Buy a Business or Plan to FIRE?

[rolliefingers]

I am wrestling with a business opportunity versus aiming for FIRE by age 42.  I am excited and scared by both prospects.  Following through with purchasing this business is virtually doubling down on a scenario which already has us in great shape financially.

Prospective Biz Purchase:  $1.2-$1.5MM, I would go in 50/50 with a business partner on this buy; net profit is from $300-600k per year, 30 years in business and no employees (several independent contractors), owner is 62, very wealthy and is looking to retire; the business is far from sexy -- it is fundraising for schools (cookie dough, wrapping paper, candles, et al) -- but highly lucrative and something I know we can manage successfully.

My chief reason for considering the new business is twofold:  foremost, I am able to escape the corporate malaise and run my own show with a long established and very reputable company; next, I can't imagine being 41 years old and "retired" -- granted, I can bike, workout, paint, run a web biz and have a million other distractions during the week but I am so accustomed to the grind/game that I believe I will be lost without it.

Our financial picture:
Stocks / Funds / ETFs:  $750k
IRA / 401k:  $750k
Home:  $340k left on $550k mortgage
Annual Expenses:  $75k (mortgage included)
I am presently the chief breadwinner at 180k+ job and wife brings in around 40k
We have no children and likely will have one in the next year or so.

I value the community input and am curious how you folks would approach this same set of circumstances.  Thanks.

[rolliefingers]

We will be aiming closer to the $1.2mm purchase price and I believe I will net around $250k per year, thus, knocking out the loan in far less than ten years.  I would like to have something to build up further then sell in my early 50s.

[skunkfunk]

That is certainly putting all of your eggs in one basket. What happens if it eventually fails?

[rolliefingers]

With failure, we would be retiring to Krakow in my wife's homeland versus Maui, our preferred destination.  The Maui idea is the hook for me to double down and go into this business.

[UlyssesG]

If you FIRE, could you use the extra time to build and develop a business like this? 
As a small business owner who has both started from scratch and purchased retail businesses, I see huge ROI advantages if you have the time to start a business from the ground up.  Based on your description of the business plan, I don't hear anything proprietary involved which usually means success is a function of time and effort, not money.  Just a thought.

[rolliefingers]

Ulysses -- you make a strong point.  Thanks for your input.  The attractiveness of this specific business is that it is a powerhouse in this industry.  He has taken a simple concept and made it explode; he is not integral to this growth carrying forward either.  All of the business is pre-wired, so to speak, with all of the intricacies and a large customer base in place.  Building this from the ground up is not something I am interested in versus taking over and growing a finished product.

[electriceagle]

If you FIRE, could you use the extra time to build and develop a business like this? 
As a small business owner who has both started from scratch and purchased retail businesses, I see huge ROI advantages if you have the time to start a business from the ground up.  Based on your description of the business plan, I don't hear anything proprietary involved which usually means success is a function of time and effort, not money.  Just a thought.

The other benefit to building your own business is that you will truly understand it.

Right now, the only guy who really understands this business is the guy who currently owns it and has run it for decades. Do you understand what value he provided and what you need to do to provide the same value? Unless you already work in a competing or similar business, you and your partner will come in as business heads with no experience. You are sure to make mistakes and therefore to make less money than he did.

Also, consider that the existing business owner may know things that are material but that he has no responsibility to disclose. For instance, there could be new laws on the horizon that force him (you) to do business differently, or his best contact at his best customer could plan to retire next year, or.....

[Cpa Cat]

We will be aiming closer to the $1.2mm purchase price and I believe I will net around $250k per year, thus, knocking out the loan in far less than ten years.  I would like to have something to build up further then sell in my early 50s.

How is it structured? Is it a C-corp or S-corp? Is "net" before or after corporate/personal taxes?

If your share of the purchase price is half of the 1.2M, then the turn around is pretty quick. Is there room for growth? What about your time commitment? Does the business have any debt?

I have to admit, it looks good on paper. Are the financial statements audited?

[rolliefingers]

CPA Cat -- it is a C-corp and the "net" is EBITA.  Room for growth is impressive as the prior owner rarely ventured outside of the central part of our state.  It is a 9 month a year job, concurrent with the traditional school year.

I pick up audited financials in the next couple of days for analysis.  I have little doubt that they are clean.  This is a meticulous guy and highly ethical from all accounts.

