Starting/Taking Over a business

[HockeyPuck]

Hey all,

Just need to tap into the expertise here.

My wife and I have been presented with an business opportunity to buy into a partnership or take over a high-end, self-sustaining business from the owner who wants to pursue other avenues.

My wife and I are in oil in gas, she's graduated with an education degree and I have a engineering degree. We both have no idea how to start a business or even come up with money. We plan to set up an appointment with the bank, but how else can we come up with some money?

What are some experiences or words of advice from all the entrepreneurs out there?

[SportsJunky]

If it is startup money you are looking for you may need to decide if you want outside investors. I have a really good book at home (I think it is called Startup Nation) that you may want to get. Chapters has it. I have a couple of friends who, in order to start their businesses, had to borrow against their homes. In their cases it has worked out but I guess it depends on how confident you are in this company that you can make it grow. Also, do some research and put together a killer business plan. Go do some market research and talk to others in your same market.

[photon]

So the business is fully established? I.e. you'd be able to step in and just keep it doing what it is already doing to be successful?

Or is this a new opportunity?

[HockeyPuck]

Originally Posted by photon

So the business is fully established? I.e. you'd be able to step in and just keep it doing what it is already doing to be successful?

Or is this a new opportunity?

Yeah it's established, nice DT location and has it's loyal customers and is doing well.

[troutman]

Get advice from an accountant and corporate lawyer.

[photon]

As for raising money, family and friends are the obvious choices. Not sure how a bank will view you, if the business is established that's a good thing and works in your favour, but if you have no experience in running one then that might work against you.

That would also work against you with investors, if I was investing I want to invest with someone who has a proven track record rather than n00bs Which is why I'd suggest family and friends as they'd be more likely to cut a bit more slack than some random investor.

As an investor I'd want to see that you'd done all your homework, understand the business and its industry and how it works, maybe worked it so you were mentored by the current owner for a while... What kinds of things are you going to do the same, what things do you think you could/should change and for what reasons... I'd also want to know why the current owner is getting out; if it's making money and doing well why doesn't the current owner just keep it and get someone else to run it (unless they want their capital out I guess)...

Just thinking out loud about things I'd want to know.

[HockeyPuck]

Thanks guys this is great! Keep it coming!

[Ford Prefect]

It's always best to play with other people's money, so the bank or finding someone to provide venture capital would be the best money sources.

However, as photon mentioned, your lack of experience will likely work against you with banks and private investors. If you have lots of equity that you can use to secure a loan, the bank may listen to you, or give you a mortgage on your home. That's the route i had to go when i bought an established business.

I was in basically the same position as you ... looking to buy an existing business and didn't have any personal business experience. That was 19 years ago and the business is going strong. It was a bit of a fixer-upper when I bought it though so there were a few lean years in the beginning. Fortunately my wife earned a good income and that kept us solvent while I learned the ropes and turned the business around. So if one of you can work outside the business to bring in an outside income and provide dental and other benefits that's a real asset.

Based on my experience I would avoid family money and partners like the plague. Tapping family money can cause bad blood, and partners are useless in my experience. The partners I had never fulfilled their work obligations, and only handicapped the decision making process. Plus, their claims to being able to provide certain expertise were grossly exaggerated.

Aside from one of you working outside the business, at least at first, the only advice I have is that success in business is 10% inspiration, 40% perspiration and 40% perseverance. Maybe even 50% perspiration and 50% perseverance. It sure beats slaving for somebody else though.

[Dan02]

Originally Posted by Ford Prefect

I have is that success in business is 10% inspiration, 40% perspiration and 40% perseverance.

I'm gonna make a guess you're business doesn't involve a heavy dose of math

[Ford Prefect]

Originally Posted by Dan02

I'm gonna make a guess you're business doesn't involve a heavy dose of math

Larf ... you're right. I publish a magazine and have an accountant who does that math stuff. Journalist types are notorious for being math illiterate, which should tip you off to not believe anything reporters scribble involving numbers and math.

[Sample00]

I wish you all the success in the world. Having been self-employed now for 12 years, it has its daily and continued frustrations but the benefits of calling your own shots is well worth it.
Good luck. If you have specific questions please feel free to PM me. I use to do seminars on "How to start your own small business" for the ATA.

[photon]

Originally Posted by Ford Prefect

Based on my experience I would avoid family money and partners like the plague. Tapping family money can cause bad blood, and partners are useless in my experience. The partners I had never fulfilled their work obligations, and only handicapped the decision making process. Plus, their claims to being able to provide certain expertise were grossly exaggerated.

Good points, family can be tough.. if things go well, then they're happy, but if things don't go the way it's expected, then yeah it can be really bad.

