Funding to buy existing business..

FirstTimer14

Hey Guys.

Long time reader, first time poster looking for advice.

Just to give you a bit of background. I have worked for a small company with a healthy turnover the last 10 years. There is currently 4 employees including myself. I am the manager and basically run the company, the director lives abroad 6 months of the year.

The director has recently called a meeting to advise that they are retiring and will be selling the business. They want to sell the business to someone already working there, so after discussion with the other staff members, I am the only one interested in buying, other employees have other commitments e.g. kids, mortgages etc.

Now here is my problem, I am currently debt free, e.g. have no mortgage or loans. But I also have very little savings. I have approached the bank about getting a commercial mortgage, they have said it will be no problem and they will cover 70% of the mortgage.

The business is been valued at €300,000, so I will still have to come up with €90,000. Does anyone have advice on where I could source this finance. I am currently considering the below options and would appreciate advice;

1) Sourcing a business angel
2) Contacting local enterprise board, don't know if they can help with this though
3) Asking the existing owner to keep a 30% stake for 5 years and buying their 30% at what it is valued in 5 years time.

Any other advice would be greatly appreciated.

Buttercake

well done on getting this far.

Have you tried crowdlending like Linkedfinance?

or a bit of negotiation? I was involved in a MBO years back, the owner looking for 150,000 but we got him to take 100,000 - it was in the midst of recession but still.. Would it be worth flying over to meet him face to face? get him drunk lol?

Is the value realistic at 300,000 euro? Whats the net profit, and what are the assets?
How likely is it they will be able to get that price if they go an alternative route?
Is the business likely to crumble if it got sold to someone else not currently in it?

These questions are important to establish your bargaining power. Don't be afraid to negotiate hard despite whatever good relationship you may have with them, unless they are giving you a big discount on the value of the business.

Either way though if they are getting 70% in cash from the bank then there is no rush for the other 30%. I would be proposing 70% upfront with an interest free loan for the other 90K. If your paying 300K for the business I would hope there is 50g's net profit a year at least.
Tie the repayments to the net profit of the company on a yearly basis 18g's for 5 years. Set up a dividend to yourself and use that money to pay the loan.

You might need some tax advice on that though. But even if its not that tax efficient to do it via a dividend and may equate to the same as an interest rate, your saving your equity and minimising your risk by 90g's. Maybe there is a way the company can pay back the 90g's directly, Im sure a decent financial advisor would have a solution for that part.

FirstTimer14

Deleted User wrote: »

Is the value realistic at 300,000 euro? Whats the net profit, and what are the assets?
How likely is it they will be able to get that price if they go an alternative route?
Is the business likely to crumble if it got sold to someone else not currently in it?

These questions are important to establish your bargaining power. Don't be afraid to negotiate hard despite whatever good relationship you may have with them, unless they are giving you a big discount on the value of the business.

Either way though if they are getting 70% in cash from the bank then there is no rush for the other 30%. I would be proposing 70% upfront with an interest free loan for the other 90K. If your paying 300K for the business I would hope there is 50g's net profit a year at least.
Tie the repayments to the net profit of the company on a yearly basis 18g's for 5 years. Set up a dividend to yourself and use that money to pay the loan.

You might need some tax advice on that though. But even if its not that tax efficient to do it via a dividend and may equate to the same as an interest rate, your saving your equity and minimising your risk by 90g's. Maybe there is a way the company can pay back the 90g's directly, Im sure a decent financial advisor would have a solution for that part.

Thanks for your reply. I feel the valuation is reasonable and I feel they would get more if they sold it publically. I would not say the company would crumble if it was sold to someone else but it would definitely lose around 40/50% of its customers if I were to leave in the morning.

What you are suggesting is pay the 70% to the existing owners now and pay the balance with an interest free loan, how does this work? Sorry if I misunderstood you.

I am meeting with an accountant on Friday and would love to have a few options to hash out with them.

FirstTimer14

Deleted User wrote: »

Is the value realistic at 300,000 euro? Whats the net profit, and what are the assets?
How likely is it they will be able to get that price if they go an alternative route?
Is the business likely to crumble if it got sold to someone else not currently in it?

These questions are important to establish your bargaining power. Don't be afraid to negotiate hard despite whatever good relationship you may have with them, unless they are giving you a big discount on the value of the business.

Either way though if they are getting 70% in cash from the bank then there is no rush for the other 30%. I would be proposing 70% upfront with an interest free loan for the other 90K. If your paying 300K for the business I would hope there is 50g's net profit a year at least.
Tie the repayments to the net profit of the company on a yearly basis 18g's for 5 years. Set up a dividend to yourself and use that money to pay the loan.

You might need some tax advice on that though. But even if its not that tax efficient to do it via a dividend and may equate to the same as an interest rate, your saving your equity and minimising your risk by 90g's. Maybe there is a way the company can pay back the 90g's directly, Im sure a decent financial advisor would have a solution for that part.

Thanks for your reply. I feel the valuation is reasonable and I feel they would get more if they sold it publically. I would not say the company would crumble if it was sold to someone else but it would definitely lose around 40/50% of its customers if I were to leave in the morning.

What you are suggesting is pay the 70% to the existing owners now and pay the balance with an interest free loan, how does this work? Sorry if I misunderstood you.

I am meeting with an accountant on Friday and would love to have a few options to hash out with them.

The company made 62K last year, I could have reduced this, as the current directors are a bit loose on what they describe as expenses. I also know there is certain routes I suggested in the past to increase profits that were dismissed, that I still feel could improve profits.

FirstTimer14

Deleted User wrote: »

Is the value realistic at 300,000 euro? Whats the net profit, and what are the assets?
How likely is it they will be able to get that price if they go an alternative route?
Is the business likely to crumble if it got sold to someone else not currently in it?

