Spencer Lofton still believes that those which lease the South Hamilton Elementary (SHE) Building will not only pay for their portion of getting the building up to code but fixing the water line problem so that there is sufficient water in the event there is a fire. Currently the water pressure is insufficient to fight a fire.
He has not considered a leader company which would draw others to White Springs, such as a Belks, a Biells, A Trader Joes or other national company, most of which would not move to White Springs due to the fact that there would be insufficient profits. Instead, Lofton has considered a dry-cleaner drop off, a fitness center and moving either the police or White Springs Administrative offices to SHE.
What Spencer doesn’t seem to take into account is that the lessor of such space needs to be assured that with all the additional costs to set up shop, there will be sufficient profitability to overcome the initial expense to fix the building and be charged for the water lines plus any inventory. And even though Lofton has bragged about investors who he felt would invest in the building, no investor will invest in a building that is not owned by the Town or by the investor itself. Furtermore, no investor will put money into a building which is not owned by them by reason that the investment is not secure and usually an investor wishes to make at least 30% on their investment.
A good rule of thumb for most businesses is that the business valuation should be no higher than 3 times the annual net profits anticipated.. Will the business provide a reasonable return on the investment, given the risk that the building is not owned by you, yet you are being charged for fixing your leased space. If your business does not receive the profits anticipated for the future, will you be able to break the lease and still be fine knowing that you have expended a tremendous amount of money to fix the building before you moved into it. In other words, as an active owner will the business provide the return on your investment and compensate you adequately for your time and money invested?
Besides the fact that your lease from the School Board may only be for a specific period one to five years and possibly a clause that if the Board decides to sell the property to someone else, will that cost additional funds and rental costs from a new owner….or the new owner may decide that all tenants may be evicted with a sixty day notice.
Furthermore the lease or sublease must be favorable so that there is assurance that when money is spent to remodel said building to the liking of the investor or business that the lease will remain I n effect for years or that the School Board prior to sale will reimburse the lessor or that the SHE building will not be sold to another after all the costs have been incurred by the lessor.
We know that the schools in this district are insured with the AIG under a special program for “schools”. Now it was determined that the Town would have to pay the School’s portion of the insurance through the School Board with AIG. However, with the Town renting it to other tenants which are not “schools”, the occupancy of the School Board’s policy would have to change to a “Lessor’s Risk”, thereby changing the policy premiums from what they are now.
Secondly, the School Board would require the same limits of liability from each of the Tenants as the current AIG policy covers, but with respect to each of the Tenants occupancies. And as such the School Board, et al would have to be included as Additional Insureds with an increased Fire Damage Limit in the event the tenant may be responsible for a fire.
So the new Tenant will have to look at Plumbing and Electrical Costs and Insurance Costs along with the Rent the Town elects to charge for the space which I believe Spencer indicated an amount that was less than $8.00 a square foot.
If the Town itself leases the building for police or for the office, the current FMIT policy limits are insufficient to provide the requirements of the AIG or the School Board.
But let’s look at some other problems we face in White Springs.
We do not have a valid Fire Department because there are no volunteers in the nearby area of White Springs since Stacy asked Kevin Pittman to resign. We have to depend upon Genoa.
We do not have an adequate Police Department because it has been neutered. Our police department will do nothing about thefts and will do nothing about the drug problems and other crimes in the Town. If the Sheriff’s department will not be able to respond, we have nothing.
Our Town has only about 800 people and if many of the people could not Pay Steve’s garage for repairs and tires, how do you expect these people to have the money to buy goods.
Mayor Lofty mentioned we should have a fitness center. In most little Towns, they have a strip mall which includes a fitness center, a grocery store and a small restaurant. We have two restaurants in White Springs and for as many drugs as our flowing in White Springs, who will take memberships of a fitness center? Those who are in agriculture or construction already have enough work which keeps them physically fit. Plus our citizens are mainly older where a recreation center would be a better choice for them to play games from cards to pool or billiards tables, zumba Classes or other exercises, but the costs and ability to pay among the citizenry is a problem. Many are on welfare and the older ones on Social Security. Who can afford the fitness center. And if there are insufficient people who purchase memberships, will the owner be able to have the appropriate trainers and equipment required to pay him or her for their investment? Plus the insurance is more expensive for a fitness center.
“Stress testing,” such as finding out what might happen to cash flow if sales are below your expectations or costs run above your projections? “Bankers often see if you’ll be able to pay them back if profits are off by 25 percent,” he says. “You should run similar scenarios.”
- Are there any easements, exclusive rights, or right of ways that impact the business?
- Has the business ever been a crime scene or has it been vandalized?
- Has the seller run into any trouble with the state, government, or IRS?
- What is the business zoned for? Is the area hazardous?
What do the customers have to say?
Unless you know who buys from you and why they buy from you, you will be flying blind,”
This is good to know before you engage in a letter of intent and is especially important during due diligence. What you find out can help you if you take over the controls.”
So it might be worth asking the seller about what kinds of things they have done to market their business and to generate inquires from new prospects, at least so that you know what you might need to do more of once you take over. “Ask them if they know which marketing efforts create the most leads,” he says. “What you want to try and find out is what marketing they are doing, if any, and how effective it is.”
“If they’re not willing to let any money ride on the business, should you?”
- What were the annual gross revenues of the business for the past two years and to date?
- What were the annual net profits of the business for the past two years and to date?
- What is the asking price?
- What assets are included in that asking price?
- Is the asking price supported by the profits of the business?
- Is seller financing available? If so, how much?
- Do you have the interest and experience necessary to make this business successful?
- Is there a positive outlook for this type of business?
- What’s the competition like?
- Do you plan to buy and run the business on your own or with a partner(s)?
- Can you afford to buy the business, given your personal and family constraints?
- Do you really need financing, or can you afford an all-cash deal?
- Do you have personal assets, such as retirement funds or home equity, that I can use to finance the purchase?
- Do you have enough money for a down payment? (10-20% for most traditional loans)
- Have you written out a business plan with financial projections to provide to lenders?
- Do you have a resume to provide to lenders which highlights relevant industry experience and/or business management experience?
- Do you have a good credit score (680+) that will allow you to qualify for long-term financing? (check your credit for free)
- How much collateral do you have?
This due diligence before you buy the business will help you confirm whether or not the business is worth what you’ll potentially pay for it, and it will help you find any red flags that may exist.
- Does the business currently lease space? If so, will the lease end soon? Does it need to be renegotiated before you close? These are not answers the School Board can provided since they are attempting to sell SHE.
- Who are the employees of the business, what are their roles, and what do they do every day?
- Who are your biggest competitors and how do each of them directly impact your revenue?
- How will you handle payroll, including paying yourself, after closing?
- Will you take a salary from the business right away?
- Is the business highly dependent on the personality of the owner, or is it fairly independent from the owner?
- Is there a good management team in place?
- Which employees do you need to make sure is staying with the business post-closing?
- Have I talked to employees, suppliers, and other third parties to get their perspective on the business and verify information that I’ve learned from the seller?