So it's been a while since my last blog. Thank you Chip for reminding me, lol.
It's been a month and a half since I went on terminal leave from the Marine Corps. However, it feels like I've been out longer. I recently go back from a trip back home to Ohio where I paid a visit to family and friends. It was a great trip, but very cold weather wise.
In my first blog I had mentioned that I was interested in setting up a business to do government contracting or purchasing an existing business. Well, I weighed all my options and I decided to purchase an existing business. There were many factors that helped me come to this conclusion, but the main one was money. I have bills to pay, and going the start-up route I may not see a return a year or two from the start date. If I purchased an existing business the cash flow would already be there, and I can work on building the business from there.
So my search began for an existing profitable business that I could potentially see myself in. However, I soon realized that most profitable businesses are very expensive. Since I didn't have the money to purchase these expensive businesses I decided to give my bank a call and see if they could finance the deal. My banker told me in today's economy banks aren't doing a lot of lending to small businesses, and if they are they have strict requirements they must adhere to. Not only that, but they would require 20% down. After hearing that news I knew my business selection would be limited. I didn't let the news get me down. I decided to call two other banks and see if they might be in a better position to lend. Unfortunately, I got the same bad news. Plus one banker told me the last SBA loan she did took four months to fund.
At this point I realized I may have to fund my business acquisition using a little more creativity. At first I thought why not bring on a partner. The only problem was I didn't really know anyone with money who was willing to go into business with me. I had thought to myself "wow Al was right, social capital really is important to have". I knew I had to find another way to fund my business. I thought long and hard about ways I could come up with cash for an acquisition. Then it hit me "why not do a rent to own".
Here's what I meant by a "rent to own". Because I invested in both myself and other assets wisely all my expenses will be covered for the next 3 to 5 years. That is a very important achievement because it gave me time. Time, which could be used to own/operate an existing profitable business for free, and use the cash flow from the business to service the debt. The only problem would be convincing someone to sell me their business in this fashion. I knew I needed some selling points. Something I could tell the owner that would give them confidence in me.
Here's an example business that I am currently working on. The owner want to retire out of the business.
Type: Welding Shop
Asking Price: 700,000
Cash Flow: 300,000
Asking / Cash Flow = 2.33 years to pay off with cash flow.
1. Now to sweeten the deal I offered him an additional 100,000 above asking price, so the new price is 800,000, which would take me 2.66 years to pay off
2. I told him I can use my service disabled vet status to potentially win government contracts and increase sales
3. I offered to work/own the business under a 4 month probationary period. If he decided that I wasn't doing what I said I would, which is increase sales than he would have the option to let me go.
Now I was the first person the owner saw since he put the business on the market. He had two other parties interested, and I told him it would benefit him more to go with me instead of the other guys because I'm offering more than the asking price and also they will more than likely low ball his offer. If I had the money I would more than likely low ball the offer as well. Everyone wants to get the best deal possible, and in the above case we would both come out on top. There would obviously have to be a lot of disclosure on both our parts and a contract to know our exact roles. This of course would protect the both of us.
Now I just play the waiting game to hear back from the broker.
What do you think about my plan?