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Buying existing business

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Old May 5th, 2015 May 5, 2015 7:19:18 AM -   #1 (permalink)
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Default Buying existing business

Looking to buy an existing screen printing business with my partner.

Partner has 5+ years of experience in the screen printing business and am just providing cash to purchase(as I have another full time job) and need help assessing the business potential.

Existing owners are asking $50K for the business including assests and the business did about 185K in sales and made $41K in net income for 2014 and projected to earn net income of $60K in 2015.

What should be our offer? $50K or $41K?
Also, are the sales number and net income typical of this business?

Also, since am upfronting about 30K and assuming purchase price is 50K, as a non-working partner should I ask for 60% of the ownership ?

Note: I have no background in screen printing and will be relying on my partner to run the business. If partner quits tomorrow, I lose everything.
 
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Old May 5th, 2015 May 5, 2015 9:19:39 AM -   #2 (permalink)
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Default Re: Buying existing business

50/50, without a partner that can print, your dead in the water. $ sounds good for that client base to start, but I have no idea what equipment your getting with that.
 
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Old May 5th, 2015 May 5, 2015 10:32:57 AM -   #3 (permalink)
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Default Re: Buying existing business

Quote:
Originally Posted by Printor
50/50, without a partner that can print, your dead in the water. $ sounds good for that client base to start, but I have no idea what equipment your getting with that.
Jay, below are the list(this is not exhaustive)
  • M&R Sportsman Pneumatic Index 8 Station / 6 Color Textile Printer
  • Lawson Dryer Unit
  • Lawson Manual Printer Unit
  • Lawson Exposure Unit
  • Lawson Flash Cure Unit
  • Platends, Aluminium Screens, Wood Screen Frames, Ink etc
  • Pressure Washer Machine
  • Brother Fax Machine
  • HP Color Printer
  • Tables, Shelving units
  • Small Fridge, Microwave etc.

This was a 2 person shop and my partner intends to do everything on his own or maybe get part time help.

50/50 probably is the way to go once I get my initial investment back or even 40/60 in my partner's favor as he is the one toiling and making this happen.

Am risk averse and would expect my principal investment back. What would be a fair payback schedule ? should I go with a fixed return every month or say a percentage of net income?
 
 
Old May 5th, 2015 May 5, 2015 10:46:01 AM -   #4 (permalink)
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Default Re: Buying existing business

Sounds Decent. So your only paying about 30-35k for the client base. Sounds good. I'd go with a %, don't want to bankrupt a small biz. You also want to keep your partner motivated, And at first he'll try to keep up on his own without help to keep his $ up. How many years did it take them to get to this $?
 
Old May 5th, 2015 May 5, 2015 10:52:34 AM -   #5 (permalink)
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Default Re: Buying existing business

Equal 50% shares in a business is a prescription for liquidation. It only works as long as the two partners agree 100% of the time. This is even more difficult if one partner has considerable operational experience and the other partner intends to be silent. I seldom have seen a silent partner remain silent for long and therein lies the problem.

One of the partners must have over a 50% share to run the business long term.It usually should be the partner with industry experience. Any other arrangement is hopeful at best but unlikely to be successful for the long term.
 
Old May 5th, 2015 May 5, 2015 11:01:55 AM -   #6 (permalink)
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Default Re: Buying existing business

If he's considering 40/60 after investment is returned, I'd offer 51% after return, Then if printer is frustrated with any thing, he'll bust his @$$ to pay him back.
 
Old May 5th, 2015 May 5, 2015 11:20:03 AM -   #7 (permalink)
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Default Re: Buying existing business

Hi,

So this shop is returning a 22% net profit? Thats a nice return. Seems more like the gross than the net to me. In my experience, this figure, if net, is high. You need to see 3 years of tax returns, in my opinion, to actually determine what is happening.

If I read this right, you have a friend who wants you to front him the cash to buy a business. The business is something you are not familiar with. The loan ( which is really what it is) should be structured with a repayment schedule and a reasonable amount of interest. I would suggest 7 year payback at prime +2%. Don't be a partner, be a lender in this case.

I doubt that a two man shop can be converted to a 1 man shop ( or maybe a part timer) and keep up the volume. Something will suffer - most likely the customers.

Some other questions:
Will the previous owner sign a non-compete?
Have you priced the value of the equipment as that is the only asset?
Is this the best investment? Maybe a craft brewery would be a better return?

Good Luck!
Robert
 
Old May 5th, 2015 May 5, 2015 11:22:06 AM -   #8 (permalink)
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Default Re: Buying existing business

Quote:
Originally Posted by Printor
Sounds Decent. So your only paying about 30-35k for the client base. Sounds good. I'd go with a %, don't want to bankrupt a small biz. You also want to keep your partner motivated, And at first he'll try to keep up on his own without help to keep his $ up. How many years did it take them to get to this $?
I believe it took them almost 10-15 years. For some reason, the owner didn't market well or it could be that the local area has lot of competition and business is hard to grow!

