[donk.]

Have any of you purchased a percentage of a business?

Have any of you purchased a percentage of a business and were also part of that company for years to come?

The company I work for, the owner will most likely be offloading 49% of the company within the next few years.

Seems like the offer is for senior internal staff to buy that 49% first. Assuming they come up with the funds.

Questions:

1. At what point is it worth to invent into a business vs stonks or real estate? ROI is a greater percentage than anything else > go for it?

2. There will most likely be 4-10 people splitting that 49%. What comes to mind first in regards to paperwork, legal, etc?

3. If you have been at this company at 5-20 years, and would be investing, how would that change your mindset vs simply putting 100k into stocks and getting your 3-7% back annually hands off.

I figure I do the math, and go from there. these are general numbers, because I know some of you will have a stroke that I left out 75% of the details and variables

Stocks = 3-7% ROI (zero involvement, no leverage)
Real estate = 12-20% ROI (20hrs per year involvement, + leveraged money)
Investment in company = ???

-Off the top of my head, if I was to be a blind investor in a company, and I could get a 80% loan, I would want similar or greater return than real estate. Say 15-23%.
-If it was not leveraged, I would want 6-10% at minimum, as a blind investor (hands off).

Since I will be a part of the company, making decisions, pushing profits, being involved, add an extra 5% to the numbers above. Otherwise what's the point of going above and beyond, for minimal return.

If anything, I may just push the idea to run the service side of the company as it has been brought up before.
Ask for a heavy raise, and keep my investments in RE.

[Hondaracer]

My old boss was a pretty savy businessman and he gave me a lot of good advice over the time working there. Used to be a senior construction manager for big companies like Bosa etc. eventually the company he started on his own grew to about 30 employees managing 6-8 sites at a time.

He told me one day, that while the company has millions of dollars in assets in heavy machinery etc. and all this work, the company itself is only worth the phone number.

In that, the reputation and the relationships he has mostly single-handedly built are where the value lies in the company. Without those, the company is largely worthless.

So with that said, is this a company that can rely on its reputation to get business into the future? Or will you always have to work to seek out business? If it’s the latter, imo, the company really isn’t “worth” much at all

[Gerbs]

Probably around 2-3x EBITDA or 15 - 33% Return on the dollar for the high risk you're taken with pretty much no control.

The selling clause when you exit is unfavorable too, I don't think anyone will buy out the business as a higher valuation in the 5 years.

[PeanutButter]

I'm in a similar position with my work. The man in charge is pushing 60 and he wants to slow down and wants to sell the business.

We haven't talked numbers, but he has floated the idea of me buying the business from him. I told him it would depend on the numbers, but realistically, I can't see it being worth it.

The amount of work he does for the business is a lot. It's the little things that he has to deal with. Our company is about 12 people, so everyone does everything, and he does the most. He's pretty stressed most times and there's always something going on. I can see the amount of work he does and I don't think I want to do it.

The return would have to be minimum 25% for me to even consider joining the company. When you have an equity stake in the business, your mindset has to change. My job is pretty relaxed and I don't need to deal with the majority of the stress, but the moment you become the big man, you have to.

Even though his net worth is a lot higher than mine, I feel like i'm enjoying life and doing more things than he is. I definitely go on more vacation than him lol. I still have my retirement plan and I have savings for my kids, so I don't think owning a business will drastically change my life to be honest, besides making MORE money, which I don't know if I need at this point in my life.

[bcrdukes]

Who will own the remaining 51%?

[donk.]

Who will own the remaining 51%?

The current owner. He will be selling 49%

Long term wise, I would guess he would pass the 51% onto his family, or slowly sell to internal staff as second pick, or just simply tell to anyone if need be

[JDMDreams]

Yea is it a business that runs itself? Or will you be the one actively seeking the business.

[bcrdukes]

There are so many ways to slice and dice this. I work on M&As and succession planning often but you have to see what his long term plans are.

There is no one size fits all answer to this but if he controls 51% stake in the business, and lets say the diversification of the remaining 49% is splits between 3 or 4 of you (hypothetically) decision making may end up in a not-so-friendly walk in the park.

Word of advice: Don't make a decision based on what you read on this forum lol

[murd0c]

one of my good friends did that a number or years ago and then the company was bought out by another company and was bought out again a couple months ago. When the new company bought it out they got him to sign a letter that after 5 years they will buy him out for a total of 10 million. He's 43 right now and couldn't be happier and is just waiting to retire in his late 40's.

