You’ve really got two loans here. One is real estate loan, the other is a business loan.
You’re paying $6 million. Let’s assume that the real estate is worth what you say, $3.6 million. That means you’re paying $2.4 million for the business.
Let’s further assume a simple 10% cap rate on the real estate, meaning that it would rent for $360,000 per year. Deducting that from the net operating income of the business ($1.2 million by your calculation) leaves about an $800,000 pre-tax net that is attributable to the business. So, you’re basically paying 3X earnings for the business, which is very likely about right given that the business really can not grow very much (it is limited by physical capacity, right?).
Let’s start with financing the easier part first, the real estate. If it’s worth $3.6 million and you can get the seller to allocate $400K of his $1.2 million take-back to the real estate, then you need to finance 90% of the value, more or less. This might be doable.
Now you need to finance the business itself, for which you’re paying $2.4 million. The seller will hold a note for $800K (the difference between the $1.2 million he’s taking back and the $400K he allocated to the real estate), leaving a financing requirement of $1.6 million.
This will prove challenging as there is really no collateral to secure this $1.6 million. There is not going to be much in the way of receivables or inventory or fixed assets that can secure this loan. This is a straight cash-flow deal. Now, you might be able to find a lender willing to do a $1.6 million loan against an $800K cash flow, but it will be tricky.
Your biggest challenge is that you don’t seem to have any experience running this kind of business and you’re not putting any equity into the deal. You’re basically asking the lenders to take all of the risk and yet have a limited upside. That’s a tough sell.
I’d put together a short financing proposal summary and go around and talk to a few of the local banks. See what they say. You might find some are hungry for assets, and others will tell you they can’t help you. If they say “No,” then find out what you’d have to bring to the table to make a deal happen. Maybe the current manager has some money squirreled away and would like to buy in. Maybe she has a friend or family member who would help her buy in to the business.
For what it’s worth, I don’t know that you have what I would all an amazing deal here. It sounds like you’re paying fair value for the real estate, and you’re paying a reasonable multiple on the cash flow of the business. Maybe these things trade for more than 3X earnings, but that’s not a bad multiple for a small business.
If it were me, I’d buy only the part that’s a good deal. If you’re paying full value for the real estate, then don’t buy it. Let the owner continue to own it and rent it back from him. Then you can just focus on buying the part that really creates the cash flow, which is the business.
Like I said, though, buying a business in which you don’t have any industry experience or “skin in the game” is a very tough sell to a lender.
I do wish you luck. It would be nice to pull this off.