Buying an existing small business

Mill

Lifer
Oct 10, 1999
28,558
3
81
Hi, all, I'm hoping there are some small business owners or finance people that have experience. A friend and I have been discussing the purchase of a small business. It is a tech firm that sells and services POS devices. The owner is retiring, and he is trying to sell the company. The asking price is around 185k, annual revenue is 450K+, and the cashflow is around 130-135k.

If we did this, I'd be paying 100-110k out of pocket(60% ownership), and then my friend and I would be on a joint note payable to the owner for the remainder. He would be managing the business, and would be paid a salary. He has an option to use some of that salary to help increase his overall stake past 40%, or he can be content with 40% ownership. The business has been around since the late 70's, and has a lot of longterm clients. New blood, it seems, would really help to grow the company to include many new customers.

My friend and I (lifelong), have a pretty long experience with POS devices and software (he longer than I) and IT. He will be getting his MBA during this time frame as well, and I will be in law school. He's willing to put the MBA on hold and quit his job if this pans out. I'm going to continue on with my career, and I prefer not to have much say in the daily operations and management side of it all. I'm wanting to be a fairly silent investor, as I have much more to concentrate on. He has business experience, and I'd trust him with my life.

Thoughts? I'm supposed to talk to the broker who is selling the company tomorrow. My only current concern is the looming recession... although that may mean any borrowed capital might be cheaper (even though the owner would like to finance any part not paid in cash). Finally, the owner is willing to do training, stay on as a consultant/employee, and do whatever until we are comfortable. We'd be keeping the same clients, employees, etc.
 

jpeyton

Moderator in SFF, Notebooks, Pre-Built/Barebones
Moderator
Aug 23, 2003
25,375
142
116
So the waffle bar didn't pan out?



Too bad...there's real room for growth in the waffle business.
 

redly

Golden Member
Nov 15, 2004
1,159
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I was afraid you were going to say the business was a video rental store
 

OulOat

Diamond Member
Aug 8, 2002
5,769
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You could lose a friend when things go sour and the blame gets thrown around. Make sure you are okay with that.
 

amdskip

Lifer
Jan 6, 2001
22,530
13
81
Originally posted by: OulOat
You could lose a friend when things go sour and the blame gets thrown around. Make sure you are okay with that.
Yep, happening to my dad right now and it is very ugly.
 

NoShangriLa

Golden Member
Sep 3, 2006
1,652
0
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Money and friendship doesn't mix, and it would be wise to have the bank statement to compare with the book record.

Get everything on paper regarding training & consultant/employee and make sure you have the working hours & the expected employment duration iron out (because he might quit soon after he have the money).

It also make sense to find out how much cash come from service contracts, how much from sales, and what is the average grow rate (year end is a poor indication of expected growth because year end tend to be in the time that the business bring in the most cash).

IMHO, 185K is way too much for a business that generate 135K (maybe less when you actually sees the numbers on paper) in cash flow, and revenue of 450K with out including large amount of asset. I think the company worth between 110K-150K if existing service contracts worth 450K of revenue. If 1/2 of the revenue is from sales with little growth then the company would worth 10-20K less than the previous number that I mentioned.

The number I posted above is usually use as a rough estimate for a service company with growth of 6-8% per year in my area, however it may vary vastly in your area.