Adventures with lyrical - buying a business

Inspired by Tuco"s thread, I thought I"d throw this out to maybe give info to those looking to start their own business, or start a discussion amongst those of us that are business owner wannabees.

I am hoping the Finance forum could maybe branch out a little bit into the arena that is Enterpeneurialism.

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OK, so I"ve bought stock for years, and worked for two Fortune 500 companies over 13 years after graduation from college. The first company I worked for, I absolutely loved, but the second one, not so much. I left the first one because I had five promotions in ten years and ended up with a direct responsiblity of about $200 million annually, but they were barely paying me 90K. I just didn"t think my pay was right for the amount of responsibility I was carrying, and no one was getting promoted as they were downsizing anyone in the Exec band above me. The second one was right after my MBA program, and I was working in a Junior Exec role (as a Regional CFO with a P&L responsibility of about $2 billion in revenues) that did analyses for the VP"s, President and CEO. It was the type of job you dream about in b-school. I rubbed elbows with VP"s, and was considered to be at their level in the organization. When people heard from me, they knew it was the same as hearing from the VP. But I ended up hating it - I kept Investment Banker"s hours. I got very little free time, and while it was my first true six figure paying job (after bonuses), I just flat out hated being owned. I worked seven days a week, and put in 12-14 hour days each day but Sunay. I think what I loved about the first job was that I had autonomy to make my own decisions, and my boss trusted me enough that he let me run the city I was responsible and only even visited once every six months. We were told we owned our part of the corporation, and that we were to act like entrepeneurs. The second job paid better, but I had no autonomy. If a VP called me at 4 AM or on the weekend, I was expected to stop what I was doing and run a financial analysis for them. I went from almost 100% autonomy to very little autonomy and I hated it.

I have always toyed with the idea of owning my own business. I started doing research in my spare time, and I was trying to decide between starting my own business and buying one. As I did more research, I learned that while something like only 1 in 20 business survives after ten years, that you could mitigate your risk by buying an existing one that has already stood the test of time. Banks saw a business purchase as much less riskier than doing a start-up.

I went to a local business broker"s website who explained that buying a business was like buying a job, and that if you had the money down, you could buy an income. A business with a net of $100K might cost 300K, and you could put down 60K, and makes 100K less the debt service to the bank. Most businesses sell for 1 to 3 times earnings. It all sounded so simple.

It all sounded so easy, so I set on the path of being self-employed. Little did I know the pain I would face, or that the process would take up one year of my life.

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1- The first business I looked at buying was a franchise restaurant that was a local favorite. The SBA loved the franchise because it had a minisicule failure rate. I met with the owner and broker, and he told me about the business. It was a place that specialized in budget gourmet recipes. The business was netting 139K and they were asking 350K for it. The seller"s reason for selling was that he had a bigger restaurant in the franchise that he owed $2 million on. And he needed the cash, because when it was making money, it made alot, but when it lost money, it lost alot. There was alot of overhead.I never understood the strategy of selling the profitable part of your business to prop up the part that is losing, but yet you hear of corporations that do this all the time.

We went into negotiations, and the seller refused to lower the price. At the time, it was the only restaurant of this type of franchise for sale in the country. I couldn"t find another of this type even if I were willing to move. Furthermore, the franchisor wouldn"t allow a new start-up franchise of its type anywhere in the state. The only way to get this was franchise was to buy one. We really liked it, and we ended up giving him every penny he wanted in negotiations. He pretty much broke us after three weeks of negotiations and we really loved the franchise concept.

We took the deal to the bank, and they loved that it had been in business for 11 years, and the low fail rate of the franchise. Franchisees almost never went under. We spoke with the franchisor, and we were confident we would get approval. We needed to get landlord approval, and this is where the problem was.

We were living in Atlanta at the time, and rent for businesses could easily be 10-12K a month. That is pretty high when you are only making 139K. Since rent is so high, landlords have really high net worth requirements. You do the math - a few bad months and you could be teetering at the edge of bankruptcy. The landlord kept asking us for more information from us, and strung us along, all the while acting like he would approve the deal. Two months into trying to get approved by the landlord, he comes out and says NO. We tried to get him to list out his requirements, but he refused. He finally did come out and say that we needed $500K in cash before he would rent to us.Hey, jackass, if I had a half a million dollars, I would buy my own land and not rent, OK? Never go full retard.

