First off, I highly recommend the book
Buy Then Build by Walker Diebold. It was one of the books that helped me make the decision to purchase a business, rather than try to start/grow one from scratch.
Hello all. I'm wanting to purchase a small business that could operate as passively as possibly allowing me to keep my current steady FT gig that I need 10 more years to reach pension eligibility. This has led me to consider laundromats as a # 1 option though I have also considered an existing pet grooming/supplies store. I have identified a few options in my area for around $350-$600k that generate the profits at least on paper to make this enticing enough to take the plunge.
I am looking to put 10-20% down and would likely end up with a SBA(7)a loan which I understand can take months to get approval. I haven't yet reached out to any of the brokers or a bank. I understand the SBA process can be lengthy and require a business plan, and a lot of detail that would come from the existing owner such as financial statements, etc. Looking at some of the ads on like Loopnet, Bizbuysell, the brokers do not want to release much info until you sign a letter of intent and some other forays into showing you are serious.
So my quandry is if the approval process can take so long and I need to do due additional due diligence in reviewing and these businesses could sell at any moment anyway how should I proceed? Should I reach out to a SBA lender first and have a talk with them about what to have lined up or will they basically tell me I need to identify the business first? Usually like with a home loan you would get a pre approval letter but obviously business lending is very different. Or should I reach out to the broker about the business I am interested in and try and get all the necessary information before talking to a lender?
Talk to some brokers and some banks. Figure out which brokers are trying to sell a steaming pile of crap, and which are realistic. Which banks are making business loans. Some lenders specialize in certain industries. Live Oak Bank for instance lends to a lot of veterinary clinics, breweries, and some other niches:
https://www.liveoakbank.com/small-business-loans/ Celtic Bank lends to car washes, day care centers, restaurants, etc.
https://www.celticbank.com/sba-7a-loans When should I get an attorney involved which I assume would be towards the end when I am looking over a purchase contract?
A letter of intent (LOI) is generally non-binding except for confidentiality. This can be a fairly boiler plate document and the broker may even have a template. You can involve an attorney, but you might end up spending $500-1,000 for something that basically just formalizes a few desired deal points (price, due diligence period, desired closing date, financing terms, etc.)
The real need for the attorney is the actual purchase agreement. You're probably going to spend a few thousand dollars - find an attorney that specializes in business purchases and/or real estate. Their main job is to write a purchase agreement that protects you - without killing the deal by being unreasonable or going back and forth driving up the cost over minor details.
Should I consider owner financing which often seems to require 30% down to bypass all the SBA requirements? Some of these laundromat businesses don't seem to have the best records though there are industry standards for valuations like reviewing the water bill.
Owner financing is usually desirable. It helps to assure a lender that the seller has enough confidence in the business that they're willing to put some of their money at risk. If the business is a complete failure and you (or the LLC the purchases the assets - don't purchase any business or commercial real estate solely in your own name) file bankruptcy, they're not going to get paid back on their owner financing. If an owner is unwilling to finance anything, it could be a red flag. Also, this should not be at some exorbitant credit card interest rate. Maybe a few percent over a bank loan, say 7-10% - and usually for just a few years at most. This could be financing just the inventory or just the equipment, or just a percentage of the purchase price.
Money is cheap right now. An SBA 7(a) loan is going to be 6% or less, usually for a 10-year term (longer if real estate is involved). That's better terms than you'll find anywhere else. And most importantly, the SBA guarantee means a business that is light on assets can be financed. Banks like collateral. They want to see a dollar of collateral for every dollar of loan - more if they can get it. So unless you have a bunch of home equity to pledge or the business is asset heavy (lots of vehicles, equipment, real estate, etc.) it could be difficult to get a loan approved on the cash flow of the business alone.
About 20% of the business I purchased was assets, and of that it was almost all inventory. All the rest was intangibles (customer list, brand, trademarks, domain names, process, supplier relationships, etc.). No bank would look at that without an SBA guarantee - or me pledging far more assets than I have.
Any thoughts and opinions on any of this especially the 7(a) experience would be appreciated.
Thanks!
If you are looking for passive income, make sure you are purchasing a business with a manager in place - and that your financial projections account for that. No broker or seller is going to say "this business takes 60 hours a week to run" they're going to say it runs itself and only takes them checking in once a week. That's bullshit. A business is not a passive investment. If it is, it's because you're giving up some of your profit to hire someone to run it. But if you're completely hands off it's not going to run as well as if you're involved. That manager is working a job, they don't have their own money invested and won't be as committed or invested as you are.
