Adventures with Lyrical: Buying a Business

[Lyrical]

Originally Posted by blizzak

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.

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.

[Lyrical]

Originally Posted by Tyreny

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

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.

Originally Posted by Tyreny

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?

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.

[Lyrical]

Originally Posted by Jysin-DW

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.

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.

[Lyrical]

Originally Posted by chu

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

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.

Originally Posted by chu

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.

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."

[Craelin]

I second Lyrical's recommendation for "Millionaire Next Door"; probably the best book I've read on money (I haven't read too many, though). I thought the authors did an excellent job discussing the pitfalls/temptations parents run into when they give their children too much help money-wise. In my opinion, this is the book people must read when they get tempted to pick up crap like "Rich Dad, Poor Dad".

From the point of view of a college student whose parents built their success from nothing, I've found the book's commentary rather invaluable in breaking some of my bad habits and avoiding other pitfalls that I or my parents would be tempted to step into. A+

[Lyrical]

Originally Posted by Desx

Do you use the same CPA as the previous owner?

I didn't answer this question. I plan on using the CPA the previous owner had, because they were able to shield the seller from about 150K-200K in taxes last year (legally). We had to have the guy come in, and he charges $80 an hour, even for small talk. He records every conversation, so if I were to pick up the phone and talk about the weather, this sucker would be charging me. I feel like I am getting nickelled and dimed.

[Lyrical]

Originally Posted by blizzak

I work nights 5 days a week and I typically put in about 6 and a half hours a night. In 3 years everything we owe will be paid off and I can then start to look for a good employee and drop down to a couple hours a day. Our spending habits and income haven't changed much if at all, but we don't like being in debt so we won't splurge much until we are clear.

Don't you worry about not having staff? I had to call in sick today for the first time (with the Flu I think), and it is definitely nice to have a secretary, manager and assistant manager to pick up the slack. I will also be visiting family next week, but we'll still be open for business. I can't imagine not having back-up = we'd have to shut down every time I wasn't there.

Another reason that businesses get put up for sale is when the owner gets sick, and doesn't have staff to keep running.

[Tuco]

Finally read the thread, thanks for posting it.

How much debt do you have now, and how much will you have before you buy another business?

[Snugglebear]

I hope Lyrical is a real successful black dood and not just another intricate Khorum-esque troll. His posts make me want to read this board moar.

[aychamo_aycono]

Awesome thread Lyrical, really good reading.

[Lyrical]

Originally Posted by Tuco

Finally read the thread, thanks for posting it.

How much debt do you have now, and how much will you have before you buy another business?

No problem. The process was pure hell, but maybe someone else can learn something from my errors and save six months' if they decide they want to do it themselves. After going through a gruelling year of getting jerked around, I wouldn't wish it on my worst enemy.

I will be open about my debt. The business is trending to do 350-400K this year. I paid 650K. So that is less than two times earnings (most businesses sell for two to three times earnings). Last year, it did 300K. The sales price was based off of last year. While we were in negotiations, the seller had some two killer months where he was netting 50K. He actually had four months this year where he netted 50K each month. The seller could have actually tried to raise the price (because the purchase contract had enough loopholes), but the broker didn't want to push it, as he had other deals where the seller thought the current year would be better, so he raised the price, and then the buyer walked.

Right now, with 10% down, I owe about 600K. I took out 20K from my 150K line of credit because some customers pay late. Its a classic b-school analysis. You have a business with a strong cash flow, but customers take up to 90 days to pay. You have to account for the cash flow you are outlaying for business ops in those months. Some people get into business, and don't account for this. A friend of mine bought a business in a non-bank deal (the owner financed the deal). But he forgot about the pesky little thing called working capital. They are making money, but forgot that customers pay later, and they put every penny into owner financing.

Some people forget that you can't pay bills with accounts receivable, you have to find ways to convert your A/R into cash.