As the broker (who is now a friend of ours said), a landlord blocking a business purchase rarely happens. And in this economy, with all of the open store fronts, you would think that landlords would take just about anybody. She said that landlords sometimes have ulterior motives, like they want to kick everyone out so they can tear down a building and put up a newer one to get better rents. Sometimes, they might have a grocery store wanting to move in, and the only way to clear up space is to kick out the existing tenants, which isn"t easy.

So after all this time of trying to get the landlord to commit, and the threats to sue him for breaking the state law of blocking the resale of a business, the seller refused to follow through and take him to court.

I lost five months of time, and all those hours of me conducting due diligence. Ouch.


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2- The second business I looked at was a pair of health clubs. Together, they were netting $500K a year, and the seller and broker wanted 1.2 million. It seemed that one could make a decent living off of this! I was able to negotiate them down to 990K. Both clubs had managers and staff, and they sold me on the fact that owner spent very little time running them.

The owner was actually a franchisor who started up locations, and then sold them off to potential franchisees. So they stressed that they were going to be open and honest, and that since it would be a franchisor/franchisee relationship, I was very important to them bla bla bla. We had several meetings, and they told me that sales were up, in year to year sales, because the strength of their business model allowed them to do better in recession, etc. They looked me dead in the eye when they said this, without flinching.

So we enter into due diligence (the process where you look over the books). I have an undergrad degree in accounting, so it helped. But the biggest thing to remember is that businesses of this size don"t have audited statements. So you better be super careful. Its not like looking at a corporation"s books, even though the financial statements might look similar. Throw out FASB standards when looking at small businesses. I asked for a ton of info to be sent me, with the rationale being that if you ask for something ten different ways, most people aren"t smart enough to falsify everything.

Five minutes after they sent me the due diligence packet, I knew something was wrong. Having already been through due diligence on the first deal, and talking with CPA"s specializing in due diligence, it wasn"t the first time I had been here. On the previous deal, I talked with a CPA and asked him what he would be doing. He basically said he"d look at the tax returns, and also bank statements. And that the cash flow on the bank statements should be close to what they were reporting in sales. I didn"t want to pay this guy $500 an hour when I had the same coursework that he did, but not the three letters after my name.

On this deal, based on the sales they were reporting, $80-90K a month in sales dollars should have been hitting. In reality, only 35K in sales a month was hitting. Given that the combined rent was almost 20K, adding in employee salaries and then the debt service to the bank, there was barely enough money to pay the light bill!

They abolutely didn"t care that if they sold these location for one million and had a franchisee go under, that future franchisees would see it as a negative. All they could see was the cash. When I confronted them with it, they finally admitted that they had lost 452 members.

So I wasted a month on this one, and I had now gone six months with nothing to show for all the long hours.

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3- My wife and I toyed with the idea of moving back home to a small rural town. Her family was there, and my karate studio was there. We had alot of friends there. Also, the rent there might be 1k a month compared to 10k for Atlanta.

We looked at buying a business that dealt with livestock. The claimed net cash flow was $330K a year, and the price tag was 900K. We negotiated them down to 800K. Given that this is a rural area, any business that nets 100K usually sells within a week of going on the market. In a small town, demand is much higher than supply, and for every good business, there are 100 buyers clamoring to grab them. So we moved fast to take it off the market.

The same day the seller accepted the offer, I looked throught the financials a little closer. Sales were declining from year to year. I already knew that. But I looked at the percentage of profit to sales from year to year. And the scary thing was that while sales had declined 30% from the previous year, the net profit margin increased from 33% to almost 50%. I asked the broker about this, and he did more digging. It wasn"t his listing, it was a fellow broker"s. The bottom line is that this sweet old couple who was getting ready to retire (they were of retirement age) was flat out lying. The net wasn"t 330K, the broker figured that it was close to 50K. 50K wouldn"t even pay the debt to the bank. The broker said that it was a good thing because it showed that due diligence actually works, but for me, it was another 45 days I wasted on sellers that were lying.

So now I am getting really frustrated, and thinking I should just stick with Corporate America, and that it just wasn"t time to buy my own business. I tell my wife that we"ll look at one other business, and this will be the final one we look at.

