Purchasing an Existing Business

Hi there

I'm currently looking at buying a business in the manufacturing industry. Recently I've been talking with a broker who is selling one on behalf of a guy who is moving out of country in two months. The business has been on the market for a while with no buyers.

According to the sales memo, the assets of the business are valued at ~$70k and the stock is valued at ~$70k. I've been told the owner is definitely moving and is desperate to sell and would likely accept an offer under $70k for the whole business, stock and assets.

Looking at the financials, the business hasn't been doing great, with a $50k loss in each of the last two years on sales of ~$500k. The owner pays himself ~$60k a year, plus super and a few other small perks.

Assuming the stock and assets are assessed at 70% of what the owner is saying, that's still $90k+of assets for less than $70k.

Could I just buy the assets/stock and sell them off piece by piece?

 

No where near enough information to really answer the final question, you'd need to do a stocktake and find out a fair value of the stock, for instance if it's all obsolete it could very well be worthless, the plant might be specialised and have a very minimal resale market.

You'd need to thoroughly understand and be able to value what you're buying yourself to know if you can effectively liquidate the assets and make it worthwhile.

 

For 20k upside that sounds like a massive risk. Owner heading OS, what if there's a trail of bad debts attached to the business. Would want $100Ks to even think about it

 

i assume you would be taking on the obligations of the business too, ie lease (is there a personal guarantee on the lease and will you be required to replace the current owner as guarantor?), are there any other debts you will be taking on?

businesses losing money can still have some goodwill/value, most however dont. so you need to ask them to explain why a crap business making its owner 10k a year net including working full time is wortth a dime.

 

So, $140k on the books... it would be a lot less (and a lot less than 70%) in a fire sale (and this is basically one of those).

Offer $1.

So how do you stem the flow of red ink?

There are easier ways to lose money.

I'll give you a bank account number if you don't believe me.

 

Sanity check received! Thanks all for your replies!

 

You would structure it in a way that you are not liable for the debts of the current owner. You wouldn't be taking over their legal structure, but just buying equipment (that is not mortgaged) and good will.