Buying a business - need financing advice - Posted by Tammi

Posted by Tammi on October 21, 1998 at 16:58:42:

Thanks for your input Jimbob. The confidentiality agreement is on it’s way to me, after which I can receive a whole package of info including detailed financial data. I will run it by you again once I have more info. I’d appreciate your thoughts on my financing proposal/questions.
Thanks again.

Buying a business - need financing advice - Posted by Tammi

Posted by Tammi on October 21, 1998 at 12:22:34:

Hi. My boyfriend Michael and I are studying real estate investing (I’ve posted once before)and right now are actually looking into buying a business to provide more cash flow for investing in real estate (plus it’s something I know I can do well and would enjoy). I need advice on financing options for this deal. I realize this is not a real estate deal but I thought that one of you great financing minds could give me some advice/suggestions.

Here’s the deal:

It’s a retail flower shop for sale in Denver. They are asking $150K for the business. The gross sales are $330K and they net (before personal income taxes) $130K. They are willing to finance part of the purchase price themselves but are wanting at least a 50% down payment. We can come up with $30K from a home equity loan. They recommend having $10K for operating capital.

Therefore we need:
$75K - down payment
$10K - working capital

  • $30K - we can get from equity
    = we need $55K
    Where can I get this kind of money? Private investors? What interest rate would they want? 7%? Would a payback period of 5 years at 7% be attractive to someone for that kind of loan??? I have no idea. Also, would offering the seller a similar payback period and interest rate for the remaining $75K of the purchase price be attractive to him/her? I hope I’ve given you enough info, I’d really like someone’s opinion. Oh, and also, my personal fixed expenses are based on my current $33K salary…so I would be able to use much of the $130K (-taxes) net income to repay this debt. Also, the business has been operating for 5 years with a steady financial history.
    Hope you can help! Thanks!

Re: Buying a business - need financing advice - Posted by Harvey Carroll, Jr.

Posted by Harvey Carroll, Jr. on October 26, 1998 at 21:23:38:

Is this a business that you would love and appreciate being in? If not then you may be setting yourself up for a loss.
I would consider opening up a shop in the area and compete with them. For the same price you should be able to finance a nice building with commercial as well as a rental unit. You may have to do a bit of remodeling. Possible lease space to an antique shope, be creative…
Go out and do get some magazines that appraise such business and then contact local area equipement dealers and let the corporation lease and or purchase the equipment either used with cash and or financed with afordable terms. As far as the working capital; consider how much inventory you can purchase with $10,000 and how much you will have to throw away…
With this in mind, I would look at the real estate investment over the retail shop; however, get into a growing and enjoyable business at minimum expense. If the shop goes under then you still have your investment secured in real estate…
Good luck…

Rule 1 - Incorporate, let corporation buy… - Posted by raelynn mitchell

Posted by raelynn mitchell on October 24, 1998 at 22:53:00:

the business, as with a retail business there are many many liability issues.

Also, by incorporating, it is possible to build credit to the corporation by a step-by-step process that will allow you to raise some if not all of the $$$ needed to finance the business and the day-to-day operations.

Another reason to inc. the bus. is, individuals are taxed on INCOME, corporations are taxed on PROFIT. That means, if the corporation spends $$$ on its employees (you, your significant other) for normal items that would be spent on employees (medical insurance, 401K or ESOP plan, company car or van–for flower delivery and other business transportation issues–and other expenses that come up in the ordinary course of business, then by the time you get through, you may find that the business can be structured to break even and not make any money (or so little that you will smile as you make out the check to the IRS).

Definitely consider a Nevada corporation, as NV is the only state that does not disclose ownership. Many other states require revealing name, home address, and details about any shareholder owning 10% or more of stock. Nevada has NO DISCLOSURE rules (a very good thing).

Also, visit and check out Mr. Bronchick’s “How 2 Ensure You WILL get sued.” (Not sure title is exact, but you get the idea.) It’s a real eye-opener. If we can only learn what NOT to do, we can survive long enough to succeed at what we want to do.

Also visit, a note buyer/seller web site. Listed somewhere amongst all the real estate buyers is a paper buyer that buys notes secured by businesses. Contact this individual and ask them what they look 4/want to see in a note created by a business seller. Then structure a note secured by the business that you pay the seller. He/she then sells the note to the business note buyer during the same transaction or immediately thereafter, obtaining the cash they need while you have the financing you need.

Good luck in your new venture.

raelynn mitchell

Re: Buying a business - Posted by David Alexander

Posted by David Alexander on October 21, 1998 at 19:30:57:


Are you buying a business, or job.

Make sure you know the difference.

Good luck,

David Alexander

Re: Buying a business - need financing advice - Posted by JohnBoy

Posted by JohnBoy on October 21, 1998 at 19:13:05:

Whew! ok, sorry. I had to get up off the floor after reading this. If this business is grossing $330k with a net profit of $130k before taxes and has a selling price of $150k, then this sounds like one FANTASTIC deal! Why is the owner selling???

Who owns the real estate? Is it leased or owned by the seller? If it is leased, how much time is left on the lease? Will the landlord let you take over the lease? Will the landlord give you a new lease for a longer period if this lease has little time left? You say the owner has owned this for 5 years. Is he facing a new lease to sign with a hefty rent increase? This could be one reason he’s selling at a low price if his numbers are correct. Is his landlord willing to give him a new lease? For how long? For how much? The longer the lease, the better.

