How to buy out / buy into a small business?

In My Humble Opinion
1

Sorry in advance that this question’s so general…

I’ve become intimately involved with the ghost tour company that’s employed me for the last three years, and increasingly convinced that I could do a MUCH better job at running the company (lower costs, higher revenues). I brought up the idea of me taking over operations the last time I met with the boss, and to my pleasant surprise, she seemed open to the idea. (She has other projects she’s interested in.)

So now I’m in a position that I need to come up with ideas or a proposal for taking over. My boss doesn’t want out entirely, as far as I know, since the company is still some source of income for her (and is her baby to begin with).

The question is: how do I calculate or formulate a plan to buy into the company? Is there a calculus to this? The company’s pretty small: approx $20k annual revenues, approx. $10k profit. One idea I had was to offer her $10,000 (a year’s profits) for an 80% share and total control of operations. That way she gets a whole year’s worth of money up-front and still gets 20% of profits moving forward. I get 80% of profits, which would allow me to pay off the $10k loan in less than two years.

Am I on the right track? Anybody have any resources to suggest?

2

[QUOTE=happywaffle]
Sorry in advance that this question’s so general…

I’ve become intimately involved with the ghost tour company that’s employed me for the last three years, and increasingly convinced that I could do a MUCH better job at running the company (lower costs, higher revenues). I brought up the idea of me taking over operations the last time I met with the boss, and to my pleasant surprise, she seemed open to the idea. (She has other projects she’s interested in.)

<snip>

Am I on the right track? Anybody have any resources to suggest?
[/QUOTE]

I’d look up how to write a business plan, because unless you have the money free and clear, the bank is going to want one before they’ll give you a loan.

Even if you have the money free and clear, writing a business plan will help focus your thoughts and goals.

Good luck!

3

[QUOTE=happywaffle]

So now I’m in a position that I need to come up with ideas or a proposal for taking over. My boss doesn’t want out entirely, as far as I know, since the company is still some source of income for her (and is her baby to begin with).

The question is: how do I calculate or formulate a plan to buy into the company? Is there a calculus to this? The company’s pretty small: approx $20k annual revenues, approx. $10k profit. One idea I had was to offer her $10,000 (a year’s profits) for an 80% share and total control of operations. That way she gets a whole year’s worth of money up-front and still gets 20% of profits moving forward. I get 80% of profits, which would allow me to pay off the $10k loan in less than two years.

Am I on the right track? Anybody have any resources to suggest?
[/QUOTE]

I would be hesitant about any business the owner was eager to sell.

Part of any agreement should be permission to crawl all over every square inch of the books and bank accounts.

Also make sure you have contracts to cover issues like labor problems/tax issues that existed/developed prior to your aquisition of controlling interest in the business.

Last but not least 50% profits? Right now my business is running about 20-25% (includes what I make). Either she already has a pretty good thing going or there are bills not being paid.

4

[QUOTE=drachillix]
I would be hesitant about any business the owner was eager to sell.

Part of any agreement should be permission to crawl all over every square inch of the books and bank accounts.

Also make sure you have contracts to cover issues like labor problems/tax issues that existed/developed prior to your aquisition of controlling interest in the business.

Last but not least 50% profits? Right now my business is running about 20-25% (includes what I make). Either she already has a pretty good thing going or there are bills not being paid.
[/QUOTE]

Well, those are ballpark; I haven’t seen the books yet. I’m thinking it’s probably more like $8,000. Which is still 40%, but our product is tours (i.e. not anything physical) and advertising is minimal. I could be totally wrong! Of course I’d want to spend a whole month with her books and an adding machine before I made any final decision.

Contracts for pre-existing tax stuff is a great idea, thanks. (Of course I’ll be consulting a lawyer before I push one piece of paper across the table.)

Related general question: is there a legal definition of who “owns” or “controls” a business? In other words lets say I give the boss a check for $X,000, she puts my name on the bank account, and I start redirecting profits to myself instead of her. Is that all there is to it? Or are we required to somehow register the new owner to make it legit?

5

IANYL, while this is some of what I do, this is not legal advice, you are not my clients, etc.

As I do some of this as part of my new job duties (since my promotion), I suggest that you get an attorney. First of all, the business will need to incorporate to shield you from liability. Second, to make tranfer of ownership easier, it would be nice for your boss to incorporate and give you shares for ownership. Third, the price of the business is typcially what the parties agree to. My finance department is full of MBAs who do price valuations on just about everything we do, but when push comes to shove we throw all those numbers out the window. It’s a good starting point (your number), it might be a little on the high end depending on a huge number of factors (or vice versa).

6

At this point you should talk to an attorney and/or an accountant. There are innumerable ways to structure the acquisition of an interest in a business, with significant financial and tax implications.

Any advice on the matter you would get on an open internet message board is worth what you pay for it, and sometimes significantly less. As a lawyer who deals with these type of issues, I can say that some of the comments here range from worthless to dangerous (and I won’t say which ones).

