||Ask the Small Biz Adviser
a combined retail-residential operation
Dear Small Biz
There is a small craft and variety business available
in my hometown. The building is 11,490 square feet with a retail
shop on the first floor and basement; six apartments are on the
second floor. The apartments would need major remodeling to rent
out, as they have been abandoned and used as storage for many years.
The business appears to be viable, but the seller
refuses to provide any financial data. She states she is selling
the building and the inventory, not the business. Is there any way
I can get this from her? Will a bank lend without this info? In
preparing a business plan I have gleaned some rough estimates of
retail sales for my small community. Would that be sufficient?
Also, I have virtually no capital to contribute. I
was hoping to get a loan to pay for remodeling of the apartments,
augment the existing inventory and keep $25,000 for working capital.
And at least in the beginning, I will be keeping my full-time day
job, with my mother working the store on weekdays. Do I stand a
chance with the financing? Thanks.
The seller is right on about the matter of financial statements.
She is selling you a building and some tangible assets, not her
business enterprise. Therefore, she has no obligation to share that
information with you.
If you think you another request, along with an added
coating of sugar, might result in some information then by all means
inquire again. But you may want to just ask her to tell you her
sales figures for only the last two to three years. Some other questions
you can ask include:
- What seasons or months of the year did she experience
more and less sales? In many locales there are seasons associated
with weather, events, holidays, etc. In the retail industry, most
stores secure more than 50 percent to 70 percent of their total
annual sales between Thanksgiving and New Year.
- What types of customers usually frequent the store?
Maybe she can give you some demographic descriptions like age,
gender, marital status, profession, etc.
- What type of pricing did she use? Wal-Mart, JCPenney
and Saks use discount, customary and prestige pricing respectively.
Typically, the pricing also reflects the quality of the products
- Are there any particular types or brands of products
to which the clients were more loyal? Learn some of the detailed
tastes of the customers.
These questions do not address her profit margins,
taxes, personal compensation, accounts payable and other line items
that she obviously wants to keep confidential. So think it over
and find a nice, tactful, respectful way to go back and approach
this subject. Acknowledge your understanding of and respect for
Answers to these types of questions are surely going
to add some insight
for your business plan. Also, if the woman has successfully
operated that store for several years, then a local lender will
be more receptive to your business plan.
Separating your enterprises
Another matter to which you may want to attend is that of
forming two separate business enterprises. One venture will be a
retailer, and the second venture will be a leasing company representing
you, the owner.
I state this separation for the obvious concerns of
liability. I expect you will address your needs for minimally acceptable
levels of liability insurance coverage for the building. However,
you do not want liability issues associated with the second-floor
rental units to spill over into the retail concern. Protect the
one venture from the other.
Speak to a commercial lines agent and an attorney
specializing in the incorporation process. Between these two professionals
you are likely to develop the appropriate business structures and
insurance coverage for each.
Coming up with collateral
Finally, the matter of collateral is one you simply cannot
Assuming your credit record is excellent, and collateral
is the only issue, keep in mind the building is the first source
of collateral. Leasehold improvements also qualify as collateral,
increasing the appraised value of the building.
If that is not sufficient then you may have to seek
someone with capital, or who is willing to add collateral to the
loan. In short, you may have to consider
As for working capital, I am glad you are going to
keep your regular, full-time job, because banks and other commercial
lenders are not big on capitalizing your compensation. They typically
insist on deferring an owner's personal compensation until such
time as cash flow is positive and cash on hand is sufficient to
cover two to three months of expenses and emergencies at any one
time in the month.
I hope this gives you more focus and understanding
of your obstacles.
-- Posted: July 18, 2002