These questions are important to establish your bargaining power. Don't be afraid to negotiate hard despite whatever good relationship you may have with them, unless they are giving you a big discount on the value of the business.

Either way though if they are getting 70% in cash from the bank then there is no rush for the other 30%. I would be proposing 70% upfront with an interest free loan for the other 90K. If your paying 300K for the business I would hope there is 50g's net profit a year at least.
Tie the repayments to the net profit of the company on a yearly basis 18g's for 5 years. Set up a dividend to yourself and use that money to pay the loan.

You might need some tax advice on that though. But even if its not that tax efficient to do it via a dividend and may equate to the same as an interest rate, your saving your equity and minimising your risk by 90g's. Maybe there is a way the company can pay back the 90g's directly, Im sure a decent financial advisor would have a solution for that part.

Thanks for your reply. I feel the valuation is reasonable and I feel they would get more if they sold it publically. I would not say the company would crumble if it was sold to someone else but it would definitely lose around 40/50% of its customers if I were to leave in the morning.

What you are suggesting is pay the 70% to the existing owners now and pay the balance with an interest free loan, how does this work? Sorry if I misunderstood you.

I am meeting with an accountant on Friday and would love to have a few options to hash out with them.

The company made 62K net last year, I could have reduced this, as the current directors are a bit loose on what they describe as expenses. I also know there is certain routes I suggested in the past to increase profits that were dismissed, that I still feel could improve profits.

FirstTimer14

Deleted User wrote: »

Is the value realistic at 300,000 euro? Whats the net profit, and what are the assets?
How likely is it they will be able to get that price if they go an alternative route?
Is the business likely to crumble if it got sold to someone else not currently in it?

These questions are important to establish your bargaining power. Don't be afraid to negotiate hard despite whatever good relationship you may have with them, unless they are giving you a big discount on the value of the business.

Either way though if they are getting 70% in cash from the bank then there is no rush for the other 30%. I would be proposing 70% upfront with an interest free loan for the other 90K. If your paying 300K for the business I would hope there is 50g's net profit a year at least.
Tie the repayments to the net profit of the company on a yearly basis 18g's for 5 years. Set up a dividend to yourself and use that money to pay the loan.

You might need some tax advice on that though. But even if its not that tax efficient to do it via a dividend and may equate to the same as an interest rate, your saving your equity and minimising your risk by 90g's. Maybe there is a way the company can pay back the 90g's directly, Im sure a decent financial advisor would have a solution for that part.

Thanks for your reply. I feel the valuation is reasonable and I feel they would get more if they sold it publically. I would not say the company would crumble if it was sold to someone else but it would definitely lose around 40/50% of its customers if I were to leave in the morning.

What you are suggesting is pay the 70% to the existing owners now and pay the balance with an interest free loan, how does this work? Sorry if I misunderstood you.

I am meeting with an accountant on Friday and would love to have a few options to hash out with them.

The company made 62K net last year, I could have increased this, as the current directors are a bit loose on what they describe as expenses. I also know there is certain routes I suggested in the past to increase profits that were dismissed, that I still feel could improve profits.

FirstTimer14

Buttercake wrote: »

well done on getting this far.

Have you tried crowdlending like Linkedfinance?

or a bit of negotiation? I was involved in a MBO years back, the owner looking for 150,000 but we got him to take 100,000 - it was in the midst of recession but still.. Would it be worth flying over to meet him face to face? get him drunk lol?

I think the valuation is fair and reasonable. I have never heard of LinkedIn Finance, how does it work or have you ever dealt with it in the past?

Buttercake

FirstTimer14 wrote: »

I think the valuation is fair and reasonable. I have never heard of LinkedIn Finance, how does it work or have you ever dealt with it in the past?

I've no personal experience of using linkedfinance, from what i can see, you submit your plan/proposal and amount required.

I'm not sure how it will work if its a MBO as you submit on behalf of a company... unless you created a company to buy the other one out.

FirstTimer14

FirstTimer14 wrote: »

Thanks for your reply. I feel the valuation is reasonable and I feel they would get more if they sold it publically. I would not say the company would crumble if it was sold to someone else but it would definitely lose around 40/50% of its customers if I were to leave in the morning.

What you are suggesting is pay the 70% to the existing owners now and pay the balance with an interest free loan, how does this work? Sorry if I misunderstood you.

I am meeting with an accountant on Friday and would love to have a few options to hash out with them.

The company made 62K net last year, I could have increased this, as the current directors are a bit loose on what they describe as expenses. I also know there is certain routes I suggested in the past to increase profits that were dismissed, that I still feel could improve profits.

With 62k profits then the valuation is probably close enough. But you also have to consider that finding a buyer for a business is not all that easy depending on how complex it is and you are giving them a very nice clean get out option.

My suggestion is a simple negotiation, you will buy the business at 70% down 30% over 5 years interest free. Your obviously an integral part of the business, they probably want to see their legacy continue in some way. I dont see them having too much argument against a deal like this. Your giving them 210k in cash upfront thats no joke.

FirstTimer14

Deleted User wrote: »

With 62k profits then the valuation is probably close enough. But you also have to consider that finding a buyer for a business is not all that easy depending on how complex it is and you are giving them a very nice clean get out option.

My suggestion is a simple negotiation, you will buy the business at 70% down 30% over 5 years interest free. Your obviously an integral part of the business, they probably want to see their legacy continue in some way. I dont see them having too much argument against a deal like this. Your giving them 210k in cash upfront thats no joke.

I will definitely consider negotiating on the price. Some great advice here. Thanks.