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Does this happen?


Slacks
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Question for the money making dudes...  How often does this happen?

Person or people have $1MM.

They find a business that can be bought for $7MM, but it's valued higher... Buy for $9MM with SBA or other loan. Immediate $2mm equity.  Pull out $1mm, everyone is whole... And there is another $1mm to run the play again.

Is this, essentially, the game being played?

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20 hours ago, Slacks said:

Question for the money making dudes...  How often does this happen?

Person or people have $1MM.

They find a business that can be bought for $7MM, but it's valued higher... Buy for $9MM with SBA or other loan. Immediate $2mm equity.  Pull out $1mm, everyone is whole... And there is another $1mm to run the play again.

Is this, essentially, the game being played?

Tell us that you've never bought a company, without telling us ...  It would be a very odd company that just has an extra $1 MM in cash to "pull out" after the transaction.  Cash and receivables are often either excluded from a sale or there is an agreed-upon working capital target, with dollar for dollar adjustments to the buyer or seller depending upon whether the target was missed or exceeded.

This does not apply if you want to buy multiple small insurance companies and pull money out of them to impress your girlfriends, but then you might have to change your address and wear odd clothing for a long time:  https://en.wikipedia.org/wiki/Martin_Frankel

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55 minutes ago, DalTxHornFan said:

Tell us that you've never bought a company, without telling us ...  It would be a very odd company that just has an extra $1 MM in cash to "pull out" after the transaction.  Cash and receivables are often either excluded from a sale or there is an agreed-upon working capital target, with dollar for dollar adjustments to the buyer or seller depending upon whether the target was missed or exceeded.

This does not apply if you want to buy multiple small insurance companies and pull money out of them to impress your girlfriends, but then you might have to change your address and wear odd clothing for a long time:  https://en.wikipedia.org/wiki/Martin_Frankel

Dude, ALWAYS pull out after transactions. Especially with @South Austin’s mom. 

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So your plan is to “take out” a million for yourself, from a loan that has to be repaid, then use it as an asset to acquire another loan, and continue repeating the process over and over until you end up with a bunch of loans that are in excess of the value of the company and you can’t afford to repay them? Nope. Can’t see any problems with that as a long term plan.

Edited by SquishMitten
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On 9/6/2022 at 6:57 PM, SquishMitten said:

So your plan is to “take out” a million for yourself, from a loan that has to be repaid, then use it as an asset to acquire another loan, and continue repeating the process over and over until you end up with a bunch of loans that are in excess of the value of the company and you can’t afford to repay them? Nope. Can’t see any problems with that as a long term plan.

It is a great plan, especially if you can control a part of the lending market. You just lend a few extra million in deal A,  Then you take the extra and invest it into debt from deal B, rinse wash repeat.

Sincerely - Michael Milken

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On 9/4/2022 at 8:06 PM, Slacks said:

Question for the money making dudes...  How often does this happen?

Person or people have $1MM.

They find a business that can be bought for $7MM, but it's valued higher... Buy for $9MM with SBA or other loan. Immediate $2mm equity.  Pull out $1mm, everyone is whole... And there is another $1mm to run the play again.

Is this, essentially, the game being played?

Who are the poor bastards you are trying to scam?

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On 9/4/2022 at 9:06 PM, Slacks said:

Question for the money making dudes...  How often does this happen?

Person or people have $1MM.

They find a business that can be bought for $7MM, but it's valued higher... Buy for $9MM with SBA or other loan. Immediate $2mm equity.  Pull out $1mm, everyone is whole... And there is another $1mm to run the play again.

Is this, essentially, the game being played?

I heard of this working, but in the story I heard it was the sellers that made the extra millions.
Seller was in the rent-to-own business in Kansas/Oklahoma/North Texas, and he had something like 15-20 stores. He decided to exit the business, and used a broker to shop it around, hoping to get somewhere between 12-15 million. Gets a few people looking at it, but nothing really serious or in that range. I think his best offer was just under 12 million. Then a group came in and said they were willing to offer $17.25 million, but he that they could only get financing for $14.5, and he would have to take the rest as a 10-year note. 
He tried not to show his excitement, and 6 months later after all the due diligence, accounting and lawyer stuff they closed the deal and he got $14 million and a note for $3+.