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4- The fourth business is a bland type of business that specialized in a specialized type of landscaping. It claimed that it had a net of 300K, and the seller was asking 800K. The broker gave away too much background info. You learn in negotiations class in b-school to use every piece of advice you can get. Bring overly friendly is a negotiations technique i learned best in my class. Make the other party your friend and they will give info that will weaken their bargaining position later. Most people try to be aggressive and ruthless in negotiations, and no one expects you to be a super-nice guy. They don"t realize that you are just gathering info. The broker said that the business had been on sale for too long, and he was really frustrated at the length of time he had spent trying to sell it. It was a decent commute, and none of the past sellers wanted to make the drive.

The business had several things that appealed to me. One, it had been around for over four decades, and it had stood the test of competition and multiple recessions. Businesses that make good money for multiple decades are worth way more than a business that has been around for a year or two and the latest tax return isn"t even filed (get ready to get ripped off in this case). Two, I really thought I could get it for a great price, based on the broker giving me too much info. Three, I was doing my research and everything I had read about this business was that it wasn"t really affected by recession. Finally, the owner was past the age of 60, and was able to only work two days a week. He also went overseas for months at a time on vacation, and his managers and crews did a great job.

We got into negotations, and I was able to get them down to 650K. I used what the broker had told me against them. One thing about brokers is that if they think they have spent too much time and money on a deal, they fold like accordians if they think they can close a deal.

I got through due diligence, and I couldn"t find anything wrong at all. I was shocked. I had never seen a business with such clean books.

The problem was that this was the week of the financial meltdown, and you couldn"t turn on the news without hearing about how banks weren"t going to lend. In a normal time, this deal would have been considered a slam dunk, because the financials were clean, it had stood the test of time, and sales were actually up this year by 20% (and that is in a recession). It should have been a 45 day close, but it was closer to 75 days. The bank took its sweet time, and our close date kept getting delayed every day. This is unheard of. You would go to close, and the bank would delay another day. This happened for 2.5 weeks. I yelled and screamed at the broker enough that he yelled and screamed at the banker. The broker did have a little leverage in that he"d sent the banker alot of business in the past.

We finally closed three weeks ago.

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My first day owning the business, I was nervous. After all, no matter how closely you look at the books, if someone is clever enough, they can falsify anything.

We go on our first job, and I watch the crews work. I shoot the breeze with the owner, but the whole time, I was wondering if I got ripped off. He goes into his house, and presents me a check for $5k. This is a service business, and typically the net is 50% of sales. I was at the job a total of two hours, and I was handed a check where the profit was $2500! I felt vindicated for putting a year into buying a business.

I have now owned the business for three weeks, and have netted $29,300 in this timeframe!This is about what I made in my first year out of college at the first corporation I worked at. Also, in terms of my post MBA job, I have been making more in one day in the business than I did in a regular, non-bonus check coming out of a tier one b-school. The banker who closed my deal was getting his MBA at a t1 school, and he commented that the business would pay much more than what you would make at a t1 school upon graduation.

In terms of my family, we live the same way we did before. This time of year is typically the slow time of year for the type of landscaping we do. And in December and January, in the past, the business has lost 40K in those two months, and then made money the rest of the year (in the Summer months, it makes $50K a month easy). We have equipment that runs 50K-100K apiece, and the maintenance on them can be 5K a month. Finally, the competition tries to steal our employees, so we pay them really well, and try to make sure they are getting 40 to 60 hours. The way the economy is right now, we can live off of 4K a month, and plow back the rest for a rainy day.

I have to say that earning a two week check in a day is a bit disconcerting. I could go out and increase my standard of living, but there are alot of business owners right now that wish they didn"t spend everything coming in. And there is alot of stress in making decisions that affects the workers" families. We pay double the going rate for laborers in the local, and the laborers are the main breadwinners for the families. They have kids. The business is their sole income, so this has freaked me out a little bit.

I put the money I made from buying beaten down stocks in recession, and put down about 80K on the business. The seller put in some financing. We bought it for 650K. It has netted 300K+ for the last three years, and is on track to do 350K this year. If anything, I see a ton of opportunity to increase this business past 350K, because the seller has done almost no advertising, isn"t on the Internet, and he subsidizes his other business at least 30K+ a year from ths one. The seller also doesn"t negotiate with his customers. He charges them $225 an hour, but he could still make money at $150 an hour. He"d rather have an open spot on the schedule than charge less. His attitude with customers is that this is the hourly rate, take it or leave it.