Having worked for Corporate America for so long, I have known people that have made the jump and gotten into trouble, so I try to learn from their mistakes. I monitor my cash flow pretty close. Customers get billed pretty quick. When you go from a corporation that has billions of dollars in resources, to being a small business owner, you have to make adjustments. We just don't have the capital that we are used to having. So far, we've done a little over 50K in sales in last three weeks, yet 80% of our customers have paid us in the form of checks. We only have about $9,500 in receivables right now. At this rate, I am hoping to be able to not draw down any more from the credit line and have the business be able to live off of its own operations. Typically, this is the slow time of year for the business, and we are struggling to keep one week of business on the schedule. We are still netting about $5K a week, but unfortunately, people start to think about Thanksgiving, Christmas and New Year's more than they do about landscaping. The business typically loses money/hovers at break-even in December and January, and makes money the rest of the year. In the Spring and Summer months, we'll have six weeks of work backlogged, and then you have different struggles (like trying to keep customers on the schedule after they've waited a month).

I also realize that most b-school students ignore limited resources. In my program, a professor gave us three projects and told us that we only had money for one, so pick the best one. The majority of the class tried to vote to do all three. B-school students are notorious for trying to spend way more than even banks will lend.


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After paying ourselves we have 30K put aside for buying a new business. Another few months, we'll have the down payment to buy another business this size. I really hope that it won't take another year for me to find another good business that will pass the strenuous due diligence I will put it under.

I am also starting to think that as the recession goes longer, than we'll start to see business valuations come down. Right now, everyone wants their pre-recession 2007 price, but after a year's worth of bad earnings, hopefully they'll lower their price. A problem is that most businesses are down 20% this year, yet they still want three times earnings, which for alot of businesses equates to four times earnings. At four times earnings, unless there is a huge cash flow, most banks won't want to finance the deal. Oddly enough, if you have a really high cash flow, than the debt service you pay to the bank becomes smaller as a percentage of the NOB (net owner benefit). In other words, if you pay 200K for a business with an NOB of 50K a year, it hurts your net way more than if you paid $2 million for a business with an annual NOB of 500K.

I do know that the Millionaire Next Door talks about how the more mundane a business is, the more profitable it tends to be, because it doesn't invite as much competition. Most people ask what type of business I own, and when I tell them the specific type of category, their eyes glaze over. Its boooorrrrriiiiingggg. Yet we bill our customers $225 an hour, and in the peak times, run two crews both billing at a combined rate of $450 an hour. But our marginal costs per hour (mostly labor, gas and equipment repairs) in the peak ties are just a little over $100 an hour.

[Lyrical]

Yeesh, I just went through my business files, and in the course of a year, I looked very closely at 18 businesses (spending several weeks on each one), conducted due diligence on 4, and bought 1. That's alot of nights and weekend time. Brokers and sellers will sell you the moon and tell you they have a risk free business, but with the 18 businesses I scrutinized, 16 of them had major problems that were hidden by the broker and seller. And they could only be found by digging through the books, multiple meetings with the sellers and brokers, talking with the customers, observing operations, calling competitors, etc.

On one of the business that I was looking at for three weeks, some idiot met with the seller for 45 minutes, only looked at the P&L published by the broker and seller, and paid full price on the business. That type of behavior is just asking for a bankruptcy.

[lendarios]

Great story lyrical. I want to be able to start my own business of software developing. Its discouraging knowing that your company charges $125-150 an hour for the work that i do, but i only see 25% of that.

[Psyqo]

Great thread. Keep us updated. Good luck in this recession (it's going to be lonnnnggg) but it seems like you have a head on your shoulders and the right attitude about running a company.

[Tuco]

Originally Posted by Lyrical

After paying ourselves we have 30K put aside for buying a new business. Another few months, we'll have the down payment to buy another business this size

With the amount of money you're generating, why not stave off extra expenses/charity for some measure of time until you can pay off your debt and buy a business without requiring much if any credit? Is the gain from using credit to purchase business enough for your strategy?

edit: well deserved avatar change btw.