Loan to buy a business

[Stark100]

Hi all,

I am a longtime Somersoft lurker but very infrequent poster! I have a few questions around obtaining a bank loan to fund the purchase of an existing business – not sure where to start with this or who at a bank (pr perhaps a broker?) I should be talking to. You may be wondering why I am posting this on a property investment forum? Well I'm just struggling to find relevant info and so thought that with the wealth of investment knowledge on here that someone may be able to assist. Have posted this in the Coffee Lounge as I'm assuming that as this is not directly property related this is the most appopriate place to post?

I am currently looking at an online business that is for sale – asking price is around $450000 including stock. I have around $200,000 equity in one of my IPs that I would either look to release as equity or perhaps raise by selling the property. So I'd be putting in $225,000 of my own money and looking to a bank to fund the rest (so 50% me, 50% the bank). My questions are as follows:

• 
  Is any bank likely to lend me 50% for a small online business (has been running for 7 years)? I understand that it can be easier to get finance for an established business such as a franchise – is it possible to get a loan for a small non-franchised business?

• 
  Assuming that a bank will loan me the necessary funds, what would I need to provide to support the loan application?

• 
  Who do I contact at a bank to discuss this – or are there brokers that can assist with this? What would the best option be? Which bank should I approach (the most small business friendly)?

Thanking you in advance for your assistance!

 

[Shahin_Afarin]

Short answer no. You would need to put up a security which I would not recommend as you would just go on commercial rates and effectively cross securitising your property. Cheaper to withdraw the equity against current properties to fund the purchase.

Some Franchise businesses can be offered as security.

 

[Aaron_C]

Best option is to pay cash.

 

[Stark100]

Thanks for the info. Just to clarify though whether I release equity or sell a property the max I can raise is approx $200k - so there would be a $200+k shortfall - are you saying that there's no way to make up that shortfall via a bank loan?

Cheers

 

[Peter_Tersteeg]

Thanks for the info. Just to clarify though whether I release equity or sell a property the max I can raise is approx $200k - so there would be a $200+k shortfall - are you saying that there's no way to make up that shortfall via a bank loan?

Cheers

Banks want security for their loans and are highly unlikely to lend against an unknown business, hence the suggestion to lend against equity in property.

I've got to question, what are you actually paying for? You may find it's possible to lend against the stock and some equipment, but good will in a business is worth almost nothing simply because it's very intangible and often disappears with a change in ownership. Pretty much every business deal I've ever seen comes up short on valuations. The seller wants too much and the buyer (usually inexperienced) is willing to pay too much because they see that it's operating successfully.

 

[Shahin_Afarin]

Thanks for the info. Just to clarify though whether I release equity or sell a property the max I can raise is approx $200k - so there would be a $200+k shortfall - are you saying that there's no way to make up that shortfall via a bank loan?

Cheers

Well you CAN ascertain an unsecured loan BUT you are talking high interest rates and a maximum loan amount (which you will be ok based on the figures provided above).

 

[geoffw]

There are business finance brokers out there. A Google of "business finance broker" will find you some info.

When I was buying my Subway (nine years ago) I could get a maximum of 70%- that for an established franchise brand (obviously)- but I still had to show good financials at inception and annually. If you didn't meet their criteria the interest rate went up. That was for a bank which was actively seeking out loans to established franchises.

While that not directly relevant it may give you some insight.

 

[lizzie]

I'm interested to know what line of online business is worth nearly half a $mil - how much of that is stock? Wouldn't it be cheaper to start your own from scratch?

 

[pinkboy]

I'm interested to know what line of online business is worth nearly half a $mil - how much of that is stock? Wouldn't it be cheaper to start your own from scratch?

My thoughts too - I thought for a second they were trying to buy eBay!


pinkboy

 

[Stark100]

Thanks all for your responses!

Approx 25% of the proposed sale price is stock. It's a niche retailer with a relatively large amount of repeat business from a good size customer base built up over the last 7-8 years.

Agree that starting from scratch may be an option but has a different set of risks and challenges.

