Author Topic: Considering Buying Family Business  (Read 4180 times)

CobraKreese

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Considering Buying Family Business
« on: November 30, 2015, 01:03:34 PM »
Hello All Mustachians!  I apologize this could be a long post because I want to post all the facts on what I know to get the best answers possible.  I also want to make it clear I do not know all the details about this just yet but I could use some council, at least things to keep in mind and develop a strategy. 

Ok here goes...

I'm considering buying my in-laws business that they have had for 30+ years.  They own a wholesale gas/propane service where they sell/deliver fuel to customers.  The business does approx $2.3 million a year in revenue and has 3 employees counting my father in-law.  That's pretty much it as far as my knowledge of the company's finances, I know the own the office and some equipment but I'm not sure if there's any debt on their assets. 

My in-laws are 73 and they purchased a house near us about a year ago.  Currently it's just a weekend home for them since the business is about 1.5 hours away from this house.  I know they are looking ready move up to their new home full time and have wanted to sell the business.  At the same time I also know they are concerned about when they sell, having enough money to live off of.  They have wanted to sell but have not really taken any legitimate steps in doing so.  They have never listed it or worked with any professionals to help in the selling of it. 

I've been given the green light by my wife to talk with her dad about all the particulars and see if a deal can be reached.  My goal is to take over the business but still pay them out of the company's profits so they continue to have income. I will not be putting money down unless that's what it will take to make a deal happen.   I also will be working on having a manager/partner run the business day to day over the long term. 

Alright so that covers a lot of what I know for now, I have a lot to ask my father in-law about but I wanted to at least see what people's thoughts are on this.  I think he is the type that would like to keep the business in the family but I have no certainty of that.  Also I'm not sure if just paying them from profits would be acceptable for selling.   

Does anyone have any input as far as things I should ask as well as any general input?  Thank you!

ysette9

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Re: Considering Buying Family Business
« Reply #1 on: November 30, 2015, 01:45:15 PM »
This post seems to have red flags all over the place for me. First, I think your heart is in the right place wanting to help family members out and making sure they have a secure retirement. If you feel you have the financial knowledge then by all means dig in and help them crunch the numbers and make good decisions.

BUT..... personally I think mixing money and family is a terrible idea that can go wrong very easily and ruin relationships. I am fearful that you are going into this discussion with the answer in your head already before you have seen any numbers and have any idea of how the business is doing. You have to think of yourself as well. The worst thing would be saddling yourself with a business that isn't doing well or takes a downturn, and then jeopardizes both your financial situation and theirs. That would put enormous stress on your relationship with your in-laws and potentially your relationship with your wife.

If the business is a solid investment opportunity then they should be able to put it up for sale and get outsider interest. If it is not a good opportunity then you should stay away from it and try to help your in-laws in other ways (advice, perhaps monthly cash support if it came to that, help running the business perhaps, etc.). I would also be very wary of thinking that it would be easy to replace the business founder/owner with a business manager who you hire and expect the same good results to appear. It is possible that your in-laws are putting their heart and souls into that business in a way that no hired outsider will care enough to do.

I'm sorry this is so rambling and I am sure others will have much better advice for you, but my overall message is of caution. (Okay, truthfully, I'm mentally screaming "run!".) Good luck whichever way you go.

CobraKreese

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Re: Considering Buying Family Business
« Reply #2 on: November 30, 2015, 02:39:04 PM »
This post seems to have red flags all over the place for me. First, I think your heart is in the right place wanting to help family members out and making sure they have a secure retirement. If you feel you have the financial knowledge then by all means dig in and help them crunch the numbers and make good decisions.

BUT..... personally I think mixing money and family is a terrible idea that can go wrong very easily and ruin relationships. I am fearful that you are going into this discussion with the answer in your head already before you have seen any numbers and have any idea of how the business is doing. You have to think of yourself as well. The worst thing would be saddling yourself with a business that isn't doing well or takes a downturn, and then jeopardizes both your financial situation and theirs. That would put enormous stress on your relationship with your in-laws and potentially your relationship with your wife.

If the business is a solid investment opportunity then they should be able to put it up for sale and get outsider interest. If it is not a good opportunity then you should stay away from it and try to help your in-laws in other ways (advice, perhaps monthly cash support if it came to that, help running the business perhaps, etc.). I would also be very wary of thinking that it would be easy to replace the business founder/owner with a business manager who you hire and expect the same good results to appear. It is possible that your in-laws are putting their heart and souls into that business in a way that no hired outsider will care enough to do.

