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Any advice as to where to get a loan to buy an existing business. A friend is selling a business for 95K. I have already had the books looked at and everything is good. I don't have any money to put down. Housing prices in my area (CA) are dropping a little. I have a real estate loan officer looking at a loan against my house, but he isn't sounding too optimistic. I will be running the business, will net me 80K a year, and my husband will keep his job (65K) a year. We can live off of the business income and my husband's income can pay off the loan... in 2 years. If I can come up with 50k down, my friend will finance the rest. I know he wants to sell and retire, so that is my last resort. I would still need the 50K down. Any suggestions?
If the business has assets that can be used to secure a note, then you've got the basis of a discussion with your banker about a loan.
However, if you have nothing to secure the loan except "blue sky", you've got ... nothing except a dream.
Your existing income is unlikely to support a $50K obligation, so that's out, too. A banker will typically look at your ability to make payments on the note from the perspective of you not deriving any income from the business you're buying. Could you support your payment obligations if the cash flow from the business didn't come through?
If your only asset is your house, and the folks you've talked to are not sounding too interested in that collateral for a loan ... then you're not in a good position to buy this business. It doesn't matter how promising the business income potential is based upon the current owner's books .... what matters is your proven track record in the business, of which you have none to date.
It's a "catch-22" to go into an existing small business. In my experience ... and watching others try to go into business ... the numbers generated by the sellers to justify their price rarely are the profits that you'll see for awhile, if at all. You must be well capitalized to buy into an existing business.
Even "franchise" business opportunities require a sizable liquid capital on the part of a buyer/franchisee before they'll let you buy into a proven business formula and location.
The only other option is to get the seller to give you better terms ... perhaps a very high percentage financing. From the seller's standpoint, that's a very poor deal ... it means they're still your business partner for a long time. The seller is taking all the risk as you could come in, not run the business profitably, and walk away with a minimal loss, if any. If you're buying mostly "blue sky", then you'd best look very closely at the real value and pricing of what you're buying. You may simply not be financially able to pay that price to be in the business ... there are many more out-of-pocket expenses to be in business than simply the purchase price of the business. Do you even have that operating capital? If you don't have money for a down payment and operating capital reserves, then you're not in any position to own a business.
Better yet, call a local small bank that makes SBA loans. SBA makes its loans through banks. With your friend willing to carry a good portion of the note you should be get a loan. I think you can even get some working capital as part of the loan but I don't remember for sure. They might ask for a lien on your house. If the income is as good as you say though you should be able to get an SBA loan.
Any friends with deep pockets that are willing to invest in you... treat it as high risk venture capital.
Do you have a 401k with that balance? There is a way if you are a certain LLC to use your 401k without borrowing the funds or facing a penalty. Your 401k basically buys into the LLC as an investment. High risk too, but any option you have will be high risk. If you do this one you must have a good attorney and accountant to make sure its documented perfect.
I would get a business valuation expert to look at the business just to be on the safe side.
I agree 100%. Buying a business for $95k when it "nets" $80k is highly suspect. It's usually not that high. Even most franchises that sell for $150-200k don't net more than $40-50k. But that's just my experience. You should look at the number much more closely before committing because if you're borrowing against your house and getting into more debt and you find that it nets A LOT less than what you expected, then you won't be able to make your loan payments. Just something to think about.
Most people that would loan the money will need some money from you.
Like at least 20%( maybe up to 30%) and NOT borrowed money, loaned money, etc. must be YOUR savings!
Now with the owner taking back a note, that is a great plus.
But you need to have something to lose to make another investor, bank, etc want to try this. That way they are not the only ones losing if things do not work out.
Location: East of Seattle since 1992, 615' Elevation, Zone 8b - originally from SF Bay Area
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Without having the capital reserve I would not recommend even trying for a loan, it's far too risky. Even if verified, the fact that the current owner can net 80k does not mean that you will. There will be a learning curve, and every business can be affected by things like new competition,
sudden increases in wholesale prices, less demand for their services, employee theft and so on. It's best to have the cash to go at least a year
with no profit, that is both business and home expenses. This is not the time to rely on a spouse's salary.
For all the very good reasons stated above I wouldn't do it. You've neither the collateral for a loan nor the initial operating expenses. Whatever your business interest and acumen, do only what you can afford to do without going into hock and work at turning something small into something bigger as your income from it grows. Good luck!
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