Buying a Wholesaler-Questions

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There is a wholesaler in my area for sale that interests me.  I've never purchased a business before but have about 30 years of experience with this type of particular business and have performed literally all functions including warehouse, accounting, billing, sales, etc.

Note:  I do not have the financials just the basic for sale listing info

Offer Price:  $800K (would make for a favorable debt service ratio)
Down Payment:  $100K (convert a portion of my 401K into a ROBS to fund this)
Cash Reserve:  $100K (again from ROBS to cover 6 mos cash flow since I don't think I would want to buy the receivables)
SBA Loan:  $700K...assuming 7 year term @ 7% interest ... PAYMENT = $10,564/month or $126,778 annually
Debt Service Coverage Ratio:  $160,000 (annual cash flow)  / $126,778 (annual SBA loan P&I) = 1.26

Before asking for the financials and paying my CPA to review with me I was hoping for some input on a few questions:
Is the 7 year 7% interest assumption par for an SBA loan?
Would $100K down payment be adequate equity? 
Would I be able to obtain an SBA loan without using the balance of my 401K funds or home equity as collateral?  I have strong credit and little debt
Can receivables be purchased at a discount i.e. 80 or 90 cents on the dollar?

The company owner offers limited owner financing ( a good sign I think ).  My thinking is to buy and grow the business as I have about 20 years to go until retirement...possibly bringing my child into the business in the future.  I know a few of you folks are business owners and I would greatly appreciate your thoughts thanks!


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What are they wholesaling?

Industrial products

Your LTV seems kind of high and your DSCR seems kind of low

Thanks what is a typical LTV & DSCR for an SBA loan?  I had done some preliminary reading and thought 1.25 - 1.30 was a fairly healthy debt service ratio.

Something like this assumes that you are making at least $126K a year to repay the loan and are essentially living poor that 7 years since you are retiring the loan. Of course if you can cover the note then year 8+ is easy street since you are making 120K+ a year net.

If the profits are high enough that you can pay for it in 7 years AND have a good income then its under priced. More likely the seller knows which, and if SBA is paying for it is guaranteeing his "retirement" either way. Even if he does some finance assistance that is just gravy, if the business is overpriced enough.

Good luck, either way.

Does the $800K offer include the real estate? If not, what are you paying $800K for that you couldn't spend $50K on an office lease, furniture, equipment and some inventory?

The cash flow is from 2015 and I would assume is NET after paying the owner compensation. The cash flow of the business.would be used to service the debt leaving around 40k free per year. I believe I will be able to improve that.

The 800k includes inventory and

I would not assume it was net after compensation, but net before. That would make a LOT more sense, if the seller was clear 126K+40K AFTER compensation then you are getting too good a price. (unless there is a market issue like a major customer going under or changing vendors that hasn't been disclosed)

BTW here's something my old 'not very legit boss' would do.

He had a company that wasn't doing very good.

1) Cook the Books after the fact
2) Present the BEST looking P&L sheet you have ever seen
3) Butter you up with great dinners, incredible tickets, and meeting flashy B-Grade stars.
4) Sell you the company
5) Move to another country

Buying companies without lawyers, lawyers, and accountants involved is just asking for trouble.

atikovi said:   Does the $800K offer include the real estate? If not, what are you paying $800K for that you couldn't spend $50K on an office lease, furniture, equipment and some inventory?
  Exactly. He would be paying a lot of money for a customer list, established logistics and current purchase contracts. 

What is the value of the RE alone?

Is the inventory on hand included? If so what is the fair discounted [fire sale] wholesale value?

The asking price is a $200K higher than that $800K number I am assuming
Real Estate Value is est $250K
Inventory I estimate at about $200-300K
Business itself looks like it's about 2x cash flow

Liquidation of all assets would net (my estimate) about $350K-$450K

Company has less than 10 employees

Do you know what your fiscal responsibility is to the 10 employees? Some States are restrictive. And does this business (type, function, transactions, customers) offer the employees special protections under Federal law?

I do not have the financials yet and so do not know if there are any special arrangements or obligations to the employees.  I would definitely have the lawyer put something in the offer that would require the seller to resolve any outstanding obligations to employees or governmental authorities prior to the sale.

We just sold a company earlier this year and this is what I learned:

1. Inventory value is in the eye of the beholder. We had it valued on our books @ $1.1million (and this was after "cleaning it up"). The buyer offered 100% for inventory that turned 3x/year or more, 50% of inventory that turned 1x/year or more, & 0% for inventory that turned less than 1x per year. We agreed and thought we were good until we got software that would run the report correctly. That report showed our inventory @ less than $500k. Ouch! I think we ended up settling for $700k +/-.

2. Receivables can be all over the map. We had some slow but regular payers and some deadbeats. I think they paid 100% for everything 60 days or less. 0% for everything over 60 days.

3. You should be given a credit for payables or they should be paid in closing. You don't want to be cut off from your suppliers because the former owner didn't pay his bills.

4. You should identify any key employees and interview them. Find out if they plan to stay, their thoughts on the business, etc. In fact, you may want to interview every employee (our buyer did).

5. You should identify any key customers and interview them if possible. This can be tricky and was in our case. We had a couple of multi-million dollar/year accounts that we didn't want to upset if the deal fell through. I think we covertly sent one of their guys with one of our guys on some sales calls to accomplish this. Certainly go over the entire customer list and figure out what would happen if you lost some of them.

6. You should identify any key suppliers and interview them if possible. This can be tricky too. Our buyer already had a relationship with our main supplier, but neither of us wanted to let them in on the deal before it was done. Ultimately, we agreed on a price contingent on a lot of things including maintaining the supplier relationship.

7. Real Estate value is pretty straight forward. An independent appraisal is cheap, get it.

8. Go over several years of financials, including tax returns. It's easy to fudge numbers for a year or two. Harder for multiple years. There are forensic accountants that will dig deep for a fee. Assume the owner is lying. Make him prove he is not. We were very thorough in our accounting for the entire time we owned the business. Our buyer was appreciative of this.

9. Add in all kinds of contingencies, including a long term escrow for items that come up after closing. Our escrow is 10% of closing price for 15 months with a 15% deductible. In other words, the buyer covers any "losses" up to 15% of the total escrow amount. We get the escrow balance 15 months after closing. This will cover any inventory or receivables discrepancies found after closing. An example of this for us was the buyer counted all the inventory but didn't open all the boxes. Some boxes had missing parts or whatever. They make a list and if it comes up to more than 15% of the escrow amount, they get compensated. NOTE - As a seller, I would really cut down on the contingencies next time. Those things ended up costing us about $600k of the original selling price. My partners were ready to get out though so we took the hit.

Thank bbr that was some excellent info.  What kind of wholesale business did you sell if you don't mind me asking?

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