need to show him that you can run that business in profit to pay his dues.
     

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