AnthemLights Posted February 25, 2017 Share Posted February 25, 2017 So we have an opportunity to buy a commercial venture. It seems perfect...it dovetails beautifully with what we are already doing, perfect business location, price is a bit high, maybe, but not unreasonable. And the bank gave us a verbal go-ahead and told us that they are excited for us to be able to get this place if it works out. But the bank also said that in order to pre-approve us for the loan that they would like to see 3 years of previous tax returns from the current owners. Not the whole return, just the schedule C on the business side of things. For some reason, the sellers are hesitant to give us these returns - which seems really backwards of them. If we are wanting to buy their business from them, shouldn't we be able to verify first how much the business makes? And not just take their word for it? They did give us one years returns (2015) but even after several requests they are holding off on handing over anything more. Their 2015 return looks good. They say they won't hand over the returns unless they have an approved offer from us first. Again, isn't that backwards? How do we know how much to offer if we don't know how profitable the business is? So what's going on here? How is this usually done? What are they worried about? It makes me feel like they are trying to hide something and yet they did give us 2015 and if we make the offer contingent upon verifiable income, why wouldn't they just show them to us in the first place? Thoughts? Quote Link to comment Share on other sites More sharing options...
Catwoman Posted February 25, 2017 Share Posted February 25, 2017 You can't make an offer if you can't figure out how much the business is worth. If the sellers want anyone to buy their business, they are going to have to demonstrate that it is worth their asking price. You need full financial disclosure, and not just several years of tax returns. You need to see all of the books. Period. If they won't provide the information, walk away. 6 Quote Link to comment Share on other sites More sharing options...
Robin M Posted February 25, 2017 Share Posted February 25, 2017 Yes, you should verify how the business has run the past three years and what the expenses and cash flow has been. We just went through the process to get an sba loan to buy a physical property for our current business. Very invasive financial investigation. We had to provide 3 years tax returns, all bank statements, do projected financials, etc. Are you buying the business or the physical property? If you are buying a business and will continue to run the business, they want the last three years so they know the business has been making a profit. They want to know the cash flow which will give them an idea of future viability. You probably have a verbal, but not a firm commitment from the bank. Depends on the bank. If this is SBA, they won't give you a firm commitment until they are 100% sure you won't fail within the first year of taking over the business. The current owners may not want to share any more tax returns because they had a bad year or just out of personal privacy issues. 2016 was a hard year for everyone including us so we had to document why our cash flows were down. Once they share the schedule c's for the last three years, it will open them up to questions not only from the bank, but you as well if you notice any discrepancies. If they are very resistant, it raises a red flag. 1 Quote Link to comment Share on other sites More sharing options...
Catwoman Posted February 25, 2017 Share Posted February 25, 2017 One thing that troubles me -- if they showed you the 2015 returns but refused to show you previous years, they may have padded their income for 2015 to make it look like the business is worth more than it really is. Be careful! 4 Quote Link to comment Share on other sites More sharing options...
AnthemLights Posted February 25, 2017 Author Share Posted February 25, 2017 We are wanting to buy the property and the business. It's a mini-storage set-up with a huge vacant shop on the property. We want the shop for our current business. The income from the storage buildings should hopefully cover the mortgage. So, in essence we would be getting a shop for free.... According to the current owners, the rentals are always filled. So, not really a very complicated business. Quote Link to comment Share on other sites More sharing options...
AnthemLights Posted February 25, 2017 Author Share Posted February 25, 2017 We would not be dependent at all on the income from the storage buildings. 1 Quote Link to comment Share on other sites More sharing options...
Corraleno Posted February 25, 2017 Share Posted February 25, 2017 I knew a family that had a business for about 20 years that they eventually wanted to sell. On paper it did not look very profitable, though, because they had all of their adult children on the payroll (who didn't really do anything) and everyone in the family had a company car, company cell phone, cadillac health & life insurance, lots of travel & vacations written off as business travel, etc. Add in the salaries, and the company was basically breaking even every year. When they decided to sell, they changed all that around, took the company cars & phones off the ledger, no travel charged as business expenses, dropped the kids' "salaries," etc., at which point it looked like a nice profitable little business that could be run by 2-3 people. But they only had one year of records that looked like that. OP, maybe that's what's going on with the business you're trying to buy, especially if it's a mom & pop or family-run business. Quote Link to comment Share on other sites More sharing options...
