We’re Buying a Business – Update #3

UPDATE – We now have a NEW website, Laundromats101.com!
This blog, MyShinyNickels.com, will remain a personal finance website, while all laundromat-related goodies, including this blog post, have been moved to Laundromats101.com.
Click HERE to read this post on the new site…

Despite the relative silence here on the blog lately, things have hardly been quiet at our house. In fact, purchasing the business consumes my mind and my time much more than I thought it would.

It’s been the cause of several (nearly) sleepless nights, plenty of heated discussions and admittedly quite a bit of stress.  But we’re getting down to the final weeks, and the many details that are involved in this process are coming to a close.

Since I last checked in, we:

• Received approval from the lender for the small business loan we applied for
• Liquidated $50,000 from our investment accounts for our down payment and start-up cash
• Have met with the seller 15+ times to watch how he collects money, performs maintenance and how he generally runs the business
• Received conditional approval from the property manager to assume the existing lease
• Negotiated a 12-year lease extension to begin in 2018, with a lower monthly rent payment
• Have twiddled our thumbs a whole heck of a LOT

Now it all comes down to one…last…detail. But it’s a big one. The deal could go through, or it could fall apart, pivoting all on this one single issue.

And The Issue Is…

Let me start by saying that it’s fairly common for a commercial property manager to charge a small fee to assign (transfer) an existing lease from a prior tenant to a new tenant. It can typically range anywhere from a handshake to upwards of $5,000. This fee is typically paid by the seller (but of course nearly everything is negotiable), and covers the costs associated with attorney review of the lease, review of financial documents submitted by the buyer, etc.

So…last week, we finally received our conditional approval from the property manager to assign the lease to us once the business closes escrow. (It’s similar to qualifying for a loan; you submit lots of financial documentation, account statements, tax returns, etc. They want to be sure you are financially sound enough to take responsibility for the lease payments.)

However, as we made our way down the conditional approval letter, one of the “conditions” they are requiring is an assignment fee of $10,000.

Yup. $10,000. Yikes.

We were warned by the business broker up front that this property manager could be difficult, and that they may charge a hefty assignment fee. But we still weren’t prepared (and neither was our broker) for that number. It didn’t give us too much pause though, as we figured that it’s technically a seller fee, and our seller is very motivated.

He would pay it…wouldn’t he?

The Seller’s Response

Should have known it wasn’t that simple.  The seller has refused to pay the fee, stating that he is taking a loss on the business as it is, and won’t put any more money into the deal.

But here’s the deal (no pun intended, truly).  The business is in fact worth less than when he bought it. That’s a bummer, I get it. But that is due in large part to him not reinvesting into the business as he should have, and letting the net profits drop, which lowers the value. Maintenance of the laundromat has been at a bare minimum, and it shows. It needs some major TLC. (Although, amazingly, it still makes a very solid profit considering its condition.)

In fact, the poor condition of the laundromat is one reason why we’re buying it.  We want to buy a distressed business that is still doing relatively well, and improve it.  But we’re only going to pay what it’s truly worth now, not what it could be worth down the road.

Is Our Offer Fair?

There are industry-specific formulas that help with the valuation of coin laundries, and the offer we made (which was accepted, mind you) was well within that window. So we feel we are paying a very fair and decent price for the business.

With that said, I understand there is a mental hurdle he has to overcome. No one likes selling something for less than they bought it. (But to be clear, he has been making a nice annual profit each year. It’s just that the actual sale price of the business itself is less than he paid four years ago.)  He feels that our accepted offer reflects a “discounted”, “steal-of-a-deal” price.

The reality, however, is that the price of any commodity or real estate or business is dictated by what a buyer is willing to pay, not what a seller believes it is worth. So while he may feel like he’s giving us a real “deal” on this business, that’s not how it works. We offered what we felt it was worth, and he accepted.

Where We’re At Now

We’re in an odd holding pattern. The seller is refusing to pay the $10,000 fee, as he feels he has “lost enough”, but we don’t feel it’s appropriate that we should have to pay it either, so we’re at a bit of a standstill.

So earlier today, Randy and I discussed our goals and our comfort levels, and came up with our “final offer.” In fact, right now as I type this post, we are in the middle of negotiating.

Take It, Or Leave It

We have just offered to split the $10,000 fee with the seller, 50/50.  (We think that’s pretty generous, given that he’s far more motivated to sell than we are to buy.)

If he agrees to pay half, then we have a deal and we open escrow immediately.

If he does not agree to pay half, the deal is off.

Final Thoughts…

On one hand, we don’t like the idea of putting any more money into this business deal. But on the other hand, it seems silly to throw away the entire deal over another $5,000 out-of-pocket. Especially if that additional $5,000 was the only thing that stopped us from buying a business that could have changed our lives for the better, and allowed us to retire even sooner than our original 7-year (now 6-year) plan.

Just now, the broker responded saying he received our final offer and that he would reach out to the seller and see what happens. Now we cross our fingers, and wait…