Need advice on uying the Distillery from my friend

[Alvin322]

Hi,

My long time friend is selling his distillery. It is not a big enterprise but, it has good sales in the local market. I have been thinking about setting up a home distillery for a long time. Now, it is tempting to buy his business. I know how the industry works. I have helped him several times in the business. But, I don't have enough savings to buy it. I was thinking about mortgaging. The takeover would cost me 450K. I consulted with a mortgage broker, Canada Mortgage Direct and discussed various lenders and rates. I will be able to pay 20% down payment and get a loan for a period of 20 years at 3% rate with a monthly payment of 1.3k. I can thereby avoid the mortgage insurance too. But, I am a little worried over the duration of the loan. 20 years seems too long. But that is all I can do. I hope I will be able to retain the customers and reach out to more markets. I have never run a business before. Do you think it would be a good idea to buy the distillery on loan? I think I have given enough information about the process. I need advice. 

[Bourbon]

I think it's pretty amazing you're able to get a "mortgage" on it at all. Typically, business loan terms are reduced to around 7-10 years. That would increase your monthly payment by roughly 2.7x. As it is with most businesses, cash is king, and if you can push out payments over 20 yrs (especially at an insanely low 3%), you should do it, assuming the business is producing cash flows in excess of the debt payment. 

[bluestar]

I suspect it is a mortgage because you are using property as collateral? In any case, if you can finance the business at 3%, that is great. You only need to determine if in fact the monthly cost of the mortgage will be more than covered by the revenue of the business, when combined with all other operating expenses and your own salary. If so, it sounds like a good deal.

[Kannuk]

Alvin322, the interest rate you have is fairly inline with the current mortgage rates in Canada (I recently had to remortgage my house and was able to obtain 2.24% 2 year fixed amortized over 20 years with CIBC).  When I tried to obtain a business loan, I was looking around 4.5% to 8% depending on the provider. So to answer part of your question, your interest rate is good for a business loan but a bit high for a residential mortgage.  Just because your mortgage is amortized over 20 years, does not mean you can't repay it fully after 5 years or whenever your loan renewal period is. 

To determine if you should grow your business organically or get into it through an acquisition, then that requires a qualitative analysis.  You generally overpay when purchasing a business as you pay for their "goodwill", which is not a bad thing, it just means you paid for someone else's effort to get the business to the state where it is with their sales and distribution network.  You will likely save yourself a lot of time by buying into the business.

But the most important piece of advice that I can offer you, is if you're serious about this acquisition, then you need to reach out to a Chartered Professional Accountant specializing in acquisitions, and have an appropriate due diligence performed, with projected cash flows, break even analysis, and ask a lot of questions, especially since you've never had a business before.  Now the CPA will cost you some money, but they are trained in providing you the required information so that you can make an informed decision whether the price you are paying for it is appropriate and if the transaction makes financial sense from your perspective.  

So should you buy the distillery on a loan? Yes if you can afford it and if the distillery's branding and operations fit your long term goal. 

 

[HamBone]

Hi, not sure if you have moved ahead with your investment, but I think there are some more important questions to ask that don't have much to do with the mortgage and interest rate, and that's defining your return on investment.  If you spend 450K on the business, can the profits from the business support the payment of that loan?  If so, what is the margin left after the payment, and what's your expected return?  10% would be a typical minimum you'd want.

Kannuk above hit some points well, and most of these can actually be preformed through doing some pivots with a little data analysis. Look at sales, revenue, and net profit.  3 million in revenue might sound enticing, but that doesn't mean the business doesn't actually lose money.  Best of luck!

 

John