The business hasn"t slowed down with me at the helm. The prior business had such a great reputation, that the past customers don"t care the owner has changed. 80% of the time his managers ran it for him anyway, as he would go on vacation four months out of the year, and when he was in town, only work two days a week.

I wonder why I worked for Corporate America so long. This is so much more rewarding. But I wasn"t born wealthy, and the money that I was so frugal with that I made in Corporate America and invested has now alowed me a new way of life. I have been able to go from dirt-ass poor to making what the wealthiest 1% of Americans do.

I thrive on challenge and thrive that no one else believes in my dreams. In another few months, I should have the cash to buy another business this size. I love a challenge (like running a business unit of $2B in revenues, getting my black belt, going to a t1 b-school) etc. Life is boring with challenge and struggle. One day I will own two other businesses this size, and donate 80% of it to charity. I guess you could say I am a bleeding heart, but my non-profit activities are at the end of the day and on the weekends. I just don"t think we should try to get change by taxing the hell out of people and redistributing it. I"d rather make money and give it to the charities of my choice. We"ve already given $1500 away in three weeks, and we plan to give away more when the busy time of the year gets in full swing.

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UPDATE:

Lyrical said:

I"m going to post more of what we do, since I get a lot of questions about labor and skills. I enjoy my anonymity, but it"s not hurting me to say what we do. None of these are my companies.

Getting a guy who is not afraid of heights is one thing, teaching him to climb up and not take all day takes one year. Then it take another year to learn what to cut, and then another year to get fast and good.

Like I said, I"m able to charge $80 an hour times four doing this, so $320 an hour. We used to run two crews and bring in almost $500 an hour, but I can"t find anyone who can do this, and have good work habits. As we come into fall, other companies start slowing down, so there will be more good employees that just get cut because of the time of year. With all of the advertising I"m doing, we are the only company that works all year round. My competitors just get business from word-of-mouth, but we get it from word-of-mouth, repeat biz, radio, billboards, yellow page ads, internet directories, google adwords, etc.

We do work for the local cities, CEO"s, and Execs. No bull, rich people have a lot of land, and they will spend $20k an acre making sure their tree work is perfect. Since this is dangerous work, we are fully insured, and it means a lot of times we are the only ones able to bid on big commercial jobs.


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And this would tell you all you need to know about equipment. My buckets cost up to $110k, we don"t buy the cheap ones.


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I know that some of us are business owners, so what are some of you guys doing? What types of businesses do you own? What kind of crazy-ass aspirations do you guys strive for? I know that having a business this size is just one of many goals I am aiming for in life. The whole time, I had naysayers that said I shouldn"t expect to make upwards of 250K in a business, and some said I wouldn"t even reach my goal of owning a business.

Hachima said:

Thanks for putting this information together. I"ve never had much faith in people being honest about what they are offering. I"m curious if you think the experiences you have posted here, reflect business that are for sell in general. Did you just happen to find a few bad apples, or are their really that many people trying to sell off junk as if it was actually profitable.

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Good question. I have found that selling a business brings out the absolute worst in people. I have over a decade plus of biz experience, and seen alot of bad behavior and greed in Corporate America.But trying to buy a business made me lose my faith in humanity for the year long ordeal.For some reason, if someone thinks they can make a quarter of a million, half a million or a million, and all they have to do is lie and falsify a few statements, they will do it in a heartbeat. The face of pure evil is the seller that will charge you a million bucks when he knows that the business is going under. The funny thing is that they think they can get away with it. The first part of the process is meeting the seller and gathering as much info as they will give you without putting any earnest money down. I have heard stories of some brokers keeping the earnest money and only giving it back when they go to court. So I don"t like to enter into due diligence until I get a real good feel for the business.

