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So I had a job offer from a former employer in a very specialized field. He is over 60 and looking to work less (bought a condo in FL etc) He has been the owner manager chief cook and bottle washer for over 2 decades at the company (4-5 employees). He has had several GM's (including me ) most did not work out (I left when he canceled my medical insurance).
His first offer was too low but I was thinking about making a counter offer involving a stake in the company and a chance to buy him out in 5-10 years. He has provided me with numbers for the company and it is pretty profitable. The issue with buying him out is the equipment and real estate value is very high ( he has a separate company that owns the real estate and leases to the business).
I was wondering if anyone has done this in the past or has an idea where to look on info? I have contacted a relative who worked financing things like this at a bank but I'm not sure where else to go.
I currently have a good job with quite good benefits and obviously there is a lot of risk here so i want it to be worth my while.
On a separate note while I think the companies valuable the owner tried to sell it a few years ago, and the problem he ran into was no one wanted it because he was too embedded in the company the feeling was without him it may fail. I gather lots of people including investment banks and capital companies came calling but were scared by the fact that he was the only one controlling and knowledgeable of the business. Which is one of the reasons he's looking for a GM.
If there is interest on his part, do not sign an agreement with the accounting equivalent of a body cavity search. Not only should a CPA look at the books, the income statements, the tax returns, and the balance sheet, but he should also be able to walk through strategies for taking over the business that protect the both of you.
While I am typically a handshake kind of guy on most transactions, the last thing you want to do is inherit this guy's messes. The last business I acquired was for the name and client list only. I didn't acquire his business relationships, his equipment, or anything else.
If there is interest on his part, do not sign an agreement with the accounting equivalent of a body cavity search. Not only should a CPA look at the books, the income statements, the tax returns, and the balance sheet, but he should also be able to walk through strategies for taking over the business that protect the both of you.
While I am typically a handshake kind of guy on most transactions, the last thing you want to do is inherit this guy's messes. The last business I acquired was for the name and client list only. I didn't acquire his business relationships, his equipment, or anything else.
Yeah no hand shakes on this one. I know him well enough not to do that. It's a business that's equipment intensive and that's where most of the value is. The customer list is secondary. He is one of very few people to offer what he does in our area, so customers find you to some extent.
I have acquired a couple of small companies and let me tell you, owners sellers love to boast how profitable their business is. The books, all sets, will be the decider of that item. There are business valuation firms that will scour the books, review assets and liabilities, look over inventory and ordering, examine employment issues as well as preform onsite observations to see if the actual operation supports what they are showing on paper. Additionally, you should conduct an honest evaluation of your skills and self standing so you can asses if owning a business is really right for you at this time.
I have acquired a couple of small companies and let me tell you, owners sellers love to boast how profitable their business is. The books, all sets, will be the decider of that item. There are business valuation firms that will scour the books, review assets and liabilities, look over inventory and ordering, examine employment issues as well as preform onsite observations to see if the actual operation supports what they are showing on paper. Additionally, you should conduct an honest evaluation of your skills and self standing so you can asses if owning a business is really right for you at this time.
Well in this case I was actually the GM of this business for 3 years so I know how it works (I ran the day to day operation with the owner often overseas for months at a time). I'm a bit worried about the risk as I have a young family. I do know how much the company used to make and the numbers he has provided so far look actually a little lower then I remember likely because he has been running the company on autopilot with little recent investment. Which is another issue at some point the company will need to raise some capital to grow back to where it was.
The glitch will be the real estate and equipment valuation. I wouldn't get involved as owners with a cash cow never want to fully retire if they can be in Flariduh and collect checks forever.
I deal with issues like this every day as business banker.
Several Questions for You and the Owner:
Is he looking to sell the business and the real estate or just the business/equipment?
Would the owner be willing to provide seller financing for the future purchase?
Do you have sufficient assets to finance a significant down payment on the purchase of the business?
Are the economic opportunity costs of buying the business at its current performance positive? (meaning, would you earn more staying your current job and getting periodic raises from now until you retire or from the cash flow of the business accruing to you after you purchase it in 5-10 years (after accounting for those 5-10 years where you're just an employee)]
What are the economic opportunity costs if there was some kind of capital expenditure like you described to get it back up to a higher level of performance?
Is the equipment for the business a fixture or is it the type of equipment/machinery that is mobile or easily moved?
Is the business already at it's peak or is there room for vertical/horizontal expansion?