And totally agree on partners, it's difficult at best, and at worst it will destroy your life.

[Ford Prefect]

Originally Posted by photon

Good points, family can be tough.. if things go well, then they're happy, but if things don't go the way it's expected, then yeah it can be really bad.

And totally agree on partners, it's difficult at best, and at worst it will destroy your life.

I've been partners with four people over the years. Three turned out to be really negative experiences, and one was positive. But even the one good partner still turned out to be a bad deal because she was partners with one of the three bad ones.

Based on my experience, I'm not sure if a good partnership is possible. If it is though, I'd say a good partner should have the same ethics, morally as well as effort-wise, and he or she should provide a different skill set that complements your skill deficits.

One more thing I'd suggest since it sounds like HocekyPuck is looking at jumping into this venture with his wife as a partner. Don't! That's doubly hazardous. Not only do the normal partnership hazards apply, but working with your matrimonial partner as a business partner really makes things tough. Not many husbands and wives can work together like that, so be very, very cautious. Even strong marriages can fail this test. I consider my marriage strong and my wife to be the ultimate. After 20+ years of marriage, we can even work together pretty well on small projects around the house. But I would never, ever consider working that closely with her, nor would she with me. Neither one of us would want to jeopardize our marriage like that.

[photon]

Yeah even the general real estate stuff that we do is really stressful at times. Good advice.

[HockeyPuck]

Wow, thanks for the words of wisdom.

I thought maybe partnering with the former owner might be a good idea. But maybe not so much. The former owner wants to pursue world travels and being some kind of public speaker, so I don't think they would have much time involving themselves in the business. Probably just wanting to collect the cheques I'd imagine.

As far as owning it with my wife, I guess I would continue with my current employ while she can take care of the business. Right now, we're living off of my pay cheque, so we should be ok.

[SeeGeeWhy]

A few questions...

Will it be a share purchase or an asset purchase?

Do they own the building they operate in, or do they lease?

BTW, there is going to be a lot of work before you figure out if this is right for you or not.

[Ford Prefect]

I think your in the right track with those decisions, especially not working together with your wife and instead bringing in an outside income. Both are hugely important in my experience.

As for partnering with the former owner, ya, it sounds like he just wants money for nothing. Instead, negotiate a deal whereby he is available to consult for a transitionary period (6 months? 1 year?), and after that you're free and clear of each other. That way you get the benefit of his experience, without get tied to an ongoing cash drain with little in return after the transition period.

[SeeGeeWhy]

Do you have a purchase price that you've agreed upon?

3 - 5x EBITDA is a good place to start for small business transactions. Higher multipliers for higher quality business (what defines "quality" is up to you, but it generally means stable numbers with decent growth rate, management in place and good prospects for the future).

You can also negotiate price for performance measures. For example, you pay $1 million for the shares of the business, but will pay an additional $500,000 if sales in the first two years is greater than $2,250,000. This is usually done if you have concerns about fluctuations in performance or a recent downward trend in performance.

I recommend doing Vendor Take Back.

Put 25% of the purchase price up yourself (home equity, savings, family loan, whatever).

50% of the purchase price will be a loan from the vendor that you are buying the shares or assets from, with interest of course.

The other 25% will come from a financial institution such as a bank, venture capitalist, etc. Depending on the risk rating and the security that the company has available, the interest rate on this will vary.

This model works well because it means you pay less up front, your return on invested capital can be excellent, and it keeps the vendor invested in the performance of the business (i.e. if he wants the rest of his money he is not going to bolt and leave you high and dry).

There will very liklely be caveats on the loans from the bank (i.e. sales need to be 1.5x debt payments, etc), but those are okay for a guy in your position because they keep you on track and working with your banker.

Also work to establish your operating line of credit, which is usually based on 75% of your accounts receivables and liquid inventory.

Become very intimate with the working capital requirements of the business.

Look for any sort of government grants or lending programs available to you that will help alieviate the burden of funded debt.

How much does the owner currently do?

Seriously, you have a lot of work to do before you can say this is good or not.

[Locke]

How hostile is this takeover? Will there be guns?

[HockeyPuck]

Originally Posted by SeeGeeWhy

A few questions...

Will it be a share purchase or an asset purchase?

I'm sorry, I'm not familiar with these terms - it's a privately owned company, so no shares involved... The owner just pretty much told my wife she wants to sell the business, and if we're interested, make an offer.

Originally Posted by SeeGeeWhy

Do they own the building they operate in, or do they lease?

I believe they lease.

Originally Posted by SeeGeeWhy

BTW, there is going to be a lot of work before you figure out if this is right for you or not.

Yeah, we definitely need to do our homework. I figured I would have to do more work than posting on an internet forum!