One thing that helped was for me to learn everything I could about doing the process of doing due diligence, whether it was doing internet searches, talking to brokers and CPA"s that specialized in it. The bank will do its due diligence also. The main thing the bank goes off of is the tax returns. If the addbacks (owner"s salary, interest, net profit of the company, company car, cell phone) aren"t on the tax return, the bank won"t finance it. So you have to beware of the guy that claims that the business is making 150K a year, but the tax returns only show 50K. In this case, when he hides his profit, he"s hurting the resale value of the business by 300K (100K profit *3). You can"t rationally pay someone more than what shows on their tax return, but the problem is that most businesspeople hide profits. The tax return is the floor on the price, because the banks say that if they have claimed it as profit, then that is as about as valid as you can get. Most reputable brokers, when the seller tells them that they are hiding profits, will tell the seller he can only sell the business for a multiple of the tax return and to ignore the profits they are hiding. The broker will tell them to either take the business off the market and come back in three years when they have three years of tax returns showing all the profit. You hear these great stories of people buying a business, and then finding out that the business is doing triple what the seller stated. That would be like Christmas every day.

In a regular economy, you could just go off of tax statements (and that is what banks do most of the time in recession). But one thing I learned in b-school is to look at comp sales. I asked the sellers to give me their comparative sales from time period to time period. Brokers hated giving it and tried to not give it, but the picture becomes clear when a business does 30% worse in sales from Jan to June 2007 to Jan to June 2008. You"d be a fool to pay three times earnings for something when sales are down 30%. Sellers usually would fess up then, because they knew if it was in writing and the business did poorly, they would lose in court for making fraudulent statements. For the health clubs, they didn"t show the drop in sales in writing, as they stated they had the same amount of members year over year. But when you compare their stated sales with what is hitting the bank accounts, you get a clear story. The bank accounts showed there was no way their comp sales were up, but that they were down by 60%! In this recession, some businesses are impacted more than others. For instance, health clubs are usually the worst impacted in a recession. The first thing people cut is their gym membership, because they figure they can just go running outside, or do pushups and sit-ups at home. I knew this from researching the industry before talking to the sellers, but the franchisor looked me in the eye repeatedly and lied without flinching tht their business model was so superior that they were recesssion proof bla bla bla. Those health clubs were actually netting 500K in 2007, but this year, they had so many cancellations, that they were barely breaking even.

So to answer your question, I think that brokers try to simplify stuff and spin it, and most of the time, the sellers hide stuff from the brokers. I believe that the recession has really hurt the market for buying a business, because its brought out more scammers that are selling because they have to and are willing to falsify anything. I would say that only a third of the businesses I looked at were represented truely.If you can find a business you feel comfortable with, as well as seller and broker, and the numbers are right, you are headed in the right direction. I didn"t post every deal I spent time on, just the ones we contracted on. Some brokers and sellers were so slimy that even if the numbers looked great, the deals just didn" feel right. I looked at buying a mechanic"s garage for almost a million bucks (including land), and I just started to get the feeling that they were lying about stuff. I spent a month on the deal before I got cold feet.

Craelin said:

Damn good read, thanks Lyrical. I"ve always been incredibly motivated in much the same way that you are - in college now, but I"m aiming to be self-employed for as long as I can. I just do not see how planting myself in someone else"s giant corporation can ever be the best move, unless my goal is to gain experience.

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Thanks for the compliment. I wasn"t sure if anyone would want to read this, but it was really a rough year, that has now eventually paid off. If I can share any info, I am more than glad to do it for people that are contemplating doing the same. And I am sure that we could get other people"s experiences in here also, and all be better off from the learning experience.

For me, being in Corporate America was a great way to gain experience in managing people, sales, finance, marketing, etc. And I was able to earn enough to invest in equities to eventually have a decent amount of capital. Unless you are a trust fund baby, you might have to work to gain the cash to have freedom to do what you want entrepeneurial-wise.

Craelin said:

My ambition has made me realize that the most efficient way for me to effect others is to pursue and succeed in business, hopefully in a manner similar to what you have done. The idea of generating a sizable income with which I can pursue philanthropic endeavors makes me so damn excited.

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That"s kind of the way I see business. Once you earn enough to take care of your family, then you can start doing things in the community. I guess you could say I am big on civics, and in the past, we"ve given cash and time to various local organizations that we believe are making an impact, whether its for troubled teens or food kitchens. I do not trust government to do anything right, they always screw things up.

One day, I will own two other businesses this size, and knock back about 100K a month. I plan on buying another business the same size in the next year, and then another one the same size the year after. While I am working full time in it now, I am still stepping back and letting the managers make the operations decisions. The problem I have in the business is that there are no salespeople, and I am doing the selling/estimates. We also have big corporate accounts (some of them own parks), and those need a level of finesse that my people don"t currently have. I think I will be able to step back and do like the previous owner did, work twice a week and let the managers handle 90% of the work. I am only working a ton of hours right now because I want to learn everything I can about this business.