I'm sorry this is so rambling and I am sure others will have much better advice for you, but my overall message is of caution. (Okay, truthfully, I'm mentally screaming "run!".) Good luck whichever way you go.

Thanks for your post, I'd like to address a few things that were mentioned.

1.  I'm not fully decided on this yet I still have to work out much of the particulars.  I don't really know how much the business profits each year currently i just know revenue.  I certainly aim to make this a win-win. 

2.  I'm also not doing this JUST for them, I currently work full time from home and it would take something good to make me leave.  I don't make as much money as I would like but I have a lot of freedom which I enjoy.  I want to make more to invest in more rental properties and index funds. 

I guess where I don't agree is that if it's a solid opportunity why not make it solid for me as opposed to someone else?  If it's not a good opportunity then I would obviously stay away. 

ysette9

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Re: Considering Buying Family Business
« Reply #3 on: November 30, 2015, 02:47:18 PM »
I am glad to hear that you are going into this with an open mind and looking for a win-win. Since I have seen money be a source of extreme strife and overall nastiness before, I would recommend that if you do decide to buy, you sit down with a neutral party like a lawyer to draw everything up in writing. Make sure everything is extremely clear, expectations are set up front, and you go through what-if scenarios in advance. Don't make or accept any promises that aren't in writing. This is to protect everyone involved but most importantly the relationships.

trailrated

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Re: Considering Buying Family Business
« Reply #4 on: November 30, 2015, 02:55:47 PM »
I think it is great you would look into hiring a managing partner that knows how to run the day to day operations. That being said, I am still not sure it is very wise to jump into something so hands on. I have seen family businesses passed down to and ruined by people that had little understanding of how to successfully operate and without realizing the sacrifice and time it takes to run a business properly.

oldmannickels

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Re: Considering Buying Family Business
« Reply #5 on: November 30, 2015, 03:13:22 PM »
From what I've personally seen through my own experience with family businesses you should help them make the deal if they want to, but should probably stay out of it. Most of the businesses run into the following problems:

  - Person buying the business does not have the requisite knowledge or personal connections with existing customers to run the business properly. Personal connections of the first generation are also retiring and business dries up.

 - Financing the business sale with the first generation creates situations in unprofitable years where the family as a whole has to choose who gets paid because there's not enough money to go around.

 - Competition senses weakness and swoops in and takes all the business.

 - Now that the business not only has to support one, but two or more families incomes, additional risks are taken on by the business, which don't pan out and ultimately cost them all the business.


BTDretire

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Re: Considering Buying Family Business
« Reply #6 on: November 30, 2015, 07:07:28 PM »
I'd want to see the last 5 years of the schedule C of their 1040.
Is there enough income to pay you, the sellers, the new manager,
building rent/mortgage payment and any unknown debt?
Has the revenue grown or shrunk?
Is the building and equipment separate from the business?
What's the competition, is it new in the last few years?
Are they big and buying in cheaper larger quantities?
$2.3M sounds like a lot, but not if the cost of inventory is $2.1M.
Also, if you aren't going to move to be near the business, forget it.
 From the sound of it, you are adding new costs, you, and the manager.
Bottom line, revenue means nothing, the net is what you want to know.
Then how many ways do you need to split that.
 Business and family... How will things be if the business hits hardtimes
and you need to decide between paying your inlaws or keeping an employee?



chasesfish

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Re: Considering Buying Family Business
« Reply #7 on: December 01, 2015, 05:30:50 AM »
My first take is there's probably isn't enough money to go around.  You're going to need some disclosure of tax returns to see if there's anything that you can do.

totoro

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Re: Considering Buying Family Business
« Reply #8 on: December 01, 2015, 07:36:36 AM »
You need way more information.  The fact that you are here asking questions without enough information to prepare a business plan tells me you are not experienced.  That is a concern but you can do the work to get there  Paying off a purchase with profits is not the best deal for them unless the business is extremely hard to sell otherwise - which points to issues for you as a purchaser.  They may agree to do this to keep it in the family but it could cause difficulty if their are heirs other than your wife. Gross sales is not the figure you need.  You need overhead, expenses, industry outlook, risk anAlysis,.. You need the detailed financial statements.. Everything that gets you to a place of being able to do a proper feasibility study.  If this business generates enough to pay off with profits, pay you and pay a manager so you don't have to be an owner operator your in-laws are likely going to be better off selling and investing the proceeds than getting paid over time from you.

