LBO

very interesting.
you don't have to any money into it? just pay some fees and that is that? good luck op, sounds like a great deal.

>Private Equity analyst here

Have you done further due diligence on the business outside of just running a few numbers? Have you built a debt schedule? Whats the IRR?

A lot of LBOs fail because the numbers look good but there's some sketchy qualitative stuff - boosted numbers, upcoming liability (legal / environmental, etc.), all manner of things. You need to invest a significant amount of time and money into just investigating the thing before you buy it.

Any other questions feel free to ask

If it's so easy to run and consistently making profit why is the owner selling it?

If the books are good and youve done your own research then all seems pretty gewd.

>south carolina
>cash flow numbers from accounting book

>nope
>yep
thanks, it almost feels like im cheating.

no i haven't, my girlfriend worked there for 4 years during high school and we went to get some ice cream, and i asked the owner what his plans for the place was. he told me he wanted to sell it, but didnt know where to start and wanted to stop dealing with it, (hes the type of owner thats always at the shop). so i asked him if i came at him with a real number would he be interested in selling it to me.

he went to the back, grabbed the financials and let me look over them for a week and my dad looked over them too (hes an attorney, i know not accounting but it helped). everything checked out, and it legit looks like a guy who just wants to wipe his hands clean and still come out with some money. hes been running/owned it since it opened in 1994.

>debt schedule

n-no. i was just going to pay back as much as i possibly could every month (8k~ or so). shouldnt take a bit more than 3 years and will still leave the business with some cash in case god forbids something happens like a fuckin hurricane or some shit.

>IRR

fuck youre making me feel like such a fucking noob. all i know is after a little over 3 years, ill own this business debt free and can play with 130k~ every year from it.

god damn it should i hire someone to audit or do the accounting to crunch the numbers here? I'm not really a numbers dude, i just see opportunities and try to fuck them. hope this one doesnt fuck me!

hes been running it for 22 years and is 67 now and just wants to not have the headache, hes a real hands on type of owner and really stressed himself out micromanaging it. atleast thats what the current manager told me. i do know he wants to move out of state to just chill with his wife.

i thought the books looked good, but after seeing i may have to run my eyes over them again lol

but then again, the biggest risk to me is just losing the business, the way the deal is structured is im not personally reliable for anything incase it cant meet its debt obligations for some reason.

Well that's probably the best reason for someone wanting to sell.

I think you may be oversimplifying the owners role in the business if he was there everyday and micromanaging.

Have you had experience running this kind of thing before?
Employees call in sick, find new jobs, have issues with customers and eachother. You've got to manage payroll, suppliers and marketing.

Everything can be well and good on the books but i doubt your expectation of checking up once a month is how it will play out.

Worst possible outcome: you're running a failing ice cream shop. Doesnt sound so bad.
Best realistic outcome i see is youre running in there multiple times a week making sure all is going smoothly.

>why
because they don't even know you can do that
>am i missing
depends on what you end up signing, but i'm pretty sure whoever is loaning you the money either intends to scam you or is very inexperienced considering how you presented this problem.

anyway, most people who come to US as immigrants and suddenly become businessmen where before they were just street vendors or thugs, this is exactly what they do. my dad got a loan from a friend and bought a beauty salon before he even had the training or the language, then just worked 7 days a week with some young hires and everything turned out okay.

there are tons of old people now too. you caught onto an opportunity that will become pretty popular in like 5-10 years.

The whole deal should be under an LLC you control, nothing under your personal name. IRR is just % return. you want it to be greater than your interest rate (duh) and you're not selling equity. Investopedia and Google fuck these snobby fags they're trying to banker contracting tell them to fuck off

You do eeet.

I don't know if you really need to audit the numbers or hire an accountant... Make sure you have a proper acquisition agreement signed though, just in case you do find a problem that wasn't disclosed by the owner, covers your ass, that sort of thing.

I would honestly try and build a simple LBO model to see how this plays out financially - if you can't get an IRR above your interest rate, or if things get close to bankruptcy, then you've just thrown money and time down the drain. You can learn this stuff through google, investopedia, Rosenbaum & Pearl, and it'll make all the difference.

You definitely want to see audited accounts or at a minimum business bank statements, OP. What are you working off now? Tax records are also fine because people are generally less willing to lie to the IRS than you.

I personally think this doesn't sound that great once you consider the implied cost of putting in the time to run it but it doesn't seem obviously bad.

>...so i can just show up once a month to make sure its going smoothly

If you really think running a business works like this, you'll save yourself a lot of hassle if you file for chapter 11 immediately after the purchase.

>hedge fund guy here

I just posted but didn't see your reply. Why would you look at an LBO here to value it? There's no obvious exit that is going to be differentiated from your in-going capital so I would be more inclined to value it as a perpetuity once it's at a steady state of leverage taking into account the cost of hiring a full time manager.

Also, OP, is the ice cream shop highest and best use of the property? The actual property could be some tasty upside depending on where it is.

Personally I'd set it up as such with a debt schedule and all the statements, then probably going into a steady state like you suggest or an eventual sale, don't think OP would run the business forever.

