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buying an existing place

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piemaker2007

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While I’m waiting for a broker to call me back to help me I’m curious about the process of buying a business.

Can anyone that has been through the process give me some insights. Particularly in regards to getting more informaiton to be able to analyze the opportunity. I found a business on a listing site and all the information it really gave was asking price (275K), gross income (500K), cash flow (39, 500; no statement just a single number), FF&E value (175K), and current inventory value (8K).

At what point do you normally get more information on income statments, more detailed cash flow, paid taxes, etc? Do you normally need to sign a NDA or offer ernest money up front? Any advice on finding a broker to help me through the process (credentials, types to stay away from?).

Bryan
 
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You’ll need to sign a NDA for sure…

But to bottom line it…ask to see the sales tax returns…calculate the year’s gross revenue…take a max of 10% as their profit and multiply it by 2…

That’s a simple way…you’ll still be overpaying, but it’s a great starting point…

When folks ‘hide’ income, they loose when trying to sell their business…

Just my 2¢…

Semper Fi!
U.S.M.C. Auditor
3rd MAW, El, Toro, CA
 
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  1. You can expect to see a detailed P&L when you sign a non-disclosure.
  2. That is a pretty low cash flow number for 500K gross… but then who knows how they calculated it.
  3. Pizza stores often sell for 2X seller’s discretionary cash flow as posted above but also sell for 1X and 3X and everywhere in between. Factors that would influence that are many. Terms of the lease would be near the top of the list. Whether gross revenue and profit are climbing or declining would be another. Local market conditions, recent changes in competition etc etc etc
All things equal, I would expect to see SDE more like 100K than 40K with numbers on the rise and a good lease with time to run to justify a price of 275K… but that is just me. (I am, however a broker and business appraiser)

Since they do not tell you at this point how the cash flow number was derived, it is too early to draw a conclusion on that. For example, If the owner/manager takes a salary of 70K and the 40K cash flow is profit from the corp taken AFTER that salary it would be a pretty nice picture and not impossible at 500K revenue.

You will need to find out whether the seller will pay a commission to a broker or not. If they will not, you could still make a deal with one to represent you but YOU will be paying whatever the agreed amount is. Please DO NOT hire a “realtor”. You need someone with business transaction exerience. Even though most states allow realtors to sell businesses, that does not mean they bring anything to the party. (You will find that many business brokers are also realtors however)

The common steps in the process from this point would be:
  1. Make inquiry/ sign non-disclosure (give your bank a head’s up you are thinking about this) Provide YOUR financial info to demonstrate you have the $$ to do a deal.
  2. Receive P&L’s and basic lease info and then run the numbers.
  3. If the numbers work and you are interested, get tax returns, copy of the lease, meet with the seller. (time to tell the bank it is getting real)
  4. Sign letter of itent or make offer.
  5. Get to work on contract, financing, lease assignment, inspections… other documents such as non-compete, bill of sale for FFE and inventory, business registration, insurance, changover of utilities, phones, URL registrations…
  6. Closing.
Total time: Fast would be 30 days. 90 days is more common.

I would not expect to put down earnest money until an offer is made. Even then, it is not done in 100% of deals. Earnest money should NOT be held by the seller. It should only be held by a broker, attorney or title company who has an escrow account for the purpose. Even if you are working with a broker, you should have an attorney look at the deal and the lease and advise you.
 
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Hi Piemaker:

Just my usual advice to those buying an existing shop.

Building and health code are updated regularly.The shop you are looking at may not be up to date.

You will be required to bring the shop up to code to get an occupy permit.

Be advised the nothing is grand fathered in for a new owner.

Have the Health , Building and Fire department inspect the shop and tell you what if any upgrades will be required before you make a decision.

George Mills
 
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