buying a small business, broker turned me down?
I've been shopping around on craigslist with some success, but just recently tried the bizbuysell website. Found a few good ones I want to look into, filled out the confidentiality agreement with a broker that listed all my finances on it. He called me and pretty much told me I can't buy a business if I wanted to and that I need at least $100K cash on hand to buy one. I have $20K on hand, $40K stuck in the UK, $45K stuck in inventory, and $50K worth of credit card credit. I was requesting info on a $130K business and a $185K business. He went on to say you need at least 50% down to get owner financed and banks aren't lending right now specially for restaurant purchases, blah blah. It doesn't make sense to me because the broker is pretty much turning away a potential customer. I mean, do ALL business sellers require 50% down? When I was looking at a smaller one for $40K, the seller only wanted 20% down.
When I look at it logically, the business is $185K and reports a $100K annual net profit. So if I even managed to put $40K down, that leaves $145K that I could pay back FROM the earnings of the restaurant. I just don't get it. TONS of people don't have 10-20% for a down payment on a house, so how can people possibly expect people to have 50% for a business (that makes money vs a house not) especially in this economy? Also, doesn't with owner financing, if I were to fail to pay, wouldn't that mean the owner would repo the business pretty much?
I'd realllllly like to buy another business though :/
- 1 decade agoFavorite Answer
The broker is trying to be realistic for you.
You will not find a business selling for $185k which returns a $100 k net profit. You just won't, it would be worth closer to $500k-$1 million.
If you DID have a business such as this, it obviously has little in the way of assets, but consists totally of 'goodwill'. Goodwill is the value of a business over and above it's actual physical assets. For a small business, that means actual good will, in other words the reputation and connections the owner has made over the years. If the seller was foolish enough to sell to you without a large down payment, he risks you screwing up his goodwill, and if you do, what does he have to repossess?
It is VERY common for banks and other lenders to demand a much higher net worth before supporting a business. If nothing else, the cashflow of the company needs to be buttressed by personal wealth, or it become very unstable, working hand-to-mouth. so to speak, and will quickly fail.
The primary cause of small business failures is lack of capitalization, lack of money to operate in other words.
- 4 years ago
Buying or selling a small businesses takes so much attention because if there is any lose happened while dealing with buyers or sellers, then it will seems like a big difference in the cases of small businesses.
- GemLv 71 decade ago
Banks are not lending money to anyone right now. Especially small business.
We have a business that has been around over 25 years. We have a line of credit that we have had and made on-time payments on for over 6 years.
Our loan officer is avoiding us and it looks like they are going to "call" the note. Even though we have never been one minute late on the payments AND have a co-signer worth over $6million.
The broker is telling you the truth. If you find one that says differently, he is lying and you are going to lose your cash.