The concerns noted above are all valid, in particular the one by @Rabrrita. If you are convinced you could do it and have the temperament for it, there's several paths forward depending on the answers to questions above.
I deal with issues like this every day as business banker.
Several Questions for You and the Owner:
Is he looking to sell the business and the real estate or just the business/equipment?
Would the owner be willing to provide seller financing for the future purchase?
Do you have sufficient assets to finance a significant down payment on the purchase of the business?
Are the economic opportunity costs of buying the business at its current performance positive? (meaning, would you earn more staying your current job and getting periodic raises from now until you retire or from the cash flow of the business accruing to you after you purchase it in 5-10 years (after accounting for those 5-10 years where you're just an employee)]
What are the economic opportunity costs if there was some kind of capital expenditure like you described to get it back up to a higher level of performance?
Is the equipment for the business a fixture or is it the type of equipment/machinery that is mobile or easily moved?
Is the business already at it's peak or is there room for vertical/horizontal expansion?
The concerns noted above are all valid, in particular the one by @Rabrrita. If you are convinced you could do it and have the temperament for it, there's several paths forward depending on the answers to questions above.
He is looking to sell both business and property. The property is the biggest value part of it but has been neglected.
I'm hoping he may provide some financing. I'm pretty sure he is in a position where he does not need cash right away (paid for houses cars and plenty in the bank)
I could raise 10% of what he is looking for now or more like 15% of what I think it would appraise at.
I'm pretty sure in the long run I would be better off in the long run owning the business and the property then working in my current or similar positions what the owner currently takes out of the property is close to 3x my current salary and like I said that's off quite a bit from his peak.
The opportunity costs would likely be fairly low for the return.
The machinery and business could be moved. I have located another site but there are big advantages to the current site. I don't want to say the business as it is a small industry so I will use an example business a friend owns.
A friend owns a trucking company (dump trucks) he has property where the trucks are stored and repaired but also uses it as a material storage area and it was previously a sand pit that he still pulls small amounts of material from. He could move the business the trucks just need parking, but the cost of permits approvals make it cost prohibitive. He would also likely lose some of the income he gets now from being able to store and process materials on his own site. The business I'm looking at would be similar you could move it but doing so would be tricky and destroy some of the value.
The business is not at it's peak. With current staffing he appears to be only running at 65-70% of what the business used to do with the same staff. To gain some of that back will require some investment thou. There is also the possibility of adding staff. Looking at his books there is enough open days on the equipment that more staff could be added with little further investment and they would likely return 40-50% over their salary based on what he currently runs.
Also on the site he has a commercial space that could be leased out that he does not(he has run a sort of side business out of it that made a whopping $200 last year according to his books). The property may also have one section that could be subdivided and sold or possibly add a small office/commercial building for lease looking at land records.
All that said I'm leaning a bit towards not doing it. Mostly do to the time costs to make everything right. With little kids around I would rather not go back to working 6 days a week with a cell phone ringing every 10 minutes.
It's an interesting position, so I'm bumping this again. The problem the owner will have in selling is precisely what you've noted. He's too attached. If he can get you to show that the business can run without him, the value of his business soars. Conversely, he can't move the business at the moment. That's a huge impairment.
If he's been looking to sell, you're going to need to watch out for deferred maintenance costs. These guys get it in their head to sell, and they quit fixing their plant and property in order to boost the bottom line. Sometimes they start capitalizing weird stuff. Frankly, in a cleaning service operation, there's little to prove that revenue actually existed outside of cash coming from outside cash accounts into the main checking. You want to check all of that in an exercise called due diligence. Finally, in terms of the land, check to see if there was ever some sort of chemical that could have been dumped on the property. If there's environmental damage, the value of the land and building could be worthless because it will have to be cleaned up prior to a different operation starting there.
If you know the business is legit and that you can run it, make the offer to buy him out. If you use his books, and you won't have time for a full audit, don't pay the full amount up front. Hold the remainder in escrow. Alternatively have a declining profit sharing agreement.
Finally, make sure the guy signs a non-compete or he'll just take your money, go across the street and start a new operation with a new building and new equipment and drive you out.
We can get buys all the time in the dry cleaning business where plants are selling for a very low multiple on their profits because nobody can trust their books, and few people know how to actually operate a plant. If someone bids crazy on it, they obviously don't know what they're doing, so we can just wait for them to fold and buy the equipment later.
The nasty way to do it is to become GM and drive the business into the ground, knowing you can buy it on the other side for nothing.
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