Thinking about purchasing a business...suggestions?

[SillyClown]

My wife does the bookwork for a small photo development and camera store. She is watching the owner run this business into the ground. He is past due on just about every bill imaginable and has mail from year 2000 that hasn't even been opened yet! So instead of watching this place go up in flames my wife and I have been toying with the idea of purchasing this place from him. We would take out a $500,000 business loan and offer $400,000 to the owner and use the other $100,000 to pay past due bills and fix the place up. Looking at the assets and liabilities we should be alright.

My question to anyone here is what do I need to do all of this? (Besides the loan of course) This place has a permit and everything but do I need to apply for any sort of business license? I live in the state of Iowa so maybe I should start checking stuff out on Google. Just wondering if there are any other things I would need to apply for to actually own and operate a business. I am not the smartest person in the world but my wife and I feel we can run the place a whole lot better than the shape it is in.

Any ideas, comments, suggestions would be appreciated!

Thanks!
Clown

 

[PsychoAndy]

youre probably gonna need a transfer of the license or a new license entirely. youre also going to be avised to incoprorate

how do you expect to get a loan for 500k? what kind of collateral are you going to put up?

store- building or rented space? if rented, whats the $/sq ft, cam and triple net? how long is the lease?

if building, whats the property taxes and valuation?

whats the business gross annually? if you do kick in half a million, how long do you expect to get it back?

 

[SillyClown]

Again - this is just an idea that came up yesterday. The 500k loan will come thru a bank that my mother works at. She and another there help with loans. She was talking to me the other day about an individual that recvd a $500,000 business loan to run a pool supply company.
I don't think that is going to be an issue.

The lot and land are assessed at a value of $170,000. It will be purchased and not rented. It's got around 14,000 sq ft. Property tax I am unsure about. It didn't come up on the county assessor website.

Annually the bussiness makes around $250,000+

If it is a 10 year loan we are looking at around $5500 a month payments. Which should be easy to deal with. Processing at this joint easily brings in $15,000 a month. Christmas time and Summer brings in a lot more. Anyhow the loan would be easily paid back in 10 years or less.

A lot of thought has gone into this already but I am not so sure I want to jump right in yet. We are trying to weigh everything and see what the cost will be to reestablish relationships with all the camera distributors and equipment companies that the owner is severely past due with.

So far it doesn't seem like too bad of an idea.

Thanks for the speedy response!

 

[ggavinmoss]

Well one thing in your favor would be not having to buy new equipment or find new employees necessarily.

Sounds very exciting. Do find out about property tax and remember all those little details like insurance, wages, benefits, blah blah blah.

-geoff

 

[amdskip]

What does this store primarily do, process film onsite or do they sell camera's mainly?

 

[SillyClown]

yeah that's what my wife and I were thinking as well. It's definetly an asset with everything that would 'come with the business'. The employees are good workers (heck my wife is one of 'em!) and the place has so many repeat customers. I'd love to get started but it still can be quite a risk.

 

[Scipionix]

You don't have to hire a lawyer, but if you, your wife, or some other family member knows one who can give you a good deal, it would be worth $1000-$2000 to get the whole thing straightened out -- that's a tiny fraction of the purchase price.

 

[SillyClown]

This place is great. They are the largest telescope dealer in the city, they sell anything from digital cameras to your normal 35mm. The individuals that process film are perfectionists so everything turns out great. They also have someone there that is a photochop master and edits pictures for people if need be. They can make 'copy negs' for people that lost there negatives to a picture and only have the picture.

This place can bring in so much more money than they are now if it was run properly. Everytime someone calls that place that is representating the 'bills past due department' the owner asks them to say 'he isn't here right now can i take a message'. It's pathetic. But anyhow...this store can do everything for anyone who is in to photography.

 

[kranky]

I'm not trying to rain on your parade, but by nature I tend to think of the "gotchas".

- What would the finances look like if film processing dropped by 30%? Or 50%? Because that's the direction things are going with digital cameras.

- It's good that you have a connection at the bank to get the loan, but you can be sure you'll have to put up collateral over and above the $170K building/land. Are you prepared to bet your house?

- Is there a chance the current owner is skimming profits that don't show up on the official books? (This could work in your favor, of course, because if so the business is making more money than it seems.)

- Do you have any feel for whether the owner is interesting in selling? If he is, and the business is as good as you think, why would he want to sell?

- What would happen if Photochop Guy or some other talented staffer left? Would that significantly hurt?

- I have a picture of my grandfather, but his back is to the camera. Can you scan it in and print it from the other side so I can see his face? 😉

 

[SillyClown]

those are all excellent questions!

- What would the finances look like if film processing dropped by 30%? Or 50%? Because that's the direction things are going with digital cameras.

This has been the speculation for some time now. Everyone that comes into this place to develop there film are anyone from wedding photographers to journalists to your average joe. I don't see processing going down any. Every business has there 'off' days though. Looking at the bookwork for the past few years the 'rough spots' seem to be Jan and feb and september. But the profit coming in from processing has probably been going up! So that isn't a worry.

- It's good that you have a connection at the bank to get the loan, but you can be sure you'll have to put up collateral over and above the $170K building/land. Are you prepared to bet your house?

