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  #1  
Old 03-07-2013, 06:49 PM
xPhr0z3n xPhr0z3n is offline
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Purchasing a business - Letter of intent

Hi guys, my name's Chris and this is my first post on this site. I'm 25yrs old and I've been working for a fence company for the last 3 years. I went to college at MSMC and have a bachelor's in business management. I have six overall years in fence and am confident in my abilities and potential.

My boss has an interest in selling the business sometimes soon, and I have an interest in buying it. We've discussed the matter and he knows my intentions.
As of right now, he's figuring out how much inventory is around the shop and hopefully his next step it to hire a professional appraiser.

I am very eager to make this happen, and have talked to many professionals, gaining their insight on my situation. But I've never bought a business before and I don't know what the terms would be on a contract like this. My proposal is the following and these are all estimated figures.

Seller - Dave
Company - XYZ - Dave is the owner of XYZ, his wife Donna is the secretary, I am the foreman and at any given time we can have anywhere from 1-4 helpers. Dave and I are often at the jobs together, creating a very efficient operation. We do many residential jobs are often say no to jobs that involve risk. We work m-f and do approximately 150jobs a year and generate about $500,000 revenue, profiting nearly $125,000est annually.

Operating this way the estimated cost of XYZ- $300,000

To finance the deal, this is my proposal.
Instead of having Dave in charge of estimates, leads, ordering, inventory, hiring; we have Donna in charge of those things. Donna was the manager of a grocery store for many years and is full capable of having a bigger responsibility with us. Now we have Dave running the residential crew, I run a commercial crew and instead of doing 15 jobs a month, we're doing at least 20. Allow longer days of work, and allow Saturdays or Sundays. Now we do approximately 200 jobs and generate $650,000 in revenue and profit nearly $150,000est annually. The difference in the profit between the years moving forward and the averaged annual profit over the ten previous years, goes towards the cost of the business. We do this until the business is paid off which would be anywhere from 5-10 years.

Does this sound like something my Dave would sign up for? Is this a common way businesses are purchased? Any advice would be appreciated! I'd love to talk to someone who's been in my shoes before.
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Old 03-07-2013, 07:28 PM
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jrs.landscaping jrs.landscaping is online now
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So, you want the owner of the company to get out of his office, work harder, and more hours per week for 10 years to bankroll your buyout?

Maybe I'm wrong but if I sold my business I think a check in my hand and a drive to the bank would be easier
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Old 03-07-2013, 09:06 PM
xPhr0z3n xPhr0z3n is offline
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Obviously a check is ideal but I'm not necessarily asking to take money out of his pocket. I want the business to make more money so I can afford to be paid more. I don't have the cash to finance the deal and we don't plan on going to a bank so we are going to have to figure something out. He knows what I get paid, he wouldn't have interest in me as a buyer if he was looking for a check in hand.
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Old 03-07-2013, 09:30 PM
Raymond S. Raymond S. is online now
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No this isn't common nor would any business owner do it. "Dave" isn't going to get out of the office to run a residential crew, on Saturday and Sunday as well, all the more ask his wife to take on more responsibility, just to boost sales to put in a fund to finance the purchase of his business to YOU! If he's selling out, he wants out. He doesn't want to work harder. Not to be a prick but your idea makes absolutely no sense.
I think there is a misconception amongst some people, primarily younger people. They think that because they have worked somewhere for a few years and got a degree in business that somehow they're ready to own a business, of which they actually have no idea what is involved in actually running that business. Often times people will have 15-20 years in a field before starting a business in which case they work several years at building it to the point where it can support them and their family. It takes a ton of sacrificed time, energy, money, etc. I'm not saying you fall into this category 100% but it does seem that what you're asking your boss to do doesn't really benefit him and is really just more demanding of him and his wife for the sake of you getting to own a company.
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Old 03-07-2013, 09:45 PM
xPhr0z3n xPhr0z3n is offline
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So have you ever purchased a company or sold one before? What should I propose to him? How does this process look on paper?

This is what I'm going to be doing as a career. Whether I buy this company, or starting from scratch, ill be building fences, I just want to do everything in my power to make this happen, to where were both happy and our relationship doesn't change.
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Old 03-07-2013, 10:21 PM
Raymond S. Raymond S. is online now
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Yes I have purchased 2 other existing companies. Both companies were a cash deal (check technically.) One was a maintenance company with some equipment. Had about $75k in revenue and maybe $10k in equipment. I paid $25k. Other had around $85k in revenue and $8k equipment. I paid $35k. Neither owner had an interest in continuing on with business and there was a value to me where someone else may not see the value. Similar to your situation. You seemingly know the business, specifically THAT business. A lot of your deal depends on when the owner wants to step away. How involved does he want to be and for how long. What is he willing to accept as down payment and how much is he willing to risk essentially letting you run HIS business until its paid for. At the end of the day if he does some sort of owner finance he will be risking the possibility of you running his business into the ground reducing its value to another potential buyer.
My advice. Propose a total buyout of $XX over 5-7 years. Maybe he wants out in 3 years? Whatever. You require him to stay on as an advisor for that time. He's required to train you in total takeover. 100% transparency of the business. Expect him to want to see the books, its still his business til you pay for it. However, you are in charge and have the final say. there has to be a pecking order and established level of succession for it to work. You say the business profits $125k? Pay yourself $50k. That leaves $75k. If you think it's worth $300k looks like you'll have it paid for in 4 years. There's no risk for you and he's out in 4 years. If he's truly netting $125k then he should be tickled pink to sell for $300k. I can't help with pricing as I don't know that business. I do know that probably the most common way to purchase an existing business is with a long term buyout like this. My parents are going through the same thing only on the other end as a seller. Get everything in writing. Trust no one!!! I don't care who it is. When you start talking money, especially with 3 zeros after the comma, things can get ugly.
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Old 03-07-2013, 10:36 PM
xPhr0z3n xPhr0z3n is offline
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And should I be waiting for him to make the moves. I would say that I'm more proactive in this than he is but there are costs to making this happen. Appraiser, lawyer, does the seller pay for these things. This year I'm in training mode and I want to do more so I'm a more trusted buyer. I'm going to be the first one at the shop, I'm going to practice the machines after work, I'm going to work harder than I ever have. I want him to realize how serious I am but is there anything else I can do to prepare for this process
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Old 03-07-2013, 10:45 PM
Raymond S. Raymond S. is online now
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Tell him you want to take him to dinner. Not Denny's. Tell him your thoughts and see how receptive he is to the idea. Make a plan together to make it happen. Practicing on the machines doesn't necessarily make you better at running a business. It makes you better at installing a fence. Start asking questions about margins on jobs, material costs, labor costs, insurances, tax obligations, equipment depreciation schedules, what's your market demographic (normal customer.) These things will help you learn more about the business, not necessarily how to install a fence better.
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Old 03-07-2013, 10:55 PM
xPhr0z3n xPhr0z3n is offline
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I hear you, I agree I have to get together with him and see where his heads at. I just don't want to bring it up while were working together, I don't want to be obnoxious about it. With your plan, he's basically giving me all the profits to pay back for the business. He will basically have to pay him and his wife a salary while doing similar tasks, while I'm making the profits. I don't know if there's a way around that, but that's a tough sell.
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Old 03-07-2013, 10:59 PM
Raymond S. Raymond S. is online now
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Not necessarily. His role will be greatly reduced. He would only be an advisor. Not working in the field necessarily. You'll have to assume a more responsible role and perhaps employ someone to fill the wife's role as book keeper. Your job will get much more difficult in order to reduce his responsibity and allow him to step away which is his goal if he is talking of selling the business.
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