Proud Foot

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Re: Considering Buying Family Business
« Reply #9 on: December 01, 2015, 09:10:33 AM »
In addition to what everyone else has said there are a few other things that stick out to me.  How much do you know about the gas/propane service industry? I know you said you will hire an operations manager but without a thorough understanding of the industry how will you know you are hiring a god manager? Also, you will need to be able to evaluate your manager and the company's performance.

I think you are starting in the right direction with asking questions but you need to learn a lot more about the business than just the financials.

GizmoTX

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Re: Considering Buying Family Business
« Reply #10 on: December 01, 2015, 10:04:09 AM »
It may make sense to buy/take over a family business IF you have been active in that business for a number of years.
OP, you don't intend to even buy it or manage it, & you apparently know nothing about it.

Ask yourself this: If hiring a manager to run the business is viable, why haven't your in-laws already done this or plan to do this? They certainly would know more likely candidates than you have access to.

iMHO, it's OK to to gently find out what their financial & health situation is, but otherwise do not insert yourself in their business, as it is a recipe for disaster. A successful business should be sold & an unsuccessful one liquidated.

Thegoblinchief

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Re: Considering Buying Family Business
« Reply #11 on: December 01, 2015, 10:19:49 AM »
I wouldn't want to be anywhere near the energy sector for such a potentially high percentage of my livelihood. Way too much price volatility even though something like propane probably has semi-fixed demand.

bridget

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Re: Considering Buying Family Business
« Reply #12 on: December 01, 2015, 12:06:32 PM »
I think this sounds like a very bad idea. I don't mean to offend you, but your original post displays to me that you don't have the background knowledge you need to cleanly acquire a business, much less run it.

I'm considering buying my in-laws business that they have had for 30+ years.  They own a wholesale gas/propane service where they sell/deliver fuel to customers.  The business does approx $2.3 million a year in revenue and has 3 employees counting my father in-law.  That's pretty much it as far as my knowledge of the company's finances, I know the own the office and some equipment but I'm not sure if there's any debt on their assets. 

...

My goal is to take over the business but still pay them out of the company's profits so they continue to have income. I will not be putting money down unless that's what it will take to make a deal happen.   I also will be working on having a manager/partner run the business day to day over the long term. 


This is not how acquiring a business works. If their money depends on future profits, and their interest has not been bought out in a purchase agreement, they are owners. Owners/shareholders get paid from profits. If you are putting no money down, what you are proposing is that they continue to own the business and hire you to run it (or ... hire you to hire somebody else to run it?), instead of running it themselves. If you put some money down, they would be selling some (but not all) of their equity to you, and allowing you to be the controlling or managing owner, while they are the minority or non-managing owner. If you are envisioning that you will pay them for awhile out of profits and eventually phase that out, you are effectively asking them to finance a loan to you to purchase the business.

Simply taking over operations, taking the profits for yourself, and then sharing those profits as you see fit with your in-laws for their retirement income is a recipe for disaster. A relationship disaster, a financial disaster, and a legal disaster. You are essentially telling them that you will take over their financial future and their business (tons of risk to them), while having almost no idea how their business that they've built for decades works, and at NO financial risk to yourself. You could easily run their business into the ground and leave them penniless in their old age. If their total revenue for the year is $2.3M, their profits are far less than that. Your ONE proposed decision here - hiring a full-time manager to run the company, presumably a good one with other options in the marketplace - could easily have a 10% negative impact on profits. That's huge.

IF you buy it, you need to educate yourself extensively. Not just educate yourself on their business, but on business law and accounting more generally. Each side needs their own accountant and lawyer. You should buy 100% of the business. If you need to finance the purchase, do not use your in-laws to finance it for you through a quasi-loan. They should get a guaranteed lump sum that they can parcel that out over their lifetime however they see fit, instead of an amorphous annuity that could vanish any minute.

TL;DR: If they are at all savvy business people, they should run screaming from your offer. There is almost no upside to them, and they would be risking their security in retirement. If you love your family, you should not put them in that position.

