Question for Dory, others on a small business

[brewer12345]

A friend is considering moving and buying a dog kennel business with a residence on the same property. She hasn't picked one just yet, but I am helping her do some preparatory work. The property would be "mixed use" (commercial & residential) so I think it will be tricky to finance. I think that she should be able to get a loan, since she has good credit, will have a 20 to 35% downpayment, will have ample liquidity, and has experience running a boarding kennel. I can think of three sources of financing:

- SBA: likely to be time consuming. No idea what it would cost, but maximums on the SBA site put it around 10%.
- Bank: probably a little tricky to find a lender that would want to do a deal like this I suspect. Also no clue on pricing.
- Seller financing

Any other ideas or views from the trenches?

On a separate matter, what would you look at to make sure the seller was honest about the business and cash flow?

 

[soupcxan]

Does she have any home equity she can tap?

How about 0% balance transfer offers? Maybe JG can lend her some of his $100k float.

As far as auditing the seller goes, what sort of accounting system are they using currently? Quickbooks or Peachtree? I would think that you could do a mini-audit of a sample of transactions, independently confirm asset/liability balances, etc. I would think that any kind of SBA or bank loan is going to require financials, maybe you could kill two birds with one stone.

 

[dory36]

Most small businesses are sold with seller financing, unless things have changed a lot in the past decade. That alone is some comfort -- the seller is less likely to pull a fast one when he has to continue to collect from the buyer.

If I was the buyer, I'd look at the past reservations documents as a cross-check against claimed income. Then look at the tax returns as a cross-check against claimed expenses.

It is likely that at least some of the reservations were booked at a discount, so allow for that. Also, expect that the seller will report that expenses are somewhat inflated on the tax returns. This is normal -- his personal transportation might well have been charged as a business expense, even though there may have been little or no need for a business car. But after subtracting seller perqs from the reported expenses, make sure the remaining expenses seem reasonable for the business.

 

[TargaDave]

Most small businesses are sold with seller financing, unless things have changed a lot in the past decade. That alone is some comfort -- the seller is less likely to pull a fast one when he has to continue to collect from the buyer.

Seller financing of Mom & Pop businesses is still very common. In negotiating the more the financing the higher the price. Also sellers who finance look very carefully at the buyers ability to pay (assets, experience in the business being bought, track record in other business, etc). In this case if the business is small compared to the value of the house-property then it might finance and sell more like a house than a business but not enough info. Sellers also often agree to some term of business training to the buyer. Even if I knew the business inside and out I'd want the seller easily reachable. Lastly check out as many customers of the business as possible. What is the current reputation? It might have had great financials in the past but started going downhill just in the last year or two.