Does the owner have other flower shops? If so, are they all for sale or just this one? Does he have any employee’s? How many? Full time or part time? Does the seller work the business himself? With other family members like a spouse? If they work the business, how many hours a week are they working this business? Does their expenses show a salary for them as working managers? If not, this could be a reason they show good numbers. They might be doing all the work themselves and not showing any salaries for a manager or other employee’s. They would be just taking a draw against the income which shows as a profit. If this is the case, who are you going to have run the business? Yourself? If so, you need to account for your salary as an expense, not as part of the profits.

You say your current salary is $33k a year. How many hours per week do you currently work to make that $33k per year? How many hours per week will you be working this business? You need to account for your time as an employee and deduct that pay for yourself from the gross sales as a labor expense.

Lets say for an example that the seller is doing most of the work if not all of the work himself. He doesn’t show a salary as an expense. His pay actually comes out of the $130k net profit before taxes. So you go in and take his place. You end up working 70 - 80 hours per week. You are making $33k now for 40 hours per week. That’s about $15.87 per hour you make now. If you end up working the business yourself and put in 80 hours a week, you would take your current salary at $15.87 x 40 hrs. = $634.80…then you have an additional 40 hours at time and a half of $23.81 which comes to another $952.40. $634.80 + $952.40 = $1587.20. This is what you would account for as your salary working 80 hours a week to compensate what you would have made if you worked these hours at your current job. $1587.20 x 52 weeks = $82,534.40 per year. This would be an expense, not your profit if your working the business yourself. Take that $82,534.40 from that $130k profit and your true profit would be $47,465.60 per year. If you had to hire employee’s to run this, that would all be labor expenses you would have to pay out taking away from your profits.

Usually a small business would sell for around 4 years gross profits. If this $130k is his true gross profit then this thing should have a sale price around $450k - $525k. He’s asking only $150k??? Now if you take the above example and deduct your fair salary from that $130k, your true profit would be $47,465.60 per year. Four years gross profit of $47,465.60 would be $189,862.40. A lot closer to the $150k the seller is asking. Is this starting to make more sense to you now?

If you apply for a loan to purchase this business you will need to have a clear break down on all of these expenses to justify the money you will be borrowing from the lender in order for them to give you the loan.

If you have $30k to put down you could get a small business loan (SBA LOAN) to purchase this with. But since this is a creative real estate site that works in buying creatively we need to look at some other possibilities that may work with this deal.

Why is the owner selling?
He’s willing to carry 50%…what’s he need the $75k in cash for? Does he have a loan outstanding on the business?
What about the equipment like the coolers, counters, inventory, etc.? Does he own all this free and clear or have a loan against any of this? Or a lease with a buy out?
Whats he going to do with the money when he sells?
Does he lease or own the building the business is in?
If he owns it, would he consider selling it?
Whats the value of the improvements? (coolers, counters, etc.)

Depending on what the sellers plans are on what he needs the $75k cash for could leave him with facing a large tax bill at the time of the sale on this. (of course this is the sellers problem but it could be of a benefit for you to get him to work something else out) If the seller plans on retiring or buying into a different kind of business he will have to pay the entire tax on the the $150k when he sells plus recapture any depreciation he took against the equipment while he owned the business. This could wipe out a big chunck of that $75k he gets up front. The only way for him to avoid that tax would be to roll that money into another flower shop, otherwise the tax is due on the entire sale at the time of the sale.

Now if he was to “LEASE” you all the improvements as a separate equipment lease at 10% with a $1 buy out at the end of the lease, he could avoid the tax all at once at the time of the sale. This way he would only have to pay the tax as he recieves the payments each month from you.

You both should use a good attorney to structure a transaction like this. If it’s not structured properly the IRS could classify this as a covered up sale and you both could get into trouble.

Here’s how I structured the deal on the business I purchased.

The owner was asking $225k and wanted 50% down. He also owned the building the business was in. What we ended up doing was, we changed the name of the business. Basically he quit his business under his assumed name. Then he leased me the building the same as you would lease any other building you wanted to open up a business in. I took over the building doing business under my assumed name. Then we wrote up a separate lease for all the equipment. The lease was structured at $200k at 10% interest over 5 years with a $25k buy out at the end of the lease.

Technically the owner never sold me a business. He quit his business as if though he went out of business. Then he only leased the equipment to me for the amount he wanted from trying to sell his business. Since he didn’t actually SELL a business, and only LEASED me the equipment, he would only have to pay the tax on the equipment lease payments as he recieved them. No capital gains tax, no depreciation to recapture, and I walked in with 0 down.

If you end up getting a commercial loan, the interest rate will run around 9-10%. If the seller holds any paper the interest rate will be what ever you can get the seller to agree too. Usually a seller holding paper on the sale of a business wants 8-10%. But this will depend on whatever you both can come to terms on. How motivated is he to sell?

Re: Buying a business - need financing advice - Posted by Jimbob

Posted by Jimbob on October 21, 1998 at 15:36:05:


The numbers on this business sound out of this world which would lead me to believe something is amiss here. I cannot imagine any business selling for a price where one years profits would pay for the whole business outright, not even Microsoft can make that claim.

It’s still worth checking into but before I went through all the financial headaches, I’d want to get a look at their books for the last 2 years, might save you some trouble.


Re: Buying a business - need financing advice - Posted by DanM(OR)

Posted by DanM(OR) on October 22, 1998 at 09:49:08:


Thanks for your detailed answer to Tammi. I appreciate it. I myself also learned a lot about buying a business from you.

People such as yourself keep this site going.

Thank you and best wishes for continued success!