Again, am a novice and learning the industry but partner thinks within 3-5 years he can turn around the business and generate upto $1Million in revenue.

I doubt you can go from $185K sales to $1Million without significant investment or ramp-up but that's me thinking from the outside not knowing the business intimately.
 
Old May 5th, 2015 May 5, 2015 11:28:39 AM -   #9 (permalink)
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Default Re: Buying existing business

Why not just buy the business 100% on your own and hire your buddy to run it. As stated above 50/50 is a bomb waiting to explode. Make sure you compensate him well and he will do good by you. If he doesn't, fire him and hire someone that will.
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Old May 5th, 2015 May 5, 2015 11:30:51 AM -   #10 (permalink)
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Default Re: Buying existing business

Quote:
Originally Posted by rhilferding

If I read this right, you have a friend who wants you to front him the cash to buy a business. The business is something you are not familiar with. The loan ( which is really what it is) should be structured with a repayment schedule and a reasonable amount of interest. I would suggest 7 year payback at prime +2%. Don't be a partner, be a lender in this case.

Some other questions:
Will the previous owner sign a non-compete?
Have you priced the value of the equipment as that is the only asset?
Is this the best investment? Maybe a craft brewery would be a better return?
Robert, you are right about the friend + business + loan. However, don't want to be a lender and miss out on potential future income.

The previous owner is moving onto another state to be closer to family and wants to sell so not sure about non-compete but they may sign it.

Don't know the market value of the equipment - need to price it.

This may not be the best investment but it did sound less risky as it's a profitable business to begin with and partner has experience.

You have given me lot to think thru - thanks but if you have more questions for me, please shoot!
 
Old May 5th, 2015 May 5, 2015 11:51:56 AM -   #11 (permalink)
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Default Re: Buying existing business

Quote:
Originally Posted by tcrowder
Why not just buy the business 100% on your own and hire your buddy to run it. As stated above 50/50 is a bomb waiting to explode. Make sure you compensate him well and he will do good by you. If he doesn't, fire him and hire someone that will.
Thanks. Never thought of that! But with full-time job already don't think it's possible

Last edited by tampaite; May 5th, 2015 at 12:20 PM..
 
Old May 5th, 2015 May 5, 2015 1:51:29 PM -   #12 (permalink)
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Default Re: Buying existing business

Quote:
Originally Posted by tampaite
Thanks. Never thought of that! But with full-time job already don't think it's possible
You having a full time job changes nothing. All I suggested was buying the business and hiring your friend to run it. That's what you were planning on doing to begin with was it not?
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Old May 5th, 2015 May 5, 2015 2:11:15 PM -   #13 (permalink)
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Default Re: Buying existing business

It's a tough call without seeing the actual accounting information behind it. One thing I am curious to see is if the owners have "sweetened the juice" by purposely cutting down expenses or re-routing money in other parts of the business on the income statement. This is called "cooking the books", or making your business look like it's healthier than it really is.

If you are serious about purchasing the biz, ask the important questions, like why is the seller selling? If the business was doing great, nobody in their right mind would sell the business unless they hate their family and they're about to croak. I'm not trying to second guess you if you are sound in judgment, but let's be real, this goes into what your terms are for buying this business. In car terms, are you buying a "beater" that needs a little TLC? Or are you buying a restored vehicle?

I would certainly get some professional advice, someone who can look over the books. The owners should be up front with at least the past 3 years of accounting. If you can't understand the numbers, find somebody who can. You want the Balance sheet, the Income statement, and if they can whip it up, a cash flow statement. Because, maybe, the business is a dying cow, or maybe it's a diamond in the rough.

Once you got all of that figured out, and you are just antsy to buy the thing, there is a book that tells you around how much a business should be worth, figuring in earnings and using a multiplier. It will at least give you a ballpark figure. I can't think of the name off the top of my head, if you need it I can get it for you once I get back to the study.

Good luck.
 
Old May 5th, 2015 May 5, 2015 5:27:58 PM -   #14 (permalink)
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Default Re: Buying existing business

Curious? If it was a 2 man show last year, was $41k net for one owner, after paying 1 employee 30 or 40k, or was that split between 2 owners?
 
Old May 5th, 2015 May 5, 2015 5:47:47 PM -   #15 (permalink)
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Default Re: Buying existing business

I would hire a forensic accountant to check them out if I was spending that much money.

I wouldn't even look at that 60k future profit it sounds like a shot in the dark to me. If they have future contracts signed for next year (and that is how they get the number) the client could always terminate the contract if it is allowed in the contract.

A little info on forensic accountants: https://thomasruskinblog.wordpress.c...ic-accounting/

You could always consider buying the business 100%, and giving your friend a minority share with the option to buy back up to 50:50 over time.
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