Gives a good idea of the return, if he's going to get like 10% or a minimal MoM I'd suggest putting the money elsewhere.

We've left OP behind, but what would your required rate of return be on this bad boy?

Now that I think about it though, the numbers don't really make sense.

Revenue: 220,000
Costs, excl owner salary (including tax??): 90,000
Normalized manager salary: 40,000
Net income: 90,000
Less: tax adjusted interest: 12,285 (300k * 6.3% * 65%)
PF net income: 77,715
PF net income margin: 35%

...does that really sound right? I can't think of any companies that have that sort of margin that have real operations. large cap pharma might get close. this sounds made-up.

You'd at least want to be doing greater than the cost of debt, but that would barely be breaking even. I'd aim for like 10 - 15%, (have to do better than equity markets) in this kind of investment, maybe im being conservative cos owning a business is pretty high risk with illiquidity, unforeseen costs, etc.

Re: numbers, OP said 220k gross revenue, maybe theres a difference to net that would make the margins more reasonable? Is 80K net before the manager salary? Perhaps the owner doesn't pay salary but takes it out after tax as a dividend...

This is also mom and pop stuff, from what i recall in my summer doing middle market deals, some of the margins can get really wacky so it may not be that unusual.

My biggest worry with this deal is shoddy accounting and incorrect numbers though

Yeah, I'd be in the upper teens.

Here's where I shake out on the LBO assuming the numbers are trustworthy

OP, buy it if the numbers are real

docdro.id/rwXzB67

if he was micromanaging it, then your employees will start to fuck you over when youre gone more than he is.

t. an employee that fucks over his boss when they are away

Skimmed it and the numbers look reasonable, exit time seems a bit quick though if you push that back whats the sensitivity look like? Seems like a good deal if numbers are solid though.

You're missing quite a few numbers so I took a wild guess at things. Let's look at costs:

I assume that ice cream sells for $5/serving and at $220,000 revenue, that's about 120 servings sold per day, 44,000 servings sold per year. Let's assume that the cost of the ice cream is $1/serving. That's $44,000/year in costs.

The owner paid himself $50,000/year.

Assuming a rotation of workers that make $7.50/hr, that's $15,600 in wages for the workers assuming you only have one worker in the store at any time.

You're stating that the store nets $80,000/year.

So, we currently have the following:

$44,000 for ice cream
$50,000 for owner's salary
$15,600 for workers salary
$80,000 profit

Which is $189,600 out of $220,000 revenue. This leaves $30,400 for the salary of the manager, electricity, napkins and spoons, property taxes, and general maintenance.

I don't know what the store manager makes but if he gets $10/hour, that's another $20,800 in costs, leaving $9,600 for the other costs.

This seems like an OK deal. At 6.3%, you're paying about $6,000/month ($72,000/year) for a 5-year loan.

You might want to pay close attention to the revenue and profit numbers in 2007 - 2011, especially during 2008 and 2009 during the financial crisis. The thing you have to worry about is revenue drying up long enough that you can't make the payments on the loan and getting foreclosed.

What about insurance, property tax, and other business expenses?

He should definitely check the books and I'm not sure why the owner agreed to just $300k. How much is the property worth alone?

>tfw bank somehow gives this guy a loan for $300k for a LBO of an ice cream shop
>tfw either the current owner owes the bank money and they know it's going to fail so they're getting your shop
or
>tfw the ice cream shop owner works at the bank and OP just got got

cameras nigga

>cameras nigga
Cameras as a deterrent or to catch employees stealing?

Honestly. Some things don't make sense.

First. Do you actually know what companies do after the acquisiion via LBO? Basically they only do it if the company is undervalued or if they see they can increase the efficiency. Because Private Equities do LBO just like real estate agents do Home flippings. Buy cheap houses --> fix stuff, re paint it --> sell expense --> make profit.

I don't see anything of this in your plan. Basically you have 0 idea of icecream """industry""" I guess. Also in none of your comments you say how you will increase the value of the company.

Also you could do a financial planning and do a DCF to calculate the real value of the company.

Furthermore. I know someone who bought an icecream shop at a very touristic city. The guy told him he made a lot of profit (forgot how much it was) and the reality is he barely making any profit and he had to put more money into the business and reform the shop to be on positive net income.

Honestlt after seeing how you brag about your """LBO""" but barely have an idea how an LBO is structured, post transaction strategies nor exit strategies, it wouldn't surprise me if you just believe every lie the business owner told you .

And btw OP. Financial planning in such a small business should be easy.

> rent
> electricity (will be high I guarantee it, I worked for three weeks at this friends icecream shop like 4 years ago. He's the bf of my oldest cousin so I get to know plenty of info how he's doing)
> COGS
> insurance
> salaries

And then you can more or less calculate how many icreams you have to sell a day. (Take into account seasonality).

I calculated this as I wanted to practice for my finacial planning class and the daily icecreams to be at brrakeven he had to sell was high as fuck. (Remember if you have to close for a couple month due to seasonality or there is lower income, debt, renting, insurance etc. Will stay the same.

Just as everybody said above so a proper DD. And FYI I live in europe so hopefully for you things may be different in this """industry""'