The guy I knew asked how the lenders could justify lending $14 million, and he was told that the bank felt it was in a good position because the seller would never have take the deal with $3 in subordinated debt. Hell he was happy as shit because he got $2 million better than his next best offer. I was told the new owners filed Chapter 11 just over 3 years later, there was a recession and they were over leveraged. 

Don't think that lenders can't make bad decisions. Good luck with your scam, I mean scheme @Slacks

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1 hour ago, Wally Fairway said:

I heard of this working, but in the story I heard it was the sellers that made the extra millions.
Seller was in the rent-to-own business in Kansas/Oklahoma/North Texas, and he had something like 15-20 stores. He decided to exit the business, and used a broker to shop it around, hoping to get somewhere between 12-15 million. Gets a few people looking at it, but nothing really serious or in that range. I think his best offer was just under 12 million. Then a group came in and said they were willing to offer $17.25 million, but he that they could only get financing for $14.5, and he would have to take the rest as a 10-year note. 
He tried not to show his excitement, and 6 months later after all the due diligence, accounting and lawyer stuff they closed the deal and he got $14 million and a note for $3+.

The guy I knew asked how the lenders could justify lending $14 million, and he was told that the bank felt it was in a good position because the seller would never have take the deal with $3 in subordinated debt. Hell he was happy as shit because he got $2 million better than his next best offer. I was told the new owners filed Chapter 11 just over 3 years later, there was a recession and they were over leveraged. 

Don't think that lenders can't make bad decisions. Good luck with your scam, I mean scheme @Slacks

Yup, the only cash you can count on is the cash you get at close. Prom notes are subordinate to any lending terms.  

SBA lends on goodwill mostly but they lend based on the LOI terms and then third party valuation.  If the valuation comes back above the LOI terms that's good.  It won't change the deal unless it is much lower than the agreed upon purchase price on the LOI.  The key to that is not letting the seller or broker see the valuation.  

Cash on hand and the Net or AR-AP is trued up and typically goes with the seller.  

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On 9/5/2022 at 4:22 PM, DalTxHornFan said:

Tell us that you've never bought a company, without telling us ...  It would be a very odd company that just has an extra $1 MM in cash to "pull out" after the transaction.  Cash and receivables are often either excluded from a sale or there is an agreed-upon working capital target, with dollar for dollar adjustments to the buyer or seller depending upon whether the target was missed or exceeded.

This does not apply if you want to buy multiple small insurance companies and pull money out of them to impress your girlfriends, but then you might have to change your address and wear odd clothing for a long time:  https://en.wikipedia.org/wiki/Martin_Frankel

I've never bought a company...  Just think about it and read about it and read stories.... like the scenario I laid out (perhaps at different dollar amounts).

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10 hours ago, Wally Fairway said:

I heard of this working, but in the story I heard it was the sellers that made the extra millions.
Seller was in the rent-to-own business in Kansas/Oklahoma/North Texas, and he had something like 15-20 stores. He decided to exit the business, and used a broker to shop it around, hoping to get somewhere between 12-15 million. Gets a few people looking at it, but nothing really serious or in that range. I think his best offer was just under 12 million. Then a group came in and said they were willing to offer $17.25 million, but he that they could only get financing for $14.5, and he would have to take the rest as a 10-year note. 
He tried not to show his excitement, and 6 months later after all the due diligence, accounting and lawyer stuff they closed the deal and he got $14 million and a note for $3+.

The guy I knew asked how the lenders could justify lending $14 million, and he was told that the bank felt it was in a good position because the seller would never have take the deal with $3 in subordinated debt. Hell he was happy as shit because he got $2 million better than his next best offer. I was told the new owners filed Chapter 11 just over 3 years later, there was a recession and they were over leveraged. 

Don't think that lenders can't make bad decisions. Good luck with your scam, I mean scheme @Slacks

No scam here... Just curious.

Maybe I shouldn't have used such large numbers...

So let's say 900k / 700k.

Small enough that the current owner may be missing out on something that increases value... Or maybe current owner just wants to cash out and there just isn't a high demand for the business... 

I'm surprised that so many have responded thinking an income producing asset can't be bought at a 22% discount for some reason... 

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Who is going to loan 100% of business value on the finger?