I want to buy businesses that have capable managers. You can"t own multiple businesses and work 80 hours a week in each one, there just isn"t enough time in the week. You have to have good managers, and then you need to let them know you are watching their results and also reward them based on profits. You almost have to be able to clone yourself, and right now, I need to clone someone who can deal with customers. These guys are great laborers, and I am confident that if there was a six week backlog of work, I could go on vacation. But they can"t deal when a customer is yelling at them, and they have been trained by the owner to NOT negotiate on price or even sell the product.

When I am making 100K a month, the majority of it will go to philantropy. We live beneath our means, so I could see keeping 200K and giving the rest away. We realy don"t need much - but I need the constant challenge of expanding my horizons, or I just get bored with life. I am for-profit during the day, my non-profit activities happen when the work day is over.

Craelin said:

Question: Now that you have entered the realm of self-employment, what is your opinion on business school? If you were back in college with the knowledge you have now, would you still pursue it?

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Good question. I earned two business degrees, one in accounting/finance and an MBA, both from t1 schools. The MBA program was extremely hellacious and required 18 hour days.

Would I have done it all over again? Yup. My MBA was from the University of Texas, and I was always inspired that Michael Dell came up with the idea for Dell in his dorm room, and then started making PC"s from it. I figured that if Michael Dell can make a billion from his dorm room, couldn"t I at least come up with an idea to knock back 200K a year? In my MBA program, I met all types of people, and some of them were entrepeneurs, and I think that many of them rubbed off on me. I went back to school with the intent of getting a Junior Exec role in a corporation, but ended up being self employed and ended up buying a business making three or four times what someone at a t1 school would make upon graduation.

It also did help, in these troubled times, when I had to deal with bankers. As some of them commented, having a t1 MBA was a big plus, because it showed that I would do what it takes to get my goals. I think the economics term for it is calledsignalling.The banks are being sticklers on having industry experience now, they only want you if worked in that industry. But I have had several bankers, including the one that did my deal, that said that having the MBA and working for Corporate America for so long would substitute for having industry experience. Right now, it is very hard to buy a business, and almost impossible if you don"t have industry experience.

Dinthug said:

BTW Lyrical, how old are you if you don"t mind me asking?

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Mid 30"s.

Desx said:

Are you kidding? This is great.. I"m sure everyone on this forum appreciates you sharing your experiences and knowledge.

Do you use the same CPA as the previous owner?

Since you"re planning on buying another business within the next year, are you going to focus on the landscaping industry or expand to other areas?

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I have no idea what type of business I will be buying next. I do know that I am thinking that I may try to buy next business based on the stock beta of that industry. For those of you familiar with finance, a beta shows how a stock moves with the market. A beta of 1 means it moves with the market. A beta of 0 means it moves nothing like the market. A beta of -1 means it moves opposite of the industry. We use betas to help diversify our portfolio.

I have no idea if any schools have done any work on trying to diversify a portfolio of businesses based on the respective betas of their industries. I have no idea if this is feasible. The idea is that some businesses don"t move with recession (like the business I bought) and some businesses might actually do better.

And yes, I have considered expanding the business in terms of geography, but I am not sure other areas can sustain us as well. We cater to affluent households, from upper middle class all the way to the super rich. A week ago I was on the property of a CEO of a Fortune 10 company, and he approved the work he wanted done without even price shopping us. Half of our clientele won"t even price shop us if the bid sounds right. Tomorrow morning I will be going to a park owned by someone worth $40 billion.

I really don"t want to deal with the type of customer that would try to clip your nuts off over $50.

blizzak said:

One thing that really bothered me about the whole loan process is that it is so impersonal. Our loan officer was so impressed with our numbers initially that she gave us the impression that the loan was a lock. The reality is that someone I will never meet made the call and faxed a big fat NO, and no explanation was given.

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Bankers are not really friendly people right now. Given the state of disarray they are in now, they are a mess - they make guarantees and promises, and then they reneg on them in a heartbeat because they know they haven"t put it in writing.

