I am considering buying into a business and need some advice. The business is a small real estate development company. The primary market is adaptive reuse (hotel to apartments, warehouse to apartments) in the midwest. Currently, there is one owner (6 employees) and the net income for the business is about 280K annually. The income is “lumpy” depending on development projects and faces significant headwinds with interest rates. He (his accountants) assigned a valuation on the business of 950K and I am looking at buying in for 35%. My buy in would be $330K. We could not agree to a fair valuation and the seller has guaranteed (both the business and him personally) 285K in distributions over the next two years. I have looked at his personal balance sheet. He is worth 4.8m. So I think he could handle the 285K in distributions. The TLDR is: I pay 330K, he pays 285K (over 2 years), I get 35% of the business. I’m stuck mentally, help.
Why not just be a lp on individual deals? This protects you from ‘buying’ into the company and going through the lumpy times and still allows him to access to your cash on specific deals.
I think the answer is twofold. First, he needs help further building the RE development company and there are some specific capabilities I can bring to help streamline the company. This will hopefully result in a larger and more sustainable RE business which will kick off consistent salaries/development fees. Second, if I invest in the development company, I will be able to earn some equity in deals on the GP side of the equation via “sweat equity” so to speak.
Its a fair question though…I have asked myself the same.