Certainly income producing businesses can be bought at a discount.  Realistically though business valuation of a small business is more art than science.  Most challenging is the value of the person/people being bought out.  There are not a lot of stand alone or “professionally managed” small businesses that thrive without active owner management.

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  • 2 weeks later...
On 9/9/2022 at 7:48 PM, Slacks said:

No scam here... Just curious.

Maybe I shouldn't have used such large numbers...

So let's say 900k / 700k.

Small enough that the current owner may be missing out on something that increases value... Or maybe current owner just wants to cash out and there just isn't a high demand for the business... 

I'm surprised that so many have responded thinking an income producing asset can't be bought at a 22% discount for some reason... 

properly marketed opportunities don’t generally sell at that steep of a discount. Banks typically don’t loan money that ends up distributed quickly to the equity owners to be used outside the business, some loan agreements will even expressly prohibit profit taking. In some cases banks will loan more than required to buy if the appraisal comes back right but that excess is often earmarked and needed for real working capital and is not enough to pull of what you want. Sellers think cash on hand is theirs as well and they have a point often leaving the business at close cash starved. Hence a possible WC line of credit from a lender. Leverage across your entire personal balance sheet will also impact the ability to do this more than once, inability to manage more than one ongoing concern at a time makes this very difficult. On paper what you describe is “possible” but in reality it doesn’t happen until the balance sheet you are using to support multiple LBOs exceeds fuck you money. Certainly family offices and legit private equity do it or at least some variation on a theme - mostly just multiple businesses with director level management, good operators and banks or private lenders financing the deal. Often the idea of quickly pulling out cash is a fools folly.  Most seasoned PE/family offices look for a multi year horizon and don’t need to pull the cash to support another purchase (because they have fuck you money balance sheets). Many times they can’t pull the money out because of their debt structure doesn’t really allow for profit taking - either grow or pay down debt. Side note PE finance is very dangerous, it’s often predicated on significant growth to increase the sales multiple from a 4-5 to a 7-8 plus the incremental increase from growth. Failure to meet intense growth metrics and you’re fucked. So really the way you do this is buy one, grow it, sell it, rinse and repeat and if you’re lucky and have cash, business acumen and good operators you might get up to 2-3 at a time in about 15 years.  You also might go bankrupt. I went in reverse order almost bankrupt now not so bad. It’s a long road. 
 

what you describe is actually much easier with real estate - or at least it was about a year + or more ago. 

Edited by troph
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On 9/21/2022 at 12:21 PM, troph said:

properly marketed opportunities don’t generally sell at that steep of a discount. Banks typically don’t loan money that ends up distributed quickly to the equity owners to be used outside the business, some loan agreements will even expressly prohibit profit taking. In some cases banks will loan more than required to buy if the appraisal comes back right but that excess is often earmarked and needed for real working capital and is not enough to pull of what you want. Sellers think cash on hand is theirs as well and they have a point often leaving the business at close cash starved. Hence a possible WC line of credit from a lender. Leverage across your entire personal balance sheet will also impact the ability to do this more than once, inability to manage more than one ongoing concern at a time makes this very difficult. On paper what you describe is “possible” but in reality it doesn’t happen until the balance sheet you are using to support multiple LBOs exceeds fuck you money. Certainly family offices and legit private equity do it or at least some variation on a theme - mostly just multiple businesses with director level management, good operators and banks or private lenders financing the deal. Often the idea of quickly pulling out cash is a fools folly.  Most seasoned PE/family offices look for a multi year horizon and don’t need to pull the cash to support another purchase (because they have fuck you money balance sheets). Many times they can’t pull the money out because of their debt structure doesn’t really allow for profit taking - either grow or pay down debt. Side note PE finance is very dangerous, it’s often predicated on significant growth to increase the sales multiple from a 4-5 to a 7-8 plus the incremental increase from growth. Failure to meet intense growth metrics and you’re fucked. So really the way you do this is buy one, grow it, sell it, rinse and repeat and if you’re lucky and have cash, business acumen and good operators you might get up to 2-3 at a time in about 15 years.  You also might go bankrupt. I went in reverse order almost bankrupt now not so bad. It’s a long road. 
 

what you describe is actually much easier with real estate - or at least it was about a year + or more ago. 

So... I've been drinking, but this is long enough that I'm going to come back to it...

Thanks, Troph

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