On a major investment like this, it is necessary and usually highly worthwhile to get and pay for qualified professional help.

7

At no point did I intend to imply that this was to be my sole (or primary, or even secondary!) source of actionable information. Of course I’ll be consulting an attorney. Maybe more than one!

Currently I’m in the curiosity, back-of-the-envelope phase. Just wanted to ask as a general question what the process is in buying into a small business. If I were dumb enough to actually seek people’s advice I woulda posted this on the IMHO boards. :slight_smile:

Thanks for the info so far…

8

[QUOTE=happywaffle]

Currently I’m in the curiosity, back-of-the-envelope phase. Just wanted to ask as a general question what the process is in buying into a small business. If I were dumb enough to actually seek people’s advice I woulda posted this on the IMHO boards. :slight_smile:
.
[/QUOTE]

In truth, what you are doing is looking for opinions, albeit informed ones. But that’s where this one is going.

samclem

9

[QUOTE=happywaffle]
Related general question: is there a legal definition of who “owns” or “controls” a business? In other words lets say I give the boss a check for $X,000, she puts my name on the bank account, and I start redirecting profits to myself instead of her. Is that all there is to it? Or are we required to somehow register the new owner to make it legit?
[/QUOTE]

You are looking to create a partnership, there is a legal process for this so everything is spelled out before anyone buys in. The other option already mentioned is to incorporate and divvy up shares appropriately.

IMHO incorporating at this scale is probably not worth the hassle/expense.

10

[QUOTE=samclem]
In truth, what you are doing is looking for opinions, albeit informed ones. But that’s where this one is going.

samclem
[/QUOTE]

Fair enough. Mods can scooch this over to IMHO if they want. My factual questions consist of the following:
(a) How does one calculate the “value” of a small business?
(b) Knowing that, how does one formulate an “offer” or plan to buy in to a company? Is there an actual equation that people use, so I have an idea whether my idea is completely off-base or not?

11

Why not just start your own business in competition. If you can do it better, you will prevail. Do you really want to be partnered w/ someone who’s currently doing a poor job. I’d think it likely that the two of you will soon be at odds over how the business is managed, why buy into potental problems.

12

No, in general it’s better to take over an existing business. Goodwill and lack of start up costs are enormously valuable.

I have either started, sold, or purchased several small businesses over the last batch of years. I currently am going through my fourth start up and am in discussions to purchase one business completely and have begun preliminary talks on taking a majority position in another. Whew. It’s been a busy couple of years.

Step #1 is always have an good accountant go over the businesses books. He or she can look for jokers in the deck and also places you might be able to economize if you take over.

Step #2 is to deal with a decent corporate attourney. They’ll help quite a bit.

As for valuation that’s a sticky wicket. It’s trite to say that a thing is worth what you wish to pay for it and no more but to a certain extent it’s true.

However, to answer your question I have used a jackleg valuation equation of:

A business is worth between 4 and 10 times the average of the last three years NET profit. Not gross but NET. The existing owner has a right to collect something to make up for anticipated missed profits by selling.

So if that $8K profit figure is a net figure and holds for the last three years then that would place the valuation between $32K and $80K.

Start low. And good luck.

13

[QUOTE=A.R. Cane]
Why not just start your own business in competition. If you can do it better, you will prevail. Do you really want to be partnered w/ someone who’s currently doing a poor job. I’d think it likely that the two of you will soon be at odds over how the business is managed, why buy into potental problems.
[/QUOTE]

Competition, not a good idea for something with as small a target audience as ghost tours. And Johnathan’s right, there’s a LOT of groundwork I don’t have to do if I buy into an existing business. That being said, you’re 100% right about us being at odds, so the goal here is to make the boss a silent partner (i.e. here’s a chunk of the profits, now I get to run the business). Heck, I’d be eager in principle to just flat-out take over, except I’m sure I could get a much better “deal” buying a majority interest vs. buying 100%.

Excellent answers Johnathan!

14

(dunno where that extra H came from. JONATHAN. Sorry. :slight_smile:

15

[QUOTE=happywaffle]
Sorry in advance that this question’s so general…

I’ve become intimately involved with the ghost tour company that’s employed me for the last three years, and increasingly convinced that I could do a MUCH better job at running the company (lower costs, higher revenues). I brought up the idea of me taking over operations the last time I met with the boss, and to my pleasant surprise, she seemed open to the idea. (She has other projects she’s interested in.)

So now I’m in a position that I need to come up with ideas or a proposal for taking over. My boss doesn’t want out entirely, as far as I know, since the company is still some source of income for her (and is her baby to begin with).

The question is: how do I calculate or formulate a plan to buy into the company? Is there a calculus to this? The company’s pretty small: approx $20k annual revenues, approx. $10k profit. One idea I had was to offer her $10,000 (a year’s profits) for an 80% share and total control of operations. That way she gets a whole year’s worth of money up-front and still gets 20% of profits moving forward. I get 80% of profits, which would allow me to pay off the $10k loan in less than two years.

