I’m looking at buying a business with the seller asking for over $1 million. About 70% of that value is in the property and equipment, with the rest being the business itself (based on a multiple of the SDE). I’ve reviewed the financials for the past 3 years, but I’m feeling a bit stuck on what my next move should be.
Should I keep digging with the broker and seller, hire my own consultant or broker, start negotiating some sort of agreement, or contact a bank to see if I qualify for a loan? Also, how would I structure the loan? Do I need both a commercial mortgage and a business loan?
My biggest concern is whether or not I can even qualify for a loan. I don’t want to waste anyone’s time if I can’t. For reference, I have $120k in cash, over $200k in home equity, and I’m employed with an income of over $200k per year. My credit score is 850. Any insights would be appreciated!
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As a business broker, I’d recommend you be cautious here. Sometimes the real estate value can hide a low-value business. Make sure you’re valuing the business and real estate separately. Often, physical assets are included in the income multiple, which can cause some confusion and lead to overpaying.
You should think about building a team: an attorney, a broker, and a CPA. Ideally, these professionals should be paid an hourly fee so they remain unbiased. Starting with a buyer’s broker can help, as they can recommend trustworthy attorneys and CPAs who specialize in business purchases. Those specialists can be harder to find than brokers.
@Quin
I’ve got a small hotel and restaurant in a building we own. I’m not selling yet, but I’ll have to at some point.
The real estate is probably worth $800k based on local comps, and the business itself turns over $600k a year with a $180k net profit. If I want to sell for 5x profit ($900k), would the total value be $1.7m? It feels like double counting, but I can’t figure out how much.
@Adler
Yeah, that sounds like double counting unless the real estate is just an investment and isn’t directly tied to the business operations. If there’s a potential to make the property more valuable with a different use, you could try to convince a buyer of that and negotiate a higher price.
I’ve bought two businesses, started one, and I’m currently working on buying my third. All of them were over $3M.
Since you’re pretty new to this, feel free to DM me. I know a solid SBA 7a loan broker who’s great with first-timers. No fees on their end either. I’m worried the valuation and structure you’re looking at might not work out in your favor, and you could end up in trouble financially.
Dakota said: @Oli
Just curious, where do you find the businesses you buy? Do you go through brokers, or do you use online platforms? Any recommendations?
I’ve used a mix: business brokers, online listings, cold outreach, and networking. I’d say building relationships with brokers has worked best for me, followed by online listings and cold outreach.
My advice is to check the financials going back at least 5 years, especially pre-COVID. If the business was making $400k in revenue back in 2019 but is now down to $225k, it could be a red flag. Best to look for patterns like that before making any decisions.
Are you comfortable putting up that much cash and taking on a second mortgage? If so, it could work, but if not, it might be tough unless the seller is willing to finance part of the deal.
Don’t stress about wasting anyone’s time—deals fall through often, and brokers expect that. Your priority should be seeing if you can actually secure the loan, so reach out to a lender soon. No point in moving forward if the financing isn’t there.
For due diligence, definitely get a consultant. They’ll spot things you might miss. As for the loan, it’ll likely be a mix of a commercial mortgage for the property and a business loan for the rest, but that depends on the lender.
Make sure you know what kind of loan package (amount, interest rate, terms) you can get before moving forward, especially if you feel like the deal is fair.
Even if you qualify, if the interest is too high, it might not be worth it. Always ensure the investment makes sense after accounting for loan interest.
You could ask the seller to consider holding a note (seller financing). This would let them keep getting paid over time, and it could help you bypass the usual SBA loan process. If you’re planning to be hands-on with the business and see areas where you could improve it, this might be a good option. Older businesses often have room for improvement, especially if they’re behind on tech. Feel free to ask if you have any questions!