Buying in Debt-free

Dear Dave,

I have an opportunity to buy a landscaping supply business. The current owner said he made $250,000 last year, and he's on track to make even more this year. There are three employees, and he's asking $390,000 for everything. The building is included in the price, but the land would be either a lease or purchase. Do you have any advice for taking advantage of a situation like this without going into debt?

John

Dear John,

I'm glad you're looking at this venture with an eye on staying debt-free. There would be a lot more small business success stories if all entrepreneurs thought this way!

One of the things you could do is work a deal where you take over management of the company and have an option to buy over time. You would pay the owner a percentage of the net profits, which would go toward your ownership. You'd take out enough to live on, but everything else would go toward your purchase of the company.

You said the guy is asking $390,000, but how do you know it's really worth that much? He told you he "made" $250,000 last year. Was that how much he carried home? Or was that what he grossed? How much is he paying those three employees? Do they have contracts, or could you let them go? I mean, he could be grossing $250,000 and literally taking nothing home, or the expenses could be $350,000 and the business wouldn't be worth anything. There's just a whole lot more you need to know before you do this deal.

As far as the building is concerned, I'd say no to the idea of owning a structure on someone else's land. I'm not paying him for his building unless the ground comes with it. You can rent the building and land from him after you become the business owner. I'd put the land and building in a separate deal, and lease them with an option to buy later – after I purchase the business. By doing this, you just lowered the purchase price of the business considerably because you took the building out of the equation.

Is the business paying him rent for the building and land now? If this guy isn't charging any rent against his calculation of net profit, then the figures aren't realistic. It's also not realistic if he's not paying himself anything to manage and run the business.

The bottom line is this: be smart, and do your research before you make a move on this one!

- Dave

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