Hi all. I currently work for a small business (4 employees), and my boss is nearing retirement age.
Since I have been here the longest he offered it to me and I eould pay in installments.
I am leaning towards not buying it, but wanted a second opinion (or however many I get). I don’t know the first thing about evaluating a business deal and I doubt I could afford a contract lawyer. Also he has all these stipulations for selling (i.e. I told him if I did take over I would want to make everyone remote, he says he wouldn’t sell unless it was in the contract that the office stays open). Any thoughts/advice appreciated.
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You can’t be half pregnant.
He wants you to “buy” the business, while he retains control, and gets to role play being a “director”, while he doesn’t have to answer to you… so…
Doesn’t that still make him the boss?
Keep typing this out, and saying it out loud, until you realize what a ridiculous proposition this is.
Personally I think if you can negotiate a good deal, you should take it. Example for every stipulation he adds, ask for a reduction in price.
Paying in installments is great, you won’t need to take a loan and if the business is profitable you are just printing money without worrying about anything.
Kinda strange to me to want to control a business after selling it. I personally wouldn’t sign a contract with contingencies like that.
As far as how much to value the business for a sale/purchase, it would depend on multiple variables, especially industry. But you may expect that price to be anywhere between 2-5x profits for a small business.
Get someone to help you. There are lots of methods for business valuations. I wouldn’t pay attention to them. What I would do is focus on cashflow, and how you would manage this business.
DO NOT PASS THIS OPPORTUNITY UP WITHOUT EVAULATING IT VERY CLOSELY. THIS LITERALLY COULD BE LIVING CHANGING FOR YOU.
IF this is a good business you might have a GOLD opportunity here. Because it’s not on the market and you aren’t competing with anyone for the sale, and you’ve got a seller(owner) who clearly wants to work with you and pass it on to someone he knows and who knows the business. The other side of the coin, you don’t want to buy into a ship if it’s sinking. It seems like based on how your talking that the owner has been somewhat successful in this business for some time, if that’s so you should really consider this.
Ask him to go over the numbers with you. You need to review a P&L, and you want to calculate what’s call the SDE which is “Seller Discretionary Earnings”. It’s more complicated but in the end no different the budgeting your own finances. All the money coming in, minus all the money going out for necessities, equals your disposable income.
Why do you want to make everyone remote? Are you afraid of owning real estate or do you not think the business supports the real estate it currently has? What kind of business is this. Is “the office” owned by the business? Does the business rent it from a 3rd party. Does the owner own the property in another holding co and simply want you to guarantee a long-term lease so that he has a long-term real estate investment that he can keep profiting off of? There is no wrong answer here. Just things you need to consider.
If the business has 1 million in sales, and each of the employees makes 100k, and there is 120k in rent (or mortgage payments) and let’s say another 200k in expenses. Thats 720k cost on 1 million. Putting you at 280k in your pocket. If you could just buy 280k a year, what’s that worth to you. Most companies have different multipliers of cashflow or other metrics that are fairly industry standard, which is how a lot of companies are valued, but personally I ignore that and focus on what it’s worth to me personally. What I would pay in order to have a 280k a year of cash. Would you pay your old boss 100k a year for 5 years in order to have that 180k of profit? Do you have ideas that could drive that 1 million a year to 1.5 million a year? Do you have any idea for modernizing systems to automate Backoffice and commodity tasks and activities.
Now on the other hand. If the bossman is only making 50k a year, or worse less. Your talking about a pretty basic salary for taking all this risk. So don’t do it, or not do it, purely based on feeling, or something silly like office, or no office. Focus on hard facts. If there is good cashflow, then yes buy it.
General rule of thumb is to not make any changes for a year. If it’s working as-is, then continue.
If you dont have money for an attorney, you dont have money to buy a business.
Underrated comment. That was a big detail I noticed too.
Owning a business you’re going to find little pitfalls where for whatever reason you need to cough up some money for unexpected expenses. It’s important to have some sort of baseline so you have a bit to work with if you hit a snag. Also, where would the money to purchase come from? A loan is certainly a possibility but comes with strings, and cost, (especially with current interest rates) so tread lightly
Once it’s your you can do whatever you want with it. Get a meeting with the accountant set up first.
All about math… what’s coming in via what’s going out… advertising or set customer base… hope for the best and plan for the worst scenario… All I got… good luck
What are the terms for the installment payments? Are they paid from the company’s profit or from another source?
Can you please give a range how much the business is being offered for? 5 figure? 6 figure?
I would be very cautious about buying a business where the original owner wants to essentially play owner and stay involved in the business. He is playing owner with your business.
You need to decide how much you think this business is worth and what terms you’d be willing to consider to buy the business, set your terms and offer them to the owner. I also would not do installments through the original owner. Go to a bank and get a business loan.
The person you are buying the business from is the seller of the business. You do not want them to hold all that leverage over you. Don’t let them be your business financer, they’ll use that leverage. Also, you need to be free to run the business in a way that is in line with your goals.
So, is purchasing a business from a previous boss, who also holds the business financing on the your loan and wants to be an active decision maker in the day to day running of the business a good idea? No! It is a terrible idea.
If you do decide to consider buying the business, you can’t afford to not have a lawyer. Get the best lawyer you can find and don’t worry about the legal costs. You can’t overspend for good legal representation. Good luck!