CobraKreese

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Re: Considering Buying Family Business
« Reply #13 on: December 01, 2015, 03:17:11 PM »
Certainly a lot of great responses in here that have challenged my thoughts.  I'll try to address a few key points but I certainly do not take any criticism the wrong way and realize that all the comments here are trying to help me. 

I do not have the knowledge of this particular business currently however part of my plan would be to be trained by my father in law for at least a year learning the operation.  I admit I have lots of facts that I need to dig up and this is my first time even approaching this kind of subject matter with anyone.  I realize I need to learn all the financials of the company which they may not even want to share with me before I can even begin to see if a deal can be reached.  I had not considered all the different financial scenarios outlined here and that's something I'll need to work on to overcome. 

One of the issues I've heard brought up when considering hiring a manager before was they were concerned about theft, without ever really trying they were convinced that someone would steal from them.  Certainly something to always be concerned about but I think this can be overcome with the right personnel and systems in place.

I definitely need to consider how I'd acquire this more throughly as my current idea maybe isn't the best.  I appreciate all the responses so far and would welcome more discussion on it. 

TomTX

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Re: Considering Buying Family Business
« Reply #14 on: December 13, 2015, 06:02:35 AM »
Ugh, why would you be buying a business 1.5 hours from your house?

How profitable do you think this thing is if it can sustain

1) Paying you

2) Paying a new manager

3) Paying to buy out the owners over time


...in addition to the current operating costs?

Guesl982374

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Re: Considering Buying Family Business
« Reply #15 on: December 14, 2015, 10:10:16 AM »
I think this sounds like a very bad idea. I don't mean to offend you, but your original post displays to me that you don't have the background knowledge you need to cleanly acquire a business, much less run it.

I'm considering buying my in-laws business that they have had for 30+ years.  They own a wholesale gas/propane service where they sell/deliver fuel to customers.  The business does approx $2.3 million a year in revenue and has 3 employees counting my father in-law.  That's pretty much it as far as my knowledge of the company's finances, I know the own the office and some equipment but I'm not sure if there's any debt on their assets. 

...

My goal is to take over the business but still pay them out of the company's profits so they continue to have income. I will not be putting money down unless that's what it will take to make a deal happen.   I also will be working on having a manager/partner run the business day to day over the long term. 


This is not how acquiring a business works. If their money depends on future profits, and their interest has not been bought out in a purchase agreement, they are owners. Owners/shareholders get paid from profits. If you are putting no money down, what you are proposing is that they continue to own the business and hire you to run it (or ... hire you to hire somebody else to run it?), instead of running it themselves. If you put some money down, they would be selling some (but not all) of their equity to you, and allowing you to be the controlling or managing owner, while they are the minority or non-managing owner. If you are envisioning that you will pay them for awhile out of profits and eventually phase that out, you are effectively asking them to finance a loan to you to purchase the business.

Simply taking over operations, taking the profits for yourself, and then sharing those profits as you see fit with your in-laws for their retirement income is a recipe for disaster. A relationship disaster, a financial disaster, and a legal disaster. You are essentially telling them that you will take over their financial future and their business (tons of risk to them), while having almost no idea how their business that they've built for decades works, and at NO financial risk to yourself. You could easily run their business into the ground and leave them penniless in their old age. If their total revenue for the year is $2.3M, their profits are far less than that. Your ONE proposed decision here - hiring a full-time manager to run the company, presumably a good one with other options in the marketplace - could easily have a 10% negative impact on profits. That's huge.

IF you buy it, you need to educate yourself extensively. Not just educate yourself on their business, but on business law and accounting more generally. Each side needs their own accountant and lawyer. You should buy 100% of the business. If you need to finance the purchase, do not use your in-laws to finance it for you through a quasi-loan. They should get a guaranteed lump sum that they can parcel that out over their lifetime however they see fit, instead of an amorphous annuity that could vanish any minute.

TL;DR: If they are at all savvy business people, they should run screaming from your offer. There is almost no upside to them, and they would be risking their security in retirement. If you love your family, you should not put them in that position.

+1 You saved me a bunch of typing.

This has a "bad idea" written all over it. At $2.3M Gross, a propane business might make 5% net after tax profit, meaning $115K/year, most likely not nearly enough to pay your in-laws (really debt service), yourself, and a manager. Keep money and extended family as separate as possible.