[VIDEO] Ep. 2 How to Get a Loan to Buy an Existing Business – Creative Capital Series
Ep. 2: How to Get a Loan to Buy an Existing Business – Creative Capital Series
In this episode of our Creative Capital Series, we speak with Paul Hildebrand, the Principal of Economasters, LLC, as he shares his journey of buying an existing business and continuing its path of growth into a thriving success. Purchasing Economasters in 2009, Paul expanded its production facility from 13,000 sq. ft. to an impressive 60,000 sq. ft. with the help of TEDC Creative Capital.
We also speak with key players that helped Paul throughout his entrepreneurial endeavors, including Eric Bohne of Security Bank and John C. Johnson of Bluestem USA, the business brokerage firm that assisted him in acquiring Economasters, LLC.
Discover the insights and lessons Paul learned from his entrepreneurial path, including the benefits of acquiring an existing business, financial planning for growth, and the significance of support from organizations like TEDC Creative Capital.
[Beginning of Transcript]
Paul Hildebrand: I’m Paul Hildebrand with Economasters. We build large industrial heat exchangers for manufacturing and the oil field industry, and almost anything there is.
It takes the affluent heat that normally is just lost into the atmosphere, it captures that heat and brings it back down into the boiler, so you don’t have to preheat the boiler. It’s just very green. It increases the efficiency of everything dramatically.
There’s a lot of industry right now that’s using waste to energy. That’s taking trash and burning it and taking that heat to generate electricity.
The largest one built to date is in West Palm Beach, Florida. We built 15 economizers for that one. Each one of these economizers weighs about 120,000 pounds, and they stacked them on top of each other because there’s so much heat being generated that we capture that heat, and it’s brought back into the boiler, and it’s making electricity. It’s a very green thing that’s going on.
Tulsa is kind of the center of heat exchangers, piping, things like that. Anybody in our industry knows Tulsa is really well known for that. People are amazed at some of the big stuff that we move. People like touring and seeing all of these big cranes and skids that we put these heavy units on. It’s just fun.
There’s a lot of grinders. So sparks are flying. We have some equipment that is just absolutely amazing. It can take a half-inch thick plate, 12 feet long and just bend it, just in seconds. When I bought the company, I didn’t even know you could have equipment like that; it’s just fast and loud. And then, you have cranes that can lift tens of thousands of pounds of equipment. Two cranes together can lift twice as much, and we’ll lift 120,000 pounds and move it down the bay.
I sold the other company, you know, and thought, “Well, I guess I could retire.” But I was 57. And I thought, “Well, this isn’t working too well.” So I thought, “I wonder if there’s a business I could buy and not have to go through all the start-up and everything.” And so I started looking around. And I had one guy say, you ‘ought to try to find a business that has an older person that wants to sell, the kids don’t want to take it over, but it’s doing real well. And I thought, “Well, yeah!” So I tried to kind of look for that thing.
I didn’t know where to go to try to find a business, so I just called up several business brokers, and I found one that I was comfortable with, and they were very helpful, both for the seller and for me.
This business broker sent me the Economasters front page. You have to sign non-disclosure agreements before you go into the details. And so the front picture of it was a bunch of metal; I thought, “Why is somebody sending me a picture with metal
[and how does it] have anything to do with my background, when I’ve been in high technology?” And so, just out of curiosity, I said, “Yeah, I’m interested in this,” and it wound up being Economasters.
I didn’t know how to weld. I didn’t know what an economizer was. I didn’t know anything about the industry at all, but it had people in it, and it had really good people, and I enjoyed it. And so we put a deal together.
John C. Johnson: Compared to starting a business, [when] buying an existing business, you will know that you should have revenues from day one. You should have a recipe that works. May not be perfect, but it’s working, and it is a strong foundation to start from. Then learn it, understand it, and start making improvements after that.
As a qualified broker, typically, we are the quarterback of the deal, who’s working with all the parties. Often, we need to be the second-most informed person in each aspect of the transaction.
We’re not as well informed on the law as a lawyer, but we understand a lot about the law that goes into the transaction.
Similarly, with the accounting. We need to understand the accounting, much like an accountant would, and for banking and finance, and for running a business, and for making a transaction.
The process has probably seven to nine standard steps.
It involves:
• The introduction
• Gathering information
• Putting information together to present
• Researching the market for the best way to go about marketing
• Going into the market
• Introducing prospective buyers
• Getting an agreement to confidentiality
• Nurturing the interest and communicating back and forth
• Working through to the point of having a buyer
Hopefully, multiple buyers that are prepared to make the letter intent to offer for the seller to consider and see which one best fits their situation. Again, going to the objectives.
Once they’ve selected one, the process of getting to the end deal begins. There’s the due diligence process, which is all of the investigations. Typically, a buyer can think of that as, “I’ll make you an offer that I’ll intend to keep, based on what I know so far, but then you’re going to have to show me that everything that I thought was true, is in fact true, from your books, records, inspections and so forth.” And due diligence is a very important part of the process.
At the same time, a full purchase contract and all the schedules are being developed, typically, financing is being completed, and then if it’s been done right, it’s a rubber stamp closing. Everybody goes home happy.
Paul Hildebrand: When I was working with the business broker, he had some banks that he had dealt with in the past.
And so I got to know TEDC through that and started working with them. I knew a lot was going on in the background because it was pretty easy. I was amazed how easy it was. And as I’ve watched over the years, they have the ability to get things done.
When we first bought the business, it was a much smaller building than what it is now. We have right at 60,000 square feet, and I think the first one had about 13,000 square feet, so it’s dramatically larger, and we’ve added onto it.
When I needed to buy the bigger building in order to do the kind of growth we wanted, of course, I had to go back and do another loan. And so, of course, the first one I call is TEDC. I found out you have different groups that participate in putting together a larger package.
And again, it’s done so efficiently by TEDC. I have a lot of trust in what they do.
Eric Bohne: We don’t make money until they make money. It’s just that simple.
You know, we don’t have a good loan until they have a good business.
What most people don’t consider is the amount of capital that is needed after they buy a business or after they go into business. You have a need for capital if things don’t go as expected. You have a need for capital if it goes better than expected.
I would always want enough cash, four to six months, to cover my fixed costs. The working capital cycle is enough cash to fund your operational costs, such as rent, salary, utilities and so on, and then it’s also to be able to fund your account receivables. All of this takes cash. So, what is the working capital cycle to be able to do all this and fund it?
The financing of material and receivables is normally through a line of credit from the bank. You’ll get assistance to finance the receivables and inventory. That’s a normal working capital cycle.
When you put your key in the door and you unlock it, you’re going to have to pay a proportionate share of everything, salaries and everything. Whether you make a sale or not, you’ve got to cover those fixed costs. And then you have to anticipate if somebody doesn’t pay you when they say they’re going to; that’s an extended working capital cycle.
Then, there are those that may not pay you, and that leaves a huge hole in that cycle. You’ve got to replace it in some way. That’s where a secondary source of capital and not putting all your eggs in one basket, and cashing everything in personally and having it all the way at the same time, is holding back some money to plug those holes as they may come up in the future, that you don’t anticipate.
That just goes back to the commitment you’re willing to make.
Paul Hildebrand: I’ve done it both ways. Economasters is the first time that I bought a business, and I wish I had discovered that before because a lot of the pains of starting a business have already been taken care of, and the hits have already been taken. And if you can find the right kind of business, then you’ve really got a winner.
I always had the thought that I just wasn’t smart enough for anybody to ever hire me, so I had to do something on my own. So maybe that was my first thought. I have to somehow make a living. What was the question?
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