I"d rather be trapped weaponless in a room full of angry Al Quaeda (sp?) then deal with bankers.

Tyreny said:

Buying a business however eliminates (or mitigates) the Risk factor, which is something I had never considered.

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It mitigates risk, but you have to be like a midget in a urinal, always on your toes. A year ago, there were less scammers, but right now, the market for buying a business is flooded with people that can"t make their debt payments, and are willing to falsify anything.

Tyreny said:

Would you mind elaborating on some of the covenants that the bank stipulated in order for you to finance a portion of your purchase? It seems like you mentioned about 80% debt and 20% cash on a deal? What were the other criteria (aside from industry experience/professional qualification) that the bank thought were important?

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We put down 10% (plus a little more because we got a line of credit of 150K from the bank), the seller put down 10%, and the bank put down 80%. I am told, that given the current crisis, that banks are now asking for 25% from the seller, 25% from the buyer, and then they only do 50%. That is absolutely ridiculous! From talking with bankers now, you might get 10%, but that is only if you have a slam dunk deal. Don"t come to them with a net profit that has dropped 50% from last year, or a P/E ratio of more than 4.0. You better have a business with zero risk to get a business with 10% down nowadays.

As far as other covenants, I signed so much it wasn"t funny. My wife and I were signing papers for 30 days! The bottom line is that this was an SBA backed deal, so we had to sign away our lives and everything in case the business fails. I remember asking the banker why I had to sign the same thing over and over again.

As far as the seller carry (on the 10% goes), the SBA told him that he needed to wait ten years for me to pay him back. He almost cancelled the deal over this. Imagine having to wait ten years for 10% of the purchase! But this is becoming standard for seller carry, given the current environment. The gov"t wants its money first.

Another weird thing was life insurance. It is now standard that the buyer has to take out life insurance on any deal over 250K. The catch is that my family isn"t the beneficiary, the gov"t is! What a joke. They really want to make sure they get their cash.

As far as qualifications, the banks want a sterling cc score, industry xp, lots of cash, management experience, etc. I know someone that was turned down on the basis solely that they had no business experience, but they had a PhD in the sciences and plenty of cash. Banks are sticklers on this stuff nowadays.

Jysin-DW said:

I would love to own my own business, but I have 0 experience and have no damn clue where to start. I currently have about 100-150k to invest, but I really need to do some homework. I am not looking to be a multi millionaire, but just live comfortably on a rock solid and steady income. I had already read the failure rates of start-ups, which scared the crap out of me, so an existing business purchase sounds like a lot better idea.

This isnt something I am doing anytime soon. Perhaps in the next 5 or so years.

Any advice for where to start for a complete noob?

Great post, btw.

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I lost all the links when my comp caught a virus. Basically, research the hell of buying a business. Also, reading enterpreneur.com"s articles are a pretty good place to get ideas. The way I look at it is to find a business that is a hobby, because then you are more apt to want to spend time in it. If the hobby doesn"t make a great business, find a business you can easily understand. I had brokers try to sell mereally technical businesses I couldn"t understand, so I passed on them.

Two books that really helped me as far as business goals were "The Millionaire Next Door" and the "Millionare Mind." Whether you want to be a millionaire or not, I thought the books displayed the mindset that the best entrepeneurs have. They were required in my MBA program. What I liked most about these books is that the authors were professors, and they used research methods to arrive at conclusions on what entrepeneurs think and do.

chu said:

Why would someone want to sell a business if they can recoup their money in 1-3 years? Honest questions.

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Because most business owners have an all-or-nothing mentality. They can"t imagine not working full time in one business. And most businesses go for sale shortly after the loan is paid off. The lure of making 250K, 500K, or up to a million, and not having people headaches, etc is so strong.

chu said:

I think you"ve done a lot of work Lyrical to not get screwed over here and kudos to that but I can"t help but think that it won"t and can"t be such a smooth and non-risky ride for everyone that goes your route.

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That was kind of the point of my OP. Brokers present the process as easy and smooth, but there really alot more risk attached to it. When I started to realize the risk is when I slowed down, and started being more thorough. Brokers and sellers will say anything, so you need to check out what they say and demand they put their statements in writing (for court later). Brokers and sellers don"t care, after I broke my contract with them, they just contracted with new suckers. Some brokers ascribe to the "Greater Fool Theory."