I have been consulting with a business buyer who is looking to purchase a preschool and would like to know if the asking price is fair and if she would be able to get an SBA loan to
finance the transaction. The asking price of the business is $200K (I'll get to this in a minute). She faxed me over the last three years tax returns and the business is growing in revenues but only shows $17K in adjusted net income average over the last three years.
I asked my client how in the heck did the owner establish the asking price of $200K? She responded that the owner "had several real estate agents drive around and do some research of other preschools that sold in the area". I love how business owners put their faith in such "proven valuation methodology". After I explained to this buyer that even if she wanted to pay such a ridiculous price for this small business she would never get financing based on the tax returns presented.
"Lets do the math", I exclaimed. After punching out the debt service payments on this proposed deal she was "upside down" & the debt payments on the loan would be more than the adjusted net income from the business being acquired!
My reply & try and negotiate with the seller (good luck) or go look for another business to buy - business where the price isn't established by "real estate agents behind a steering wheel" and an owner who understands and appreciates a
fair asking price!•
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