Advice needed on best buyout options?

Discussion in 'Growing and Managing a Business' started by PeterGurney, Oct 10, 2012.

  1. PeterGurney

    PeterGurney
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    Hi I part own two companies

    Company 1 = IT company established 7 years 57 / 43 shares in my favour with Partner 1 - last years t/o 470k net profit 40k
    Company 2 = Dialler & Telecoms Company established 0 years - 50 / 50 shares with Partner 2 - projected t/o 500k net profit 150k

    I am looking into best options to raise 100k to buy out partner 1 for company 1 and exploring a few options, the company runs itself and the partner has a limited role in the organisation and he is ready for a change, we have pretty much agreed a figure and payment schedule over 12 months

    however the real issue is how to fund the buyout as my time in mainly spent in Company 2 due to Co 1 being so well established

    should I

    a. Personally Finance the deal from equity in my mortgage or family and friends funding (I don't have the cash in the bank)
    b. offer shares options to existing or new staff who are IT skilled want to drive and develop the IT business
    c. approach a V.C or Business angel with knowledge and experience of growing a business and offer them to buy stock
    d. any other option I have not considered

    My skills lie in service delivery, management, product development and company set-up, skills for negotiating and sales are my weak point, i do not need help with Company 2 but this company will increase sales for the IT business as a by product creating a sales funnel.

    thanks
     
  2. Fergal

    Fergal
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    Welcome to Business Advice Forum Peter. Are your businesses based in the UK?
     
  3. ArcSine

    ArcSine
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    Peter, if your partner would be willing to take 120K spread over 3 years instead of 100K now, you could give him all of Company 1's net for 3 years and be done with it, without having to raise a penny of outside capital.

    Exchanging 100K received over 12 months for 120K received over 36 months implies about a 16% return on his investment---not too bad at all on his part, assuming Company 1 is pretty well established and stable. It's unlikely he could get a return like that anywhere else, and in this case he's getting 16% being invested for just a short term in a company he's already very familiar with.
     
  4. PeterGurney

    PeterGurney
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    Thanks this is something i had not considered, the business is located in the UK and this could be a real option, he currently draws 40k a year for his efforts so i assume i could draw up legals and use these funds to secure the deal, i may offer 30k up front and 2.5k over 3 years
     
  5. ArcSine

    ArcSine
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    I'm glad you picked up on that. I just used a very simple scenario for illustrative purposes, because it fit easily within the numbers you described (partner wants 100K over the first year; the biz throws off 30K a year). I didn't intend to imply, though, that this was THE way to do it, and I'm glad you're already thinking about variations on the theme.

    You can indeed play with the variables (X amount up front; Y amount per [month, quarter, etc] over time). You're shooting for a payout schedule that brings these three moving targets into simultaneous alignment...

    • Is palatable to the company from a cash flow impact standpoint;
    • Is attractive to the partner in terms of the mix of up front vs. deferred cash;
    • Provides a rate of return on his investment in the deferred component that's reasonable to both of you in view of the riskiness of the company itself (and also considering any external collateral, should you choose to do so, that supports the buyout obligation). (Side note: the arrangement you described---30K down + 2.5K x 36---comes to a roughly 23% rate of return to your partner. Whether that's reasonable depends on the particulars of the situation, as I mentioned.)

    Raising external capital isn't necessarily an evil, but in some cases it's kinda nice if it can be avoided. Keep us posted on how it progresses.
     
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