Getting financing when the seller understated earnings?

[Anonymous]

Hey ya'll,

Looking at a different mat I'd discarded as a possibility a long time ago, but am looking at it with some new understanding now... :)

The seller states the following (which I now know I can somewhat confirm based on water usage):

Asking price: $270,000

Sales revenue: $233,875

Net profit: $114,588

The problem? Her income tax statements don't support that. NOT EVEN CLOSE.

Assuming the numbers are close to reality, is it possible to get reasonable financing without good tax returns? Does anyone have experience getting financing with only proof from utilities?? Her broker says she's turned down good offers with less than half down.

Cheers,
pk

[Anonymous]

It is very difficult to get bank financing on this type of business, not imporssible but difficult. What about getting the seller to perhaps finance a smaller portion and maybe you can finance the balance by pledging other assets.

[PeterH]

Call the IRS on her. After they audit her and seize the business, you can buy it from them for pennies on the dollar!

Actually this is a great question. If 2 times net is $228K, and $114K net is accurate, it doesn't seem like a bad deal. But if she doesn't want to get into trouble with the IRS, find out what she reported to them as net.

[Anonymous]

This one is already the mother of all long shots... I agree that provided the numbers she's claiming are real, it's a helluva deal. Her broker already confirmed that she blew off more than one offer with a reasonable down, but less than her magic $150k down number.

lol... yep, my fiance' also said I should turn her into the IRS. Talk about bad kharma...

It's been a while, but I recall that she stated net at about a third what she's claiming. I know most folks with a cash biz prolly understate, no skin off my nose, but a THIRD?! The patriot in me is pretty incensed by that. Then again, the pragmatist in me is pretty clear this isn't a rarity.

Kirby, any pointers on where I could find this kind of financing?? Or where to start?

Cheers,
pk

[BWJR]

Lets start by getting some info in regards to the asking price. How old is the Mat and how old is the equipment? What type of equipment does she have and what is the break down. How is the income broken down. Did she turn over C schedules to you with the expense break down? What formula did you use to calculate water usage vs. income? What is the current lease and how much time is left on the current lease. Will the landlord give you extensions and options? How long has the Mat been on the market. The asking price may be too high based on information you may discover.

Now in regards to financing, will she hold any money and how much. If you go to a bank with her understated C schedules, the bank will deep six the deal. If you can verify the income and profit within reason, do you have a line of credit available on your current assets? Rates on Lines are vey low now, so now is the time to take advantage of the rates and loose money. I am currently paying 1/4% under prime based on what I use of my line.


Be Careful and continue to dig for info.

BWJR

[Kitty]

I hate it but it is a rarirty for a mat to show a 50% profit, dontcha think? What are the details in this deal?

Have you verified the income based on Utilities? Does she have ancilliary service? WDF vending video? How much traffic is in the store? Machine mix, age? Employees???

[Anonymous]

Hey ya'll,

Before I happened on this board (read, before I really started LEARNING about this industry), I was ignorant to the possibilty of verifying income from utility bills, so I left it on the "scheah right" pile. That was in December, 2002, and the mat had already been on the market for 2 years!

Includes 38 washing machines (22 – 30#, 6-40#, 2-50#, 8-35#), and 24 dryers. Have to get the machine breakdowns, age, etc., but assuming it's all old.

I got back in touch with the broker a couple weeks ago, and got the info that she's (seller) turned down some offers with less than $150k down. I don't have anything close to that for a down, more like $100k, and that's painful. I just sent him (the broker) another note saying "get me da water usage so we can start da dance". Going by there this weekend to see what I can see... but if I can't get financing, it'll be a waste of gas.

Good point on the profit margin, Kitty. My CPA said "watch out... these folks are famous for employing all their family members and not counting that as an expense."

I haven't even started my homework on this one, since it's a no-can-do without a lender willing to loan against the water usage, not the tax returns.

Like I said, this is still the mother of all long shots... : |

Cheers,
pk

[Kitty]

Girl,

No need to finance anything if there is not a deal under the dust.

First off you have 38 washers and 24 dryers? Not even close to a decent ration unless the 24 is really stacks = 48?

[Kitty]

According to this mix, based on a buck a pound, assuming the dryer ratio is 48 and can provide 40% of washer sales, then the current biz is doing 4 turns per day. If that revenue is washer and dry sell only and not including ancilliary services. Something sounds fishy......and if it is a freaking woman selling it, you'd better watch your back.:)

[Anonymous]

ack. Revenues include dry cleaning, and I'm willing to bet WDF as well.

ROFL on the watch my back crack! Yeah, I'm pretty clear this freaking woman is suffering from Diminished Honesty Disorder, the poor dear.

HOWEVER, if the numbers bear out a decent return after debt service -- and this is a dream of a location -- I'm not adverse to doing the deal. But I don't want to put ALL my eggs in one basket with nothing left over for new machines, big repairs, etc.

Line of credit -- maybe on our rental house... don't know if my fiance' could do a loan on his 401k for a laundromat or not.

Signature loan -- already approved for $15k at an obscenely high rate. Not remotely worth it.

Since I get the impression from the broker that she's not all that excited about selling, I'm considering this one barely worth my time, and only if I could get outside financing. Worth a look, if only for Just Another (Freaking) Learning Opportunity.

Cheers and Happy Friday!
pk

[pete f]

what do you mean income tax statements do not support? Gross or net? I would NEVER give my Tax statements to a buyer, and have never asked them of a seller. Taxes and a Laundromat are 2 differrent things. If you do not understand the system don't buck it. Given the owner has turned down 50% cash down offers mean it is probably one heck of a store. I have lived below the poverty level for the last 4 years by goverment standards. Where is that free cheeze? tax returns are the last thing you should be looking at. Who wants to pay taxes? The business creates economy, the workers pay the taxes.

Are you working with CASH or lines of credit.. by your last few posts.. laundromats do not do well leveraged as a rule, 50% of your own saved up in the bank cash will go you the distance and cash flow you want.

Every area is different, so w/d/f can be a good or bad.

[Anonymous]

Hi Pete,

I mean that banks require tax returns... my question is, is there a way to get a bank to do a loan when the earnings were understated on these?

I'm not evaluating the mat based on the returns; you guys have me taught me better than that! Now how do I get a BANK to buy into that??

Cheers,
pk

[Glenn]

Bank loan officers know what goes on with cash businesses. But they'll never sign off on a loan taking undecared income into account. They will only work with verifiable income. That means they want to see records of money deposited into the business bank accounts.

[BWJR]

No Bank in the history of the world will loan money on water usage. Real Estate Equity and hard numbers only. Also the fact that you are new in the business with little experience will be considered a minus. Don't get discouraged, but i want to be honest with you.

Good Luck,

BWJR