Buying a business
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Thread: Buying a business

  1. #1
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    Buying a business

    Hello all,

    I am the general manager of a medium sized company with about 40 employees. The owners have offered to sell it to me. It is worth something like $2M.

    I could never come up with this kind of money. I have good finances. I own a home with about $100k equity. I have about $100k is RRSP and other $30k in cash.

    Are there realistic options to finance something like this?


  2. #2
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    I do not know where you are located, which can have a bearing on how things are done.

    As well, the business is in a company. What is being sold - The shares? The assets? Do you have a choice of share purchase or asset purchase? More importantly, have the owners offered to paper the deal at all?

    How long have you been GM? Do you feel confident in your ability to run things as owner? Would an earn out make sense, to keep the owners in the game for awhile?

    Lots of business owners here on CMF who can offer guidance and suggestions, most likely. My only hands-on business experience is with running a professional practice some time ago, which is quite different from what you are contemplating.

  3. #3
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    Quote Originally Posted by Mukhang pera View Post
    I do not know where you are located, which can have a bearing on how things are done.
    Alberta

    Quote Originally Posted by Mukhang pera View Post
    As well, the business is in a company. What is being sold - The shares? The assets? Do you have a choice of share purchase or asset purchase? More importantly, have the owners offered to paper the deal at all?
    Private company so I would be buying everything. All assets and all equity. The owner is looking for a straight purchase not share deal or to finance it himself.

    Quote Originally Posted by Mukhang pera View Post
    How long have you been GM? Do you feel confident in your ability to run things as owner? Would an earn out make sense, to keep the owners in the game for awhile?
    Yes I am very confident. I run everything right now and have expanded business significantly since taking over 5 years ago.

    If relevant, it is a consulting firm.

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  5. #4
    Senior Member tygrus's Avatar
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    Something seems amiss. Thats a lot of employees for a smallish company. Whats the gross annual revenue?

    Whats the $2M valuation based on? Plant and equipment and office or client list?

    If you know the business so well why not just replicate it on a smaller scale and build it yourself.

    Sounds like a mature business to buy. Otherwise the owners likely wouldnt be selling it.
    Last edited by tygrus; 2017-06-18 at 05:37 PM.

  6. #5
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    Quote Originally Posted by clovis8 View Post
    Alberta

    Private company so I would be buying everything. All assets and all equity. The owner is looking for a straight purchase not share deal or to finance it himself.

    Yes I am very confident. I run everything right now and have expanded business significantly since taking over 5 years ago.

    If relevant, it is a consulting firm.
    Thanks for that added info.

    Yes, relevant that it is a consulting firm. That suggests that it is not long on hard assets, such as manufacturing equipment, for example. It would indicate that the real assets are its human resources and goodwill. That might make it a bit harder in terms of obtaining conventional financing. There is not much that can be offered as security, if I am getting an accurate picture. Is the company operating from leased office premises?

    I'll agree that it is highly relevant to your prospects that you have been in the saddle for some years and appear to be in de facto control.

    Quote Originally Posted by clovis8 View Post
    Private company so I would be buying everything. All assets and all equity. The owner is looking for a straight purchase not share deal or to finance it himself.
    You may have missed my point about assets/shares. There are, in broad terms, two ways to buy a business being operated by a company, say A. Ltd. One way is buy all of the shares of A. Ltd. The company owns the assets, for eg., its shop premises. Once you own the shares, you own the company and, indirectly, the shop building and other assets.

    The other way is to buy the assets held by the company. If, for eg., the main asset is a shop premises and equipment, documents are prepared, such as a transfer of title to the shop and a bill of sale for a sale of the assets between you (or perhaps a new company formed by you) and A. Ltd. If A. Ltd. owns other assets apart from the business being sold, then an asset purchase would be the only way to proceed, unless those other assets are first transferred out of the company.

    Assuming the business being sold is all that A. Ltd. owns, then either and asset purchase or a share purchase is possible. There are various legal, accounting and tax considerations attaching to each. One obvious one is you probably do not want the company if it has some negative history. If the company has outstanding liabilities, they’ll still be liabilities once you take over. But, at the same time, a reason for wanting the company itself is for its name. Perhaps Albertans associate the name A. Ltd. with a high quality service, for eg. Of course, you could always buy the right to the name without buying the company.

    So there’s lots to think about, apart from how to raise financing and how to keep it serviced. On the latter score, I take it you are intimately familiar with the company books and its cash flow and ability to meet debt servicing obligations. Without knowing much about that, my concern for you is that you seem to be a bit thin on financial resources to be taking on a $2 million obligation, particularly without some vendor participation. But there might well be countervailing considerations of which I am wholly unaware, so I am certainly not expressing a view that you cannot pull it off. It's taken my awhile to compose this and, perhaps by the time I post it, one of the cmfers with strong business savvy will have come up with a plan for you. I regret not being more helpful.

    I am returning to edit in the wake of tygrus' post. That's what I am talking about. Someone with some insights that I lack. Although I too was surprised by the number of employees. Are they mostly professionals engaged in the consulting work of the company, with some support staff? Is the owner selling due to retirement or health issues or some such? Anyway, all I can do is point out some of the legal considerations and mechanics of structuring a deal. I lack the expertise to say anything about the wisdom of such a purchase, business valuation aspects, etc. Not sure you want any of that, but be prepared to get it. CMF is not known as the home of a group of shrinking violets. You asked about how to finance. I shot my bolt with the suggestion of vendor financing. I am now bereft of any further ideas.
    Last edited by Mukhang pera; 2017-06-18 at 05:48 PM.

  7. #6
    Senior Member tygrus's Avatar
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    The valuation is highly subjective imo. It sounds like its basically a client list and some employees. If the clients are regular repeat customers that give business every year, then that might prove to have more worth, like KPMG or something. If its mostly one off consulting gigs, its valuation is much lower. Not much different than a guy with a truck and a ladder. Very hard to get lending on this.

    Just for perspective, my farm would have a $2-3MM valuation and has 1 employee.

  8. #7
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    Quote Originally Posted by tygrus View Post
    The valuation is highly subjective imo. It sounds like its basically a client list and some employees. If the clients are regular repeat customers that give business every year, then that might prove to have more worth, like KPMG or something. If its mostly one off consulting gigs, its valuation is much lower. Not much different than a guy with a truck and a ladder. Very hard to get lending on this.

    Just for perspective, my farm would have a $2-3MM valuation and has 1 employee.
    The value I gave is only an estimate. Before purchase there would be much more work to ascertain value.

    The company has some field equipment, office equipment and about 10 trucks. The widget we sell is time which is why there are 40 employees. That number is consistent for the size of the client base and revenue (which I don't want to share publically) for my industry.

    I would be buying the assets, client list and brand, all of which is well established. Yes I could recreate all of this on my own but this business is 19 years old and has built significant brand recognition and client loyalty. Much of the client base gives regular work and some have done so for years. One of our clients has been more than a decade.

    I'm really curious if there are even options for me to access this much capital/financing?

    Does something like the BCD finance this kind of thing?

  9. #8
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    It would probably depend on the cash flow and financials.

    You'll need to write up a business plan and see if it makes sense. Then you can present it to the bank and see if it makes sense to them.
    Last edited by Just a Guy; 2017-06-18 at 11:13 PM.
    I'm not JustAGuy (without spaces), or Donald, or <insert name here>.

  10. #9
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    Maybe you could work something out w the existing owners to buy out their ownership w the future profits of the firm.

    That is the way some private companies can change hands.

  11. #10
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    Maybe asked the 40 employees to come up with a business plan to buy or rent to own the company with you. Never want to put to much on the table for any one bet


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