[Cpa Cat]

Alright, so while you're looking it over, remember to factor in taxes on the C-Corp, and then another tax on whatever gets distributed to you as dividends/wages. Double taxation is a huge bite when doing business a C-Corp.

It sounds like you want to do this - so telling you not to probably won't get far (and I don't even know if it's good advice - just conservative advice). No one knows what the right call is. I've seen some very good, business savvy people get bitten in the butt while purchasing into a pre-made business that looked like a great investment.

Don't fool yourself into thinking it's not a risk. If you do it, be involved 100% from day one.

If there is any part of the business that you don't understand - then figure it out. If you don't know the basics of bookkeeping/accounting/taxes - go learn it as it applies to your business.  Do not rely on managers, accountants, etc to run this for you. That's not to say you can't hire these people (you should!) - but don't be hands-off. Keep a very close eye on your suppliers. Always understand what is going on with your cash flow, your audit, your tax return.

Always remember that the person who cares about your investment the most is you. Everyone else is just collecting a paycheck.

[rolliefingers]

CPA Cat -- a couple of other attractive points:  the prior owner will stay on for a year, at least, to transfer his know how and inner workings of the biz.  Another interesting aspect of this business is the fact that the main distributor provides $11k in cash flow every two weeks (then a true up at the end of the year) to lock in the volume of business run through this company.

We will be involved in every detail of the company from day one, no doubt.  I appreciate your perspective.  Let me know your thoughts with the above arrangement.

[Cpa Cat]

It can work to have the former owner stay on. Don't be surprised if you have to prod him to actually come into the office.

In the most ideal situation, where he is very helpful, you'll quickly see diminishing returns on his usefulness (because you'll learn everything) - you may not need him for a whole year. In the worst case situation, where he's totally lazy and useless, you won't want him around for a year. Often there's a middle situation where employees struggle with the transition for as long as he's around.

So think about building in an option into the contract that allows you to cut him loose whenever you want.

[rolliefingers]

I like the points on the previous owner possibly becoming dead weight.  We have already decided two solid days a week and phone access is the low bar at which we've set our expectations.  A non-compete is a good thought.  Because of his age (in his sixties) with nobody replicating the business, I feel confident that we will not be competing against him or any progeny on the horizon.

[Johnny Aloha]

With failure, we would be retiring to Krakow in my wife's homeland versus Maui, our preferred destination.  The Maui idea is the hook for me to double down and go into this business.

If your goal is Maui, there's probably other ways you can retire there if you don't want to buy the business.  One that immediately comes to mind is to purchase a property in which you can rent part of it to vacationers.  That would probably pay your entire mortgage and give you some spending money too.  Just like the business, it would be some work though.

[Cpa Cat]

I like the points on the previous owner possibly becoming dead weight.  We have already decided two solid days a week and phone access is the low bar at which we've set our expectations.  A non-compete is a good thought.  Because of his age (in his sixties) with nobody replicating the business, I feel confident that we will not be competing against him or any progeny on the horizon.

Blahblah is right. A non compete is just good business. Don't want the guy getting bored and starting a competing business a year from now. And since he has an eye to retiring, he shouldn't have an issue signing one.

[Thegoblinchief]

I wouldn't do it personally, though a lot of it has to do with temperament. While I have my own very small business, it is just me and will (likely) only ever be me.

I've seen entrepreneurialism consume my dad and one of my brothers for years. My Dad is just slowing down now in his early 70's. He's funneled cash into his business, gotten it back, and repeated the process several times over.

Your remarks that you wouldn't be interested in starting from scratch suggest you're not cut out for it. This also ties up a ton of your assets.

[CarDude]

I wouldn't do it. As someone who has pursued self-employment in various forms over the last...many years, it takes a lot out of you, and can easily end up becoming your whole life, as Thegoblinchief stated. Nowadays, the only businesses I'm willing to run are those that I can run completely from home, and the business you're describing does not sound like one to me.

[Left]

hm I don't know how this affects things, but listening to the radio, they were talking about changes to the school food programs' funding. It doesn't sound like this is the area of the business but just pointing out that with the school funding cuts in general, are you sure that this business won't be affected somehow by current/future cuts?

edit: the main distributor paying 11k/2 weeks or a little under 300k/year or 50% to 100% of your profits, how likely is it that you'll keep this distributor or that they won't push to lower prices/etc?