Sell 1 IP and Buy Business

[outbackjack]

Hi all,

Never a dull moment in my live. Sorry if this is in the wrong section, please move it if it is.

As most know I have 3 IP's and 1 PPOR as follows, All x-coll.

June 06 This is the one I am thinking of selling
Purchase Price 186500
Loan amount 166000
Reval March 07 200000


Sept 06
Purchase Price 189000
Loan Amount 179500
Reval March 07 210000

March 07
Purchase Price 215000
Loan amount 241000
Reval July 07 260000

Aug 07
Purchase Price 237500
Loan Amount 271000

So total owing is around 850K and val is about 910k.

I have come across a business, which has great potential, the current owners are in their 60s. Figures are below

Sale Price is 190k plus SAV which is about 60K
Turnover last year 500k.
Mainly labor intensive business.

There is a husband and wife plus one other partner. Lastly they have a apprentice.

Wages per week net are
780 x 2
450 x 1
300 x 1

Like I said good potential, located in growth area etc. I have someone who will pay halve the business and come with there halve of the cash. Now I have to come up with my halve.
However speaking to my broker he doesn't seem think there is a hope in hell.

Mortgages are around 95%.

So thinking about selling one IP and this will only give me about 20 or 30K plus I have 20k in the bank. So hoping I could get a loan then.

Any one as any clues or suggestions. Or am I just dreaming???

Finally sorry for the long post

 

[Norwester]

Hi OBJ,

Given that all the loans are X -Coll isn't there a possibility that the lender will just take the proceeds of the sale?

ciao

Nor

 

[outbackjack]

Yes, they will take whatever it takes to keep loan under 95%

Maybe I just need to find a new broker who could help. But I guess using a property broker may not be the best person to try and figure it out.

Cheers
Lobo

 

[Kenster]

Lobo,

What is the cost to the business to generate that 500k sale?
(Please separate out interest cost and labour)

What is the lease term?

 

[Peter_Tersteeg]

It depends on the type of business, but chances are you'll only be able to borrow 50% LVR against the business. Unfortunately this will probably still leave you a bit short.

Your next problem may be that given your properties are all x-coll, the lender may want to use the sale proceeds to reduce the LVRs down below 95%. As Nor suggested, you may not get anything from selling a property.

I can't really offer you any answers, but gearing yourself so highly and x-coll everything has cost you a lot of flexibility. There is probably a way to do it, but it's not easily visible from your post.

 

[WinstonWolfe]

Consider that you have to get a good enough ROI to:
- match the stock market or bank interest
- plus allow extra to cover the risk and hassle of small business.
- plus pay yourself a good wage.

Another way to look at it, will the small business pay you a market value salary AND return what the share market might plus a few % extra on your capital invested.


For small business, you'll be considering 20% cap rate for low risk and 50% for high risk. That's 20%-50% return on investment after taking out salary.
ie.
Business Value = (EBPITD less Proprietor's Salary) / 50%

Why do you think the business has great potential when it is labour intensive?
Labour intensity makes it harder to increase net profit.

And keep in mind the economy may soften over the next 5 years.

 

[Sunfish]

Looking at your hand, you have no trumps left. You played them all buying your IPs.

Not many people play cards any more but you do learn tactics.