[mikemhg]

^This is why I've always found it interesting when firms are bought out by larger conglomerates, especially in the finance/consulting space. Absent of that relationship, often times the client simply terminates at their contract end and go somewhere else.

Buying a block of business has always seemed super risky to me for that very reason (unless you're able to retain those key partners on a consulting basis, etc.).

[quasi]

My old boss was a pretty savy businessman and he gave me a lot of good advice over the time working there. Used to be a senior construction manager for big companies like Bosa etc. eventually the company he started on his own grew to about 30 employees managing 6-8 sites at a time.

He told me one day, that while the company has millions of dollars in assets in heavy machinery etc. and all this work, the company itself is only worth the phone number.

In that, the reputation and the relationships he has mostly single-handedly built are where the value lies in the company. Without those, the company is largely worthless.

So with that said, is this a company that can rely on its reputation to get business into the future? Or will you always have to work to seek out business? If it’s the latter, imo, the company really isn’t “worth” much at all

Totally agree, the reputation and the relationships of a construction company are its biggest assets. Even as a sub contractor, the largest reputable GC's are probably not going to even consider your pricing seriously unless you've done work for them in the past and have a proven track record.

Now if you have relationships, even with a new company you might be able to squeeze your foot in the door.

I went to a Xmas dinner on the weekend within the industry I'm in and there were so many new faces. I was talking to my dad about it and he's like yeah well you're now the old guard......I'm like fuck you I'm not old but he's right I'm old as shit now haha.

[donk.]

I think the big thing in the back of my head is: what if this company goes IPO, or gets bought out again later on. Just like murd0c said.

I think that's the big ticket, and the big risk to take.

I know some other mid range companies have been sold recently to bigger corporations, and the numbers are massive. (Without knowing any details)

I asked my boss why he doesn't go IPO and he literally had no idea what it even was lol. Can't blame him, in the same time he genuinely wants to "pass it onto" the guys that helped him grow it for the last x-xx years.
Supposably you can go IPO on TSX as long as the company is worth more than 4mil, with a min of 1mil float. Maybe il be the guy that buys in, then pushes the agenda to go IPO. Pump and dump baby. Lol

Appreciate everyone's comments.

[donk.]

one of my good friends did that a number or years ago and then the company was bought out by another company and was bought out again a couple months ago. When the new company bought it out they got him to sign a letter that after 5 years they will buy him out for a total of 10 million. He's 43 right now and couldn't be happier and is just waiting to retire in his late 40's.

What percentage of the company did he own?

[bcrdukes]

If you want it to go IPO, your boss needs to be willing to let go of his 51% share. I think you know the business better than all of us here (we can only speculate and make assumptions.)

If you have a solid business plan and you know the numbers of this company or business, you can potentially make it big, but also be prepared to fail hard. Your investors (whoever the remaining 49% are) have to be of sound mind and then you have to deal with your boss who would be majority controller.

Regardless, best of luck on this. Keep us posted on the outcome. I am following this thread.

[6793026]

i ain't buying nothing until isee the finances.

1) lady was funneling 300k + 50K to gambling during her years being there. wasn't until she was on vacation and asked a 3rd party bookkeeper coming in and found out.

2) in China 10-15 people working there for 18 mths, was told to travel to _____ for training offsite... once they landed, they took their passports and sold them off. WTF...

i ain't buying nothing.

[Badhobz]

these are the opportunities that comes by once in a lifetime. I suggest you whole heartily do your research and dont dismiss this too quickly. it might just change your life for the better in profound ways.

Its the willingness to take these sort of calculated risks that differentiate the wage gobbling scum like us, and the ones that are truly wealthy.

I dont know anything about these type of things, but i wouldnt be where i am if i didnt gamble the shit out of my student loans back in the days. Big risk, big reward.

[GLOW]

you'd probably have to look at the books, who the management and staff are and see if the company is going to have life after owner leaves. the vibe of a firm can instantly change with the guard

did he future proof the company by putting pieces in place for the next generation?

spot on with relationships, my old company did good business with 1 firm and after owner retired and passed it on to his son with dreams of running his kingdom his way, the past long/good history basically didn't mean shit all to the son

[Wormiez]

How will you be setup as a shareholder or partner?

