Author Topic: Buying ownership in a company?  (Read 1322 times)

chake

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Buying ownership in a company?
« on: August 03, 2017, 07:20:45 AM »
Hello fellow Mustachians, I am faced with an opportunity and am not sure whether it makes sense with FI as a major goal in my life.
I work for a small company (5 employees) in a mid-size east coast city. We are growing, but rely solely on the whims of our clients - we're in a service industry and have no tangible inventory or intellectual property. The company probably has about $500,000 in assets. The owner/boss is planning to retire in the next 10 years, and has offered to sell me the business. We haven't talked specifics yet, but has essentially offered to gift the first 15% to me, with discussions to be had about the overall deal.
I haven't seen the company's books yet, nor has the owner quoted a price, but I'm wary because (being a good Mustachian myself) I hope to gain my FI in the next 10 or so years, and I'm not at all sure how this would factor into that overall trajectory. My initial gut reaction is that this could mean borrowing a LOT of money to purchase a company that I don't want to run long enough to make back my investment. And what's to say that if he shuttered the business when he retires in 10 years that I couldn't just scoop up one or two of our major clients and continue working for myself? Or maybe I'm looking at it all wrong.
Has anyone else faced this scenario? How would you go about putting a reasonable price on a small company like this?

larmando

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Re: Buying ownership in a company?
« Reply #1 on: August 03, 2017, 09:23:42 AM »
Well from his point of view of he closes shop in 10 years his residual value is 0 + whatever asset can be sold for actual money. If he sells it to you he gets the present value of the future cash flow, with the right discount. The 15% off of course is only worth something if the price is right to begin with.

To you this deal is only good if you want to run this company and/or you can sell it yourself later on.

Obviously if you don't buy he'll try to find another buyer, for the reasons above, rather than giving you the clients for free.

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larmando

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Re: Buying ownership in a company?
« Reply #2 on: August 03, 2017, 09:28:03 AM »
Valuing the company is a matter of yearly profit / discount rate. If the company has any debt things are a bit more complex. Problem is what is the value to you, vs the value to him, in your situation.

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Proud Foot

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Re: Buying ownership in a company?
« Reply #3 on: August 03, 2017, 12:22:50 PM »
Definitely look at the books to understand what the annual profit and cash flow is.  Since it's in a service industry you should try to find out what the biggest drivers of the revenue is. How much of it is based upon the work and relationships of the current owner and would you be able to retain those clients. 

2Cent

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Re: Buying ownership in a company?
« Reply #4 on: August 04, 2017, 01:00:29 AM »
Just consider how much it would take to start a new business yourself instead of taking over his. If you have all the knowledge and contacts it should not be too much work to start from scratch depending on the business. In that light you should consider the added value of taking over his business.

But if you want to retire in 10 years, and owning a business is not a dream you have, better just sit it out and retire.

chake

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Re: Buying ownership in a company?
« Reply #5 on: August 04, 2017, 09:23:53 AM »
Thanks for the replies. I guess the biggest question that needs to be answered is what's a reasonable time frame to make back my investment?
If I have to borrow $2 million to purchase the company but it will take 10 years to service that debt based on net revenue, then I feel like that's too long to break even. Although if I could turn around and then sell it for $5 million I'd be getting a good deal.

WoodStache

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Re: Buying ownership in a company?
« Reply #6 on: August 04, 2017, 10:55:24 AM »
Understand what you're going through here chake. My wife and I will purchase my family's company at the end of the year. If my goal was true RE I wouldn't do it. We're probably 3-4 years away from true financial independence at our current salaries and will be going 7 figures into debt to fund this purchase. So it sounds like a fairly similar situation.
 
In a vacuum, my advice would be to pass if your plan is to RE. That said, don't knee jerk the decision. I love the thought of RE but enjoy my job and what it affords us to do. I doubt I'll work until I'm 60 but don't plan to retire in my 30s, to give you an idea. The only trouble is that turning down the offer might lead to your boss finding out about RE. In that case, he may not only find another buyer but that buyer might take your spot at the company, so watch out for yourself first. Only you know the relationship that you and your boss have.