Connecting retiring owners with buyers wanting to grow an established business

Blog

Tips and Articles for Entrepreneurs: Selling or Buying

Why You Can Probably Afford to Buy a Business Even if You Don't Think You Can

If you don't have a lot of cash in the bank, you can still likely buy a business. It's quite simple: Unlike a car, a business is making money that repays its own loan.

Think of a business as "earning its keep" - it not only needs to pay for expenses, employees, and your salary, but it also should be able to pay the loan payment every month and STILL leave you profit left over. (If it doesn't, don't buy it).

Let's take a main street example:

You find a coffee shop for $80,000. Now, you might not have $80,000 in the bank, but if you can find yourself $8,000 between you, family and friends, you have enough to put down on it.

Then, let's see if you can make a living:

The sales revenue for the coffee shop is $200,000. After rent, payroll and expenses, about 1/3 of that ($66,000) is left as profit as it is running today. However, the retiring owner has been gradually cutting back the business' hours and they are now only open for breakfast and lunch. You plan to extend the hours to the evening and expect easily, another 25% in revenue since you are near a college campus. So you offer $75,000 and plan on putting $7,000 down (you have $4,000 of your own money and ask friends and family to help pitch in for the rest) and you take out an SBA loan for $75,000 (this gives you some extra capital for refinishing the counter and buying some inventory). Your loan payment for a 10 year loan is roughly $800/mo.

Your first year, you will make the original $66,000 profit and subtract the $9,600 loan but look what have you done to streamline or grow the business! It turns out your 25% gain for keeping later-hours prediction actually turns into a 30% increase (that's $19,800) and you have easily paid your loan and earned an additional $10K! That's just your first year. You can proudly tell your friends that you instantly turned a $76,000 profit in the first year of your business and you're well on your way to further growth over the next 2-3 years.

Compare this scenario to a startup which typically does not turn any profit for 2-3 years and you're well ahead of the game!

Your tech startup friends will grumble that they're still eating ramen with the hope that they are in the vast minority of tech startups that make it big and hit the jackpot. But you can still take part in the fun: when they're ready for a round 2 investor, you can bring some cash into their business and earn even more! :-)

Keep in mind that the coffee shop is a very small business used for example. If you plan to go big, you also must plan for scale. How will you open more locations or exit the business to move into a more profitable industry? Knowing your exit path before you commit your initial funds is often an overlooked step for new business owners.

Now let's go to special circumstances:

You are a veteran, or other protected species like the <insert sarcasm> rare, endangered woman ("woah-man") </end sarcasm> and you may qualify for special circumstances. Here in Washington state, we have groups that address these situations with special considerations:

Business Impact NW: offers loans ranging from $5,000 to $250,000. Business Impact NW is a compassionate lender that exists to fund women, veterans, communities of color, immigrants, LGBT, and disabled entrepreneurs. The 5 C's of Financing allow them to be more flexible with funding than traditional lenders. The 5 Cs are: Cash-flow, Capacity, Character, Capital, Collateral. (read more on their site)

CRAFT3: Another non-profit offering creative lending and can say yes without full collateralization and account for character and other traits important for repayment.

A good credit score goes a long way too (banks will put a 650 as the normal threshold), but a not-so-good credit score doesn't make it impossible either. If you have assets, those can be collateral but try to limit your collateral to assets other than your home if possible. One attorney reminded me that everything regarding what collateral the bank requires before the loan is negotiable. Once the loan is made it is close to impossible to get a piece of collateral released.

In sum, there are so many ways to fund a business, you just need to lean on the existing business profit and your own ability to improve, streamline, and grow to really make the business work hard for you and your family.

Buying an established business is a great way to go (even if you have a day job).

Kris FuehrComment