I hadn't thought about an unsecured loan - we'd be looking to pay the loan out in 3 years so this may be an option, even with higher interest rates.

 

[ok180]

I'm interested to know what line of online business is worth nearly half a $mil - how much of that is stock? Wouldn't it be cheaper to start your own from scratch?

Depends how well it is set up.

It can take years and years to build up a cache of good loyal customers for an online (or any) business.

Can take years to test different marketing methods until you hit the right ones.

Finding the right suppliers, developing the right logistics channels etc

These type of things take time to work out for a startup. If it's all there already done and they are asking a couple of hundred grand for that part of the business it could easily be worth that or more.

 

[ok180]

I hadn't thought about an unsecured loan - we'd be looking to pay the loan out in 3 years so this may be an option, even with higher interest rates.

It would have to be a ripper of a business to pay back 450k in 3 years...

 

[Stark100]

It would! What I meant though is that we would be looking to pay the loan portion off (ie $225k) in 3 years, and would be using anticipated income from other sources as well to do this

 

[ok180]

Whats the turnover like?

 

[Stark100]

Between $5-600k

 

[ok180]

Is it showing profit at the moment? Owners drawing a wage? Do they import their own stock?

To be honest without knowing details, i think $450k is way too much to pay for a business doing those figures. For 450k I would want to be seeing 1mil turnover at least.

 

[pinkboy]

Is it showing profit at the moment? Owners drawing a wage? Do they import their own stock?

To be honest without knowing details, i think $450k is way too much to pay for a business doing those figures. For 450k I would want to be seeing 1mil turnover at least.

Yep, and netting $200-300k per year as well after wages drawn.

pinkboy

 

[Stark100]

Interested to hear your views as I'm no expert when it comes to valuing a business! Isn't there an average multiple of earnings (say 2x) that would be a reasonable basis for a valuation? In this case business nets around $200k - but that does not include a wage to the owner. But assuming I run the business this gives me an annual income of approx $200k for an outlay of $450k - seems reasonable? Obviously subject to possible ups and downs.

 

[ok180]

Interested to hear your views as I'm no expert when it comes to valuing a business! Isn't there an average multiple of earnings (say 2x) that would be a reasonable basis for a valuation? In this case business nets around $200k - but that does not include a wage to the owner. But assuming I run the business this gives me an annual income of approx $200k for an outlay of $450k - seems reasonable? Obviously subject to possible ups and downs.

These calculations of Y x Z = X are all nonsense. If I was buying a business I would be looking at a few points.

1: How much profit is it making and how long has it been making it

2: How much turnover is it doing and how long has it been doing it

3: Is it showing growth?

4: Is there anything on the horizon that will effect the figures.

5: What needs to be fixed in the short to medium term.

If they are pulling in 200k on 600k turnover those are extremely good figures for a business in that price range. As per usual, you have to question why they would sell something making that level of profit. Stick a gun manager in there on 100k a year and keep 100k for yourself doing nothing, sounds like a great deal! Can you identify why it is they are able to pull that much from it? Have they not invested money back into the business for a while perhaps? You have to try to identify for a while where the money is coming from the best way to do that is hang around in the business for a few weeks, forget the books as they can easily be fudged.

 

[pinkboy]

These calculations of Y x Z = X are all nonsense. If I was buying a business I would be looking at a few points.

1: How much profit is it making and how long has it been making it

2: How much turnover is it doing and how long has it been doing it

3: Is it showing growth?

4: Is there anything on the horizon that will effect the figures.

5: What needs to be fixed in the short to medium term.

If they are pulling in 200k on 600k turnover those are extremely good figures for a business in that price range. As per usual, you have to question why they would sell something making that level of profit. Stick a gun manager in there on 100k a year and keep 100k for yourself doing nothing, sounds like a great deal! Can you identify why it is they are able to pull that much from it? Have they not invested money back into the business for a while perhaps? You have to try to identify for a while where the money is coming from the best way to do that is hang around in the business for a few weeks, forget the books as they can easily be fudged.

Best said there ^^!

pinkboy