Buying into existing business

Discussion in 'Growing and Managing a Business' started by kilkenny, Feb 24, 2012.

  1. kilkenny

    kilkenny
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    Hello all!

    I'm in preliminary discussions with the sole owner of a construction business about becoming partners. I would like to get some information on my best options for proceeding. This business has a debt the size of the value of the company. In simple terms, I am hoping to buy into this company by assuming half the debt. Does this make sense? Very small business here (well under $1 million).

    After we partner, we would both be full time 'employees' of the company. I'm thinking LLC or S Corp, not partnership. My main question at this point is whether it seems reasonable to the sole owner for another person to assume half the debt of the company for a 50% ownership...if that is indeed also the value of the company.

    I appreciate your patience with my inexperience in this type of transaction and helping me understand where to go from here.

    Thanks!

    ps: I'm in California.
     
  2. Business Attorney

    Business Attorney
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    What you want to do is not unreasonable assuming that the debt is equal to the value of the company AND that you and the other owner are actually each responsible for one half of the debt.

    There is often a problem with the second half of that assumption, but there may be ways to deal with it. For example, the debt is usually guaranteed jointly and severally by the owners. That means each owner is responsible for 100% of the debt. If one partner has insufficient assets to pay his share, the other partner is going to have to pick up the shortfall. Even if both partners have an equal capacity to pay, the lender may find it more convenient to go after one partner and leave it up to him to recover his share from the other partner.

    One way to deal with that is to change the guaranty so that each partner's obligation to the lender is capped at 50% of the outstanding balance. Lenders don't like that because if one partner cannot meet his share of the obligation, the bank cannot pick up the shortfall from the other partner. It increases the bank's risk on the loan.

    Of course the main problem may be with the assumption that the business is worth nothing more than the debt. Current owners often have an overly optimistic view of the value of their business. That needs to be determined up front.
     
  3. kilkenny

    kilkenny
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    Thanks!

    I shouldn't have any problems with the lender. I've been assured they can structure it any way we like.

    For a small business valued at around $300,000, what would be the best setup? LLC or S Corp?

    Is this deal something that we would need an attorney to assist with or can this be done on our own if we fully understand what we want? Money is tight!
     
  4. Business Attorney

    Business Attorney
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    I'd strongly recommend getting an attorney any time a business has two or more owners. There are lots of issues to consider such: How do you deal with a management deadlock (i.e., you disagree with each other on some key decision)? What happens when one owner wants to leave the business? What if one owner dies or becomes disabled? What happens if an owner files for bankruptcy? What happens if an owner gets divorced and the court awards the ex-spouse half of the owner's interest? What happens if the business needs money and only one owner has his share of the cash to contribute? These and more questions need to be answered.

    As for the question of LLC or S Corp, the attorney should help you there, too. There is no "right" answer. It depends on your own desires as well as how the business performs. In the right situation, an S corporation can save you several thousand dollars every year in payroll taxes, but it also means that you have to pay yourselves a salary and withhold and deposit payroll taxes and file payroll tax returns. If the business has other employees, it will be doing that anyway, but if the two of you are the only workers, an LLC would avoid the need to file payroll tax returns. For a more detailed discussion see LLC vs S Corporation.
     
  5. CamillaReberg

    CamillaReberg
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    This is obviously a negotiable amount. But, for your own peace of mind, you may want to have a business valuation done and/or have the books audited so you know in black and white, what exactly you are buying.

    My standard disclaimer: I am not offering legal advice, assume I do not know the law in your state or at all for that matter and that I am just making suggestions for starting points for when you do speak with an attorney.
     
    #5 CamillaReberg, Feb 25, 2012
    Last edited by a moderator: Feb 25, 2012

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