Hello, new to business. should I buy?

Discussion in 'Growing and Managing a Business' started by westpoint, Aug 3, 2013.

  1. westpoint

    westpoint
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    Hi, my boss is 70 years old and talked to me about having me take over the business within the next 1-5 years. He said he is selling due to his age. He owns a welding, machine shop. The company has been running for over 40 years which 12 years he owned. I have worked in this trade for over 15 years, but have only been with him 1 year. We trust one another, and work well together. He said he would gove me 5% of the business for free with no extra responsibilities. He said when I decide to take over I would owe him 95% of whatever we agreed upon after a apraiser came in to evaluate the company. I am 33, and my father and I made an appointment to sit down and discuss more about the business this tuesday. He told me what his overhead is each month/week but when I ask him how much $ he makes its hard for him to tell me because some months he makes more than others. Im planning on talking to him about what goes out, and what comes in over the past 1-3 years to get an idea. He said he will have his accountant wrtite a projection up before our meeting on tuesday. I need advice, and need to know Im not getting into a bad deal. I know I want to do this type of work forever so thats not a issue. I make the company $ and the company had 4 employees including myself. they said they would stay if I baught the company a year or 2 from now. What should I do?
     
  2. Rocky

    Rocky
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    Since you would like to take over the business and it is something you are familiar with then there is no issue with that. What remains is at what cost you should buy it. Now, unless you have the facts and figures as to what the business is making and what are its assets and liabilities this would be hard to tell. You can wait for the appraiser and see what comes of it.
     
  3. TimeRider

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    westpoint Welcome to BusinessAdviceForum.

    I see there is a lot of time to evaluate this business since it's been just a year that you have been working in this particular business. Why not see how the business goes and figure it out that If you really should buy it.

    As Rocky said this is familiar business to you, I think you really know to handle things in this kind of business. If the business makes good profit, I think there is no problem taking over it.

    Also, I think you will need to hire one more person as you will take over the place of your Boss and you will need one in place of yourself.
     
  4. westpoint

    westpoint
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    Devilbatista I sent you a pm. thanks.
     
  5. AnushaJain

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    Hi westpoint..See its very simple,if you trust each other that means you and your boss,there is no issue in having that business.But make everything clear,all issues and agreements before hand.Take all the knowledge about profits and sales about the business and whats the real cause of sale,is the real cause is only the age or something else..
     
  6. westpoint

    westpoint
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    devilbatista your pm box is full....:dunno: I wrote a very long reply and lost it when trying to send. please let me know when its clear....

    anusha. thanks for replying. i trust him. and trust his age is the reason. we will discuss more on tuesday with my father present. I need someone else to hear what I hear before I make a decision. Joe
     
  7. ArcSine

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    Joe, congrats on being offered the opportunity. Some thoughts in no particular order...

    • His assertion that his net profit fluctuates is reasonable (most small businesses have variable profits and cash flow), unless you are 100% sure that the company's revenues are constant and completely steady. If you know for a fact that the biz brings in the same amount of revenue each and every month, then you might want to pay extra attention to figuring out why the expenses are so variable. Might be a perfectly logical reason, or might be a point deserving of extra scrutiny. Generally, though, fluctuating net profits is more or less normal in a small business.

    • The current set of worker bees saying they'll stay put if you buy the company is good. Loss of key people--the possibility of which increases during the time surrounding an ownership transition--can really hurt a new biz owner and so is a key risk factor. On this point, consider (1) how confident are you that they'll indeed stick around, as they say?; and (2) how easy or difficult would it be to replace any one or more of them, quickly, if necessary? Depending on how you feel about those two points, you might want to have in the back of your mind a contingency plan mapped out for replacing somebody if need be, such that you wouldn't miss too many beats in the event of an unexpected departure. With such a small staff, the loss of even one might be a gut-punch.

    • Agreeing to have an appraiser price the company, for purposes of determining how much you pay for the remaining 95%, is good. Questions for your Tuesday meeting: • How long of a "test drive" can you take; i.e., what's the max time you can wait before the appraiser is called in? (From what you've described, your boss will be interested in keeping this to a reasonably short time frame.) • By what mutually-agreeable method will an appraiser be selected? • Who pays for the appraisal fee? • Does the answer of who pays the appraiser change should you decide, after seeing the appraiser's results, NOT to pursue the buyout?

    • Another question, which might be premature Tuesday--depending on what course the discussion takes--but will need to be addressed soon in any event: Will your boss offer some form of seller financing for your buyout of the 95% piece? Seller financing is pretty typically a component of small business buyouts.

    • During your "test drive", does the owner have the right to shop the biz to any other interested party? If he wants to retain that right, AND you feel that other interested parties might exist, AND you don't want to go to the expense and trouble of vetting the company only to have it sold out from under you, you might consider paying him some little option fee to give you an exclusive for a short, reasonable examination period. Obviously you don't volunteer this unless your discussion leads you think it'd be necessary.

    I hope all goes well Tuesday, and post back here with a progress report. As you may have surmised, this forum's a great place for bouncing ideas around.
     
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  8. westpoint

    westpoint
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    Well tuesday went well. Dad was just confirmed on all the aspects involved. The owner is having his daughter who is an attorney draw up some papers and my fathers attorney will review it. Heres a question. When an appraiser gives a number is it a retail number? basically most of the equiptment is pretty old so im wondering if all thats taken into factor? Thanks.
     
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  9. Fergal

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    The appraiser should give the current marker value. However, that doesn't necessarily guarantee that he or she wont base values on the new retail price. Hence, don't be afraid to question the figures, ask what they are based on and how the appraiser came up with their valuation.

    Good luck with it.
     
  10. ArcSine

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    Thanks for the update, Westpoint. Good to hear that you'll have an attorney at your elbow looking after your interests.

    Generally the value of a business is the greater of • its economic value based on the present value of its expected future cash flows, with risk appropriately discounted into the figure; or • the net liquidation value of its assets.

    So hopefully this appraiser isn't merely an assessor of used equipment, who'll consider only the latter, but is instead a business valuation pro who'll evaluate the biz from both angles to give a proper pricing for this deal.

    Thus if the company's economic value as an operating business exceeds the simple aggregation of its individual assets at their liquidation values, then the price will be based on the former. This doesn't mean, though, that the assets' liquidation values are then insignificant to you, because they'll still represent your safety net, in a sense. If the business unexpectedly underperforms and loses money such that you have to bail, then what you'd walk away with (if anything) would be the net cash from selling the assets (perhaps at an auction) and after paying off any business liabilities.

    So you'll still want to pay attention to the appraiser's results with respect to the asset values, even if the pricing for the company isn't based on that amount. And given their importance in the "bail out" scenario, you can see it's their net realizable value (i.e., their auction value or something similar) that matters, just as Fergal has noted.

    The assets' retail values can still be relevant, to the extent you're planning on replacements or upgrades. While these retail values have little to do with the company's current value, having knowledge of those numbers might be helpful in your planning and forecasting work. Especially true given what you said about the equipment having a lot of miles on the odometer.

    I'm glad you came away from the Tuesday meeting with good vibes, and I hope it continues to go well and eventually rolls into a satisfying and lucrative entrepreneurial pursuit for you. Keep us posted!
     
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