Determining the Sale Price and How to Finance the Acquisition
You can finance a UPS store startup, however, there are advantages to purchasing an existing UPS Store that has built up revenues over time. An existing store with an established location has developed relationships with regular customers who depend on the products and services offered. Building a business and clientele takes time. It is valuable to acquire a profitable store and to step into business ownership that that does not have to start from ground zero. Many successful, existing business, such as a UPS Store can be found and purchased via brokerage sites such as BizBuySell.
Of course as a seller of a UPS Store franchise, the owner would like to get as high of a sale price as possible. The owner has spent time, money and much effort to build up a good business and wants to reap the rewards of years of hard work. If the business owns the real estate, that could make price higher, but also give the buyer an opportunity to finance the building and business loan for a longer term. The buyer, on the other hand, wants to pay as little as possible or at least a fair price, but likely understands the value of stepping into a business that is already profitable, rather than starting out new. How does one arrive at the right price for the acquisition?
Appraising a UPS Store
The Business Reference Guide is a tool that can be used to determine a starting point for finding the value of an existing business. This guide does not replace the need for a good business evaluation by a qualified business appraiser, but it will help
Our lender partners who finance UPS Store acquisitions have shared some insight on what they have used from the Business Reference Guide to help determine a possible value when looking at financing a transaction. Whether the lender is offering a conventional business loan or an SBA loan the true value of the business must be understood. Specifically for the UPS Store our lender partner has used a few of the following ways to determine a rough value of a UPS Store location:
3 Rough Formulas
- 35 to 40% of Revenue + Inventory
- 2 to 3 times (X) EBITDA: (Net Income + Depreciation + Interest + Amortization + Owner’s Compensation + Inventory)
- 76% of Average Annual Revenues
Additional Valuation Factors
Of course it should be understood that there are also some intangibles that do not show on the tax returns or financial reports from a business, which can factor into the value of the business. A qualified business appraiser would be able to add in these intangibles. Again, the above calculations are a way to begin a discussion on the business value.
There might be reasons why the business might actually be worth more than what the appraisal has shown. What happens if the buyer and seller reach an agreement on a price that is slightly higher than the appraisal amount? An SBA loan for the business acquisition cannot be more than the valued amount. The lender will not be able to offer a loan for a higher amount than the appraised value. This does not mean that the seller has to settle for the appraised amount. We have seen businesses sell for more than the appraised amount determined by a 3rd party evaluator. In this case, if the purchaser agrees to the asking price or to a price that is slightly higher than the appraisal amount there is a way to work out a deal.
What if the purchase price is higher than the appraised value for a UPS Store?
The seller can elect to offer a carryback of the portion of the financing on a seller note. A seller note or loan is the perfect solution to make sure the bank financing is at an eligible amount and to still allow the deal to close if the agreed upon price is higher than the appraisal. The bank will often be willing to finance the full amount of the 3rd party appraisal/evaluation and will allow a higher sale price than the appraisal as long as the overage comes from the buyer or in combination with a seller note.
If commercial property is part of the transaction the equity requirement might possibly be less than 20%. Adding a building into the acquisition of a business usually allows more favorable rates and terms. However, if the UPS Store is leasing space and the building is not part of the acquisition the general term for an SBA loan will be 10 years, fully amortizing at a rate of WSJ Prime + 2.75%.
Seller Financing Considerations
When considering selling a business an owner may not initially want to think about carrying a portion of the financing. It is worth a second thought if it means that a higher sale price is possible. Additionally, a seller can stretch out a monthly income by collecting the loan payment in addition to the lump sums that would be collected at closing from the down-payment that will come from the buyer and the large chunk paid out by the lender at closing. Most seller notes are anywhere from 5 to 15%. Quite commonly many end up somewhere right in the middle at roughly 10% of the asking price.
From the perspective of the buyer, sometimes it is worth making a little higher offer than others to secure the deal. If the seller is open to a carryback it is a good sign that they will want to stay involved in assisting with a smooth transition of the ownership. There are pros and cons to every scenario. It might be a good thing to proceed without a seller note and to take over a business free and clear from the previous owner, however there is always the possibility that the previous owner might be needed for valuable advice. Rather than watching a previous owner take the full amount of funds for the sale all at once and then disappearing it might be beneficial to have the person available should some clarification or assistance be needed in the future.
Structuring the deal for a UPS Store Acquisition
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Helpful Business Lending Information
Franchise Start-up Financing FAQ
Buying an existing franchise? Read about Getting Financing for an Acquisition.
7 Financial Mistakes People Make When Purchasing a Franchise or Business and how to avoid them.
Benefits of working with a business loan broker or business loan brokerage firm to find financing