This will be the biggest concern of mine if we decide to go through with it. The loan officer is a great guy. I truely believe if we show all of our figures from business regarding cash flow and all it shouldn't be a problem with the loan. My wife and I have outstanding credit. We will put up collateral if need be. It's all still a risk though as you have pointed out.

- Is there a chance the current owner is skimming profits that don't show up on the official books? (This could work in your favor, of course, because if so the business is making more money than it seems.)

Not to be terribly mean but I don't think this man knows how to do that. He just doesn't have the frame of mind to be a financially intelligent (or literate for that matter) type of individual. So this is also not too much of a concern.

- Do you have any feel for whether the owner is interesting in selling? If he is, and the business is as good as you think, why would he want to sell?

You have hit the nail right on the head. This is probably what will hold us up. We are thinking of getting our planning done and investigate everything a little more to find out EXACTLY how much debt there is. So we can put everything on the table when we make out offer. If he rejects it, that's fine. It was worth a shot though in my book.

 

[phatcow]

maybe you can turn your store into a online Etailer.... selling photography equipment... and then give us AT discounts....

then coupon codes....


HOT DEALS!!!!

 

[kranky]

If you are saying that the business would still be viable with a big drop in film processing income, that's great. I understand that it's doing well now, but when you buy a business you're kind of stuck for the long haul. If processing does drop off by 30%, and that makes the business unprofitable, I think it's pretty risky. Just run the numbers to make sure you won't be killed by an increase in people turning to digital cameras.

I say this because the motion picture lab I once worked in is being auctioned off next month. Bankrupt. It was a slow, steady deterioration until the bank came in one day and closed it down. (It didn't affect me, I had left already.)

Did you ask your banker if your offering price makes sense based on the financials? For example, if I understand correctly, you are thinking about offering 1.6X the annual net profit. That seems low to me.

 

[SillyClown]

Did you ask your banker if your offering price makes sense based on the financials? For example, if I understand correctly, you are thinking about offering 1.6X the annual net profit. That seems low to me

$500,000 would be gross income. The place can bring that in easily but as far as a net income and after all expenses (paying employees, supplies, utilities, property tax, etc) the take home for one year teeters on $120,000 a year. So an offer for $500,000 is close to 4-5 years worth of net income from that place. I think it's a fairly decent offer. But again...as you said I should probably run these numbers by the professionals...

I will let OT know how it goes...and there may be some Hot Deal action if all goes well :Q

 

[PsychoAndy]

you're actually considering a dollar for dollar buy? (match purchase price with one years revenue)

i dont mean to pick on you, but you just went from "Annually the bussiness makes around $250,000+"

to

"the take home for one year teeters on $120,000 a year"

so our profit margin has just decreased 52%. i mean, thats a strech. on one hand your're saying you can profit 250k, but thats on a gross basis. for the sake of keeping everyone/everything on the same page, denote a gross or net w/ figures.

dont forget property taxes, payroll taxes (FICA, medicare and unemployment), monthly landscaping, utilites, (is there an enviromental impact fee w/ film develping?), insurance, etc...

500k for a bank to lend is hard to believe. i'm not saying youre not going to get it, but i find it at an extreme. maybe your mom is referring to an SBA loan. that i can see, because you have property involved as collatteral and uncle sam is taking the risk and not the individual bank. banks dont particularly make commercial loans for new business purchase as per an old investment maxim. "past performance is not indicative of future results"

i mean look at it from this hypothetical perspective. lets say i have a business that has revenue of 1.3 mil with profit at 20% every year. someone wants to buy me out dollar for dollar, 1.3 mil. the buyer can go to the bank, crack open my books and show that the business generates 20% annually. will they lend out 1.3 mil for 5 years based on that info? more than likely not. from an my standpoint, personal credit history notwithstanding, a loan of that amount seems practically impossible. if you were to get a bank (non subsidized by the government) to front you a loan for 500k a 60 month term, at or near prime for the purchase of an exsting businesss, tell me where theyre at and i'll sign up.

my best guess is that for you to pull this deal, you'll need to have accountants check the books every which way and an attorney to look over everything and make sure the business is free and clear. my thinking is his debts will be up for collection soon.

 

[Zebo]

Originally posted by: SillyClown

Did you ask your banker if your offering price makes sense based on the financials? For example, if I understand correctly, you are thinking about offering 1.6X the annual net profit. That seems low to me

$500,000 would be gross income. The place can bring that in easily but as far as a net income and after all expenses (paying employees, supplies, utilities, property tax, etc) the take home for one year teeters on $120,000 a year. So an offer for $500,000 is close to 4-5 years worth of net income from that place. I think it's a fairly decent offer. But again...as you said I should probably run these numbers by the professionals...

I will let OT know how it goes...and there may be some Hot Deal action if all goes well :Q

I've read that 3X net is more inline with a small business.

I think you're putting the cart before the horse. You need to ask him straight out if he would be willing to sell. Don't beat around the bush simply ask if he says no, oh well no harm no foul. If he says maybe that means yes if the numbers are right. Before sitting down to discuss price and ask for an independant accounting for the last three years. Then you can prepare a business plan and an offer based on accurate financials.