Need advice regarding an investor!

Discussion in 'Growing and Managing a Business' started by Tikibarman, Mar 29, 2011.

  1. Tikibarman

    Tikibarman
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    My wife and I are buying an existing insurance company. We have the experience in the business and will work the business. We have an investor who will put up all the money to buy the company (Approx. $700,000). What % of the business should he own? We are not putting any money down on it. He doesn't want payments on his money just % of profits and ownership. How do we figure his %?
     
  2. Fergal

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    Welcome to our Business Forum Tikibarman. It is very difficult to answer your question without knowing a lot more about the specific situation, because a lot will really depend on your own expertise and experience. However, the fact that you are not investing any money in the business and are hence not taking any of the financial risk in the business puts you in a position more similar to an employee than a business owner. If I was the investor I would want to own 100% of the business, because I am providing 100% of the purchase price. Then I would give you and your wife a percentage of the profits as an incentive for you to run the business as efficiently and as profitably as possible. The percentage you would be given would depend largely on the industry average and typical salary levels for people in your position.

    That may not be the answer you want, but please post back with your views and we will try to offer you some further help.
     
  3. scifi

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    You can follow a popular business agreement on the line of venture capitalists....Wherein you will agreed to repay the invested capital in pre-decided number of years according to your business plan.Apart from this you can give him return on the basis of prevailing market interest rates+ 5-10% higher....He should be happy with that...

    Keep us Updated!!
     
  4. ArcSine

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    Echoing Fergal a bit, the answer can vary widely and will depend on the perceived riskiness of the business and its cash flows. Ultimately, it comes down to negotiation between the parties.

    Generally, private investor money is expensive, because in the classic scenario the private investor goes "where the bankers fear to tread". You may have already considered it, but don't overlook a possibility of getting some cheaper financing from a traditional lender, with the investor making up whatever financing gap remains. If you expect that the business will throw off a fairly stable pattern of positive cash flow each month, then maybe it could support a reasonable amount of bank debt. Even if, say, you get 200K in bank money and 500K from investor, you'd still benefit nicely: While the bank loan is outstanding, the bank will absorb a smaller % of the profits than the investor would on that same 200K, and after the bank's been taken out the investor will get a profit % based on a 500K investment, not a 700K one.

    One key factor you didn't mention is what kind of exit does the investor want? Does he want to be taken out in 5 yrs? 10? Or does he envision remaining as a "permanent partner", extracting X% of the profits forevermore? (That latter expectation could prove pretty expensive for you, long run. After stringing together a history of nice profits for a few years, you'd find that you could borrow at a fairly attractive rate, using the proceeds to take out the investor, and thereby replace expensive financing with cheaper money. Thus, make sure your agreement with the investor doesn't completely prohibit such a possibility.)

    At the end, though, you're still with the question of what % of the profits is appropriate for $X of private investment. I've seen the answers come in all across the spectrum, with this wide variation driven principally by how much of a gamble the business is perceived to be. An existing business is generally safer than an unproven startup; experience on the part of the captain and crew is good (you've got both of those going for you); an attractive history of profitability to date; etc....

    Cheers, and best of success!
     
  5. Tikibarman

    Tikibarman
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    yes, I should have given more information. This investor is a silent one, he doesn't want any part of running the business. He is actually a customer of my wife's agency now. She has no employees and is an independent agent. We would take her book of business and put it with a the company we would purchase. Her $150,000 revenues would increase the company revenues to $650,000. This business has been around for a long time. The investor has risk but how much could he really make without any risk 3%? If we can make a profit of $150,000 a year (which according to our projections is possible after two years) and he had 50 percent ownership, he would make $75,000 or about 10% on his investment, plus the company will be worth more. Your thoughts?

    Thanks for the response. We are meeting with the investor tomorrow to find out his goals and expectations.
     
  6. Fergal

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    Thanks for posting back Tikibarman.

    That would equate to a 23% share of the new business. The expertise you are contributing would increase that share further.

    Based on the info you provided 50% ownership sounds as if it would be fair to both parties. I look forward to seeing the opinions and views of other members on this.
     

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