Is your owner aware of LCGE, Lifetime Capital Gains Exemption? If you are set up correctly, you as a partner/shareholder can benefit and incorporate as a # subsidiary with the company/corporation and take advantage of the lifetime capital gains exemption (LCGE) limit of $913,630... tax-free. This will reflect future profits distributed to the shareholders and provided as a redemption or dividend.

If this is new to the owner, consult with an accountant.

[murd0c]

What percentage of the company did he own?

Sorry that I have no clue and it's only the local branch if a larger company, all I know is he played hard ball was given a certain percent and he's laughing straight to the bank now.

[Gerbs]

I don't think a $4M valuation company will IPO and see any success. Unless we perform the classic rug pull lol. IPO's in Canada cost at least $200-500K+ to start. You're better off knocking on the competitors door and see if they wanna buy your books/clients.

[punkwax]

i ain't buying nothing until isee the finances.

This. Have an expert go through the books for sure.

[Hehe]

IMO, this is a lousy deal unless the owner is selling to you guys at a discount. I don't even need to see the finances.

Businesses sometimes do this to ensure critical people stay in the business.

If not, the owner is just cashing out while still retaining the majority. And if he's remotely thinking to bring the company to IPO, he wouldn't have chosen 51-49% split, but rather 52-48%.

This shows me that the owner just wants to cash out, make you guys their slaves while not changing much in the whole thing... he's still the boss.

I used to do acquisition for a living, from the limited information provided here, I smell a lot of BS.

[Badhobz]

^ was waiting for hehe to jump in on this. He would be the guy to talk to as he does commercial RE and this sort of thing.

[68style]

Loving all the info in this thread, it's fascinating even though I'm not in the same position as donk.

[bcrdukes]

Close and lock the thread as the Messiah has answered.

[68style]

Not yet, I haven't figured out how to have slaves (legally)

[bcrdukes]

Badhobz has a good idea on how to run a "professional services" company and you would be the perfect guy to run and operate it. Check in with him.

[Badhobz]

my whore business isn't up to snuff. cant IPO it.

Plus if 69stylez is there, he'll damage all the goods. LOUSY STYLEZ

[bcrdukes]

my whore business isn't up to snuff. cant IPO it.

Plus if 69stylez is there, he'll damage all the goods. LOUSY STYLEZ

I think this is where you need to see the bigger picture, my friend.

You see, there is pent up demand globally for these professional services and you can expand or open franchises on various business models to become profitable. With that, you can go to IPO I predict within 4 to 5 years (or less) and achieve both of your goals.

But like you said, with 69style at the helm, he may end up cannibalizing his own profits and potentially destroying the business. :lol

[Hehe]

The way I’d do this if someone comes to me about selling their business is to discuss about the exit strategy.

IPO is by nature an exit strategy. But the companies that actually go there is like finding a needle in haystack.

Now, if there’s a clear defined exit strategy, the idea wouldn’t be selling his shares to you guys but rather getting you guys to invest into the company, use the proceed to greatly expand the business and then reach the much bigger payout of the more lucrative exit.

From the information provided, all I’m seeing is that you guys are his exit strategy. Which is no bueno.

[Badhobz]

awww booo booo!!! deeper analysis plz.

[donk.]

I would not say he is looking to offload and reap the profits as his only goal.
You can usually tell when an owner just wants to cash out for max profit not giving a shit about the staff, vs when they actually care about the history, and future of their company, along with the people that helped them build it.

I always read threads and posts about people working for a company for 30 years, and once they retire they are handed a snickers bar, and a 50$ gift card to target.

This company + owner is far from that, or so I will find out......

Once things sizzle out, il report back on how things went. As for now it seems like he was just tossing the idea in the wind, to see if there is interest and if it's even worth it

[Gerbs]

On the other side, there could be good value if the owner is not willing to seek external valuation. Especially if you can land a number that will give ya 20%+ returns on profit/dividends. But then shares might be useless if company dissolves into nothing and no exit strategy.

[underscore]

I've been told that a lot of companies go under shortly after the original owner leaves and ownership changes hands. I don't know the actual numbers on that but it would be something to look into.

I'd also factor in how easily you could find a new job should you need one. iirc you're in HVAC which is probably pretty easy? But if not then having both your investment and your income tied to the same company might be riskier.

[Hehe]

awww booo booo!!! deeper analysis plz.

I haven’t done this in a long while as I ceased the practice after I moved back to BC.

Plus this used to be something billable. :fuckthatshit:

Anyway, I’ll dig my old forms and show you guys an acquisition 101 on what goes into our basic maths later when I get home if you guys are interested seeing how M&A firms work.