Robin M Posted February 25, 2017 Share Posted February 25, 2017 (edited) If the units are consistently full and customers are paying their storage rents on time, then the owner's shouldn't have any issue with showing their books. The bank will take into account, the income generated from the mini storage. Plus how you are going to manage that along with your own business. We also have a tenant now and the bank about had a heart attack after adding that income into the financial scheme of things, when we said he may or may not stay. They were pushing us to get a lease agreement when the bank hadn't even given us a firm approval. Ha! Anyhow, if you can get the seller in line to provide you with as much documented information as possible, it will benefit you in the short and long run. Once the place is yours, you can do anything you want with it, but you have to jump through all the banks hoops first to get there. Edited February 25, 2017 by Robin M 2 Quote Link to comment Share on other sites More sharing options...
AnthemLights Posted February 25, 2017 Author Share Posted February 25, 2017 I knew a family that had a business for about 20 years that they eventually wanted to sell. On paper it did not look very profitable, though, because they had all of their adult children on the payroll (who didn't really do anything) and everyone in the family had a company car, company cell phone, cadillac health & life insurance, lots of travel & vacations written off as business travel, etc. Add in the salaries, and the company was basically breaking even every year. When they decided to sell, they changed all that around, took the company cars & phones off the ledger, no travel charged as business expenses, dropped the kids' "salaries," etc., at which point it looked like a nice profitable little business that could be run by 2-3 people. But they only had one year of records that looked like that. OP, maybe that's what's going on with the business you're trying to buy, especially if it's a mom & pop or family-run business. It is a mom and pop business. I wondered if maybe other years don't look good on paper...like maybe a lot of payments received as cash and not reported so as to avoid taxes. 2 Quote Link to comment Share on other sites More sharing options...
Robin M Posted February 25, 2017 Share Posted February 25, 2017 It is a mom and pop business. I wondered if maybe other years don't look good on paper...like maybe a lot of payments received as cash and not reported so as to avoid taxes. Definite possibility or just poor accounting practices. Quote Link to comment Share on other sites More sharing options...
AnthemLights Posted February 25, 2017 Author Share Posted February 25, 2017 I still don't get why they would hold back, though. Either way we get to see the returns....either they show them to us now or else we put in an offer contingent upon the returns. IF they don't look good then we can withdraw the offer, right? So what's the point other than frustrating potential buyers. I feel like I am missing something because this seems like a no-brainer to me. :confused1: 1 Quote Link to comment Share on other sites More sharing options...
Robin M Posted February 25, 2017 Share Posted February 25, 2017 I still don't get why they would hold back, though. Either way we get to see the returns....either they show them to us now or else we put in an offer contingent upon the returns. IF they don't look good then we can withdraw the offer, right? So what's the point other than frustrating potential buyers. I feel like I am missing something because this seems like a no-brainer to me. :confused1: Yes, make sure you have a contingency clause in the real estate offer contract specifying contingent upon returns, results of inspections and any other conditions you may have. Our seller made life difficult by going to China for last two months of escrow and out of contact the whole time. Just don't know what goes on in the mind of sellers but they do have a tendency to stress out buyers. Quote Link to comment Share on other sites More sharing options...
AnthemLights Posted February 25, 2017 Author Share Posted February 25, 2017 Just don't know what goes on in the mind of sellers but they do have a tendency to stress out buyers. Yeah, me neither. :confused1: Thank you all for your help. Quote Link to comment Share on other sites More sharing options...
SKL Posted February 25, 2017 Share Posted February 25, 2017 You want to know whether they have been paying their taxes and utilities and other info that could indicate that you are inheriting past problems. Quote Link to comment Share on other sites More sharing options...
zoobie Posted February 26, 2017 Share Posted February 26, 2017 Maybe they'd feel better if you signed some kind of confidentiality agreement? Is there an attorney advising you on the sale/contracts? 2 Quote Link to comment Share on other sites More sharing options...
happi duck Posted February 26, 2017 Share Posted February 26, 2017 Hope it works out! Quote Link to comment Share on other sites More sharing options...
AnthemLights Posted February 26, 2017 Author Share Posted February 26, 2017 Maybe they'd feel better if you signed some kind of confidentiality agreement? Is there an attorney advising you on the sale/contracts? No we don't have an attorney. Only our real estate agent and the bank. We have bought and sold quite a few properties (although none commercial) without involving lawyers. Maybe we need to rethink this one though. Hope it works out! Thanks, Happi. :001_smile: We started with my husband being really pumped about the opportunity...me not so much. Then I really got on board with the idea and now my husband is starting to get cold feet. If there is one thing he hates, it's feeling like he is being jerked around. :mad: It's a huge decision for us. 1 Quote Link to comment Share on other sites More sharing options...
barnwife Posted February 26, 2017 Share Posted February 26, 2017 A couple other possibilities: high eviction/collection costs in the previous years. Or raised rents in order to boost the profit/value, unsustainable rents that will result in higher vacancies and other costs. 1 Quote Link to comment Share on other sites More sharing options...
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