Am I on the right track? Anybody have any resources to suggest?
[/QUOTE]

Honestly, you have but one question to ask: Would the $10,000 be better used funding your own start up?

If so, then start your own company - you can get good promotional materials (website, business cards, letterhead, etc) for a couple of grand, office equipment for $500 and a computer for about $1k. Incorporation will set you back a couple of hundred dollars (depending upon State), and you’re off, a mere $4k in the hole.

If not, then buy her out. Don’t do it if she demands to remain majority shareholder! Along that path lies madness.

Make the contract short and sweet: for a business this size, you don’t need a lawyer. Put in language that has you “assume all revenues, debts, and liabilities” starting at a certain date, and that has her assume all revenues, debts, and liabilities incurred prior to that date. Her problems should remain her problems. Note: the above might not be enough if the IRS comes calling. See below.

Who is providing you with the loan? Instead of going to the bank, $10k might be small enough to hit up some relatives for… any rich uncles (or a couple of middle-class ones) who wanna play sugar daddy to his nephew/nieces first start up? Don’t forget to mention that any monies gifted to you (i.e., not loaned but given) up to $10k is tax deductable. :wink:

I wouldn’t worry too much about looking at the books - seeing what I’m seeing about this type of business, it looks like a low asset, low liability, and, unless you hustle and are well-organized, low income operation. If she’s willing to sell for $10k, there’s likely not much to look at there anyway.

You will want to make sure she’s paid her taxes and kept up on her corporate filings. Prior to anything else, be sure to get the corporate tax ID and do some research - it might behoove you to get some legal aid here: you definitely need to know if the company is in good standing with all relevant state and federal authorities, including tax and regulatory agencies.

Anyway, have fun, and if it eventually crashes and burns, don’t worry about it - you’re on the right track and you will have had an education that can’t be bought in an MBA program. Good luck!

16

Stock

Specifically, issued stock.

“Issued Stock” is what’s given out to the shareholders. If you have >50% issued stock, you gain ownership of the company.

“Treasury Stock” is what the company retains. This stock is in control of the Board of the company, a body that represents the stockholders as a group.

You should get the bylaws (if they exist). If they don’t, and you actually want to act this out, the general process you have to go through to legally gain control of the company (assuming it’s a corporation) is this:

She needs to sell you 80% of her stock. At this point, checks are made out and contracts are signed. Assuming 500 original shares, 100 issued; you now have 80 shares, she has 20, and 400 shares of Treasury stock.

She has to call a meeting of the shareholders (I’m assuming she’s the Chairman/CEO/principle shareholder currently, right?). Since you’re the majority shareholder, the meeting can be held immediately as soon as you get there. Nominate, second, and vote for a new slate of Board candidates, including yourself as Chairman (insist on it!) and her as whatever role she’s to play.

Document the shareholders meeting, indicating who was present, how the quorum was reached, and the subjects discussed and the decisions made. Sign, date, and make sure that all shareholders get a copy.

Call together the Board meeting. She will have to attend, so you might not be able to do this immediately. In the Board meeting, elect new Officers of the company - yourself as President/CEO (insist on it!), her as COO, whatever… just make sure that you have the highest title in the company.

Document the Board meeting as above. Sign, make sure everybody gets a copy.

Put all originals in wherever you file all corporate documents (make sure they’re safe), and you’re ready to take control.

If you don’t want to go through all that, just have the Meeting documents prepared at the time of closing and sign everything at the same time. So you would sign:

  1. A check
  2. A contract assuming ownership of 80% of the stock
  3. A Shareholders meeting agreement electing you to the Board
  4. A Board meeting agreement making you an Officer of the company

If you have all that prepared beforehand, you can get it done in about half an hour.

17

And you do have to register the new owner - here in TN we register all corporate changes with the Secretary of State. Annual report filings are due every year detailing who is on the Board, the officers of the company, etc. You will have to refile once the changes are in effect.

18

Hell, I just noticed that this business is a sole proprietorship. That’s what I get for reading the OP and then going on a posting frenzy w/o reading the rest of the thread. Most of what I posted above is likely useless.

Anyway, I shouldn’t have been so blithe about “no attorney”, but the fact is that this doesn’t seem like all that big of a deal: you’re essentially buying a really small company that has had nothing much happening over its life being a 1-4 person show (after all, how many employees can you afford on $12k year operating expenses?)

19

Happy, please listen to Billdo. There’s a lot that’s been posted here that’s flat out wrong.

John T, please don’t give incorrect legal advice.

20

IANAL, true, and I apologize if my “analysis” was off the cuff. This is IMHO, after all.

However, I, too have bought out and sold small businesses before, and given the information before me and the small amounts disclosed ($20k revenue, buying 80% of stock for only $10k) and what they imply for the business as a whole (not much)… well… you either do it or you don’t. He can crawl up this ladies ass with a microscope, but if he’s going to spend another $10k in legal and attorney advice… hell, he might as well spend the money starting his own business. Especially given the apparently low barriers of entry in this type operation.