[Euro7r]

My previous company had something like this where the employee can own a % of the company. But they structured it where every employee that has worked full time for X years were allowed to buy shares into the company. Quarterly dividends were paid out. You can buy shares if someone retired and cashed out, also can only sell when you quit. So it forces the employee to be working for the company committed.

I worked almost 10 years at the previous company, but never became a shareholder. The time when I joined the buy in price was when the company was performing at peak, now its lowest. So you would be stuck working for a long time in order for the price of the share to become great before you quit (Sold). I think the ROI was like 10% dividends if I recall, pretty good if you think of it as a retirement investment if you plan to stick working for life (quarterly dividends).

[Hehe]

Ok. So, acquisition 101 time. There aren't much information from Donk., so I'd just try to come up with some (educated) hypothetical numbers as I go along.

I can't find my models after a quick search and I'm too lazy to dig through my backups. But it doesn't really matter because I don't think anyone here is interested in seeing me geeking out on all numbers and excel forms try to explain what each number means as it would take too much time. I'd explain it as if I were to sell this business to a dumb Joe6Pack with money to burn.

But the usual idea we use is a discounted cash flow model to calculate the NPV, or Net Present Value. It's a very interesting tool and I suggest anyone who is looking to get into this field or just to geek out on it to google it.

So, at 4M valuation, I'd expect that DonkCo is generating $600k in operating profit (EBIT, Earning Before Interest and Taxes). In Canada DonkCo would pay roughly 15% in taxes or 95k, and I use a basic 10% capital expenditure or around 60k assuming they are in an industry that doesn't require heavy CapEx.

The net cash flow comes down to 445k. I assume a 19.5% of weighted average cost of capital (interest rate to borrow for business, this is normal unless you are Fortune 500).

When extending this cash flow model into a 25yr horizon (just an usual amount of time we like to use back then, as it's neither too short, nor too long), and an expected annual growth of 10%, we get a nice NPV of $4,093,662. (this is all calculated by using a DCF calculator, you can read on it, but I won't get into technical detail) This is assuming there's absolutely no change in account payable, receivable, inventory or any other potential changes.

-----------------------------------------

Why do I call it a bad deal?
Of course, I'm basing solely on the information donk has provided thus far. But supposedly his boss sell it at NPV, or trying to get roughly 2M for the 49% of shares. Let's suppose that donk is the only one who invest in it for simplicity. The opportunity cost of 2M in 25yr horizon, is currently sitting at roughly 5% (Canada bond or US bond for similar terms).

So, 49% of the profit as a dividend (218,050) - opportunity cost (100,000)=119,050 or 5.95%

Suppose donk uses leverage and only puts 1M in, the rest is borrowed from bank at say 7% over the course of 25yrs. The math becomes
218,050-50,000-80,000=88,050 or 8.8%

Of course everything would be adjusted year after year, but it doesn't deviate too far from this. In any professional M&A firms' model, they'd include everything down to expected inflation rate, but I'm just here for quick math.

-----------------------------------

I don't know about the business so I can't comment much. But unless there is a clear viable exit strategy (say, sell it to x entity), the cashflow model is the only thing that we can discuss the business valuation from an objective point of view.

IPO IMHO is way too far-fetched of an idea. This is a 4M valuation company we are talking about here. It'd have to grow exponentially in the next 5-10yrs to be remotely close to be viable candidate for an IPO.

-----------------------------------

What would make it a good deal?
1.
The owner selling it for cheap - Say if its current net cashflow is not 445k that I estimated (using ~4M valuation) and instead at 700k, then the NPV would actually be at 6.3M instead. And in such case, getting it at 4M valuation makes a lot of sense.

2.
Viable exit strategy - Have to be careful with this one as the owner can say a lot about it. But unless he's got something in writing, these strategies are at best wishful thinking.

3.
Cash goes into the company to expand - instead of the owner cashing out, the money goes into the company in order to grow the income substantially.

Of course there are strategies that go beyond the three points mentioned here, but I'd leave at that.

Honestly, my suggestion is that if you and your co-workers are serious, get some professional counsel ASAP. Either way, you are going to have to hire lawyer to help you with the legal, why not go the extra mile and have someone who specializes in M&A negotiate on your behalf? It might be a few additional billable hours, but can make this either the deal of the lifetime, or the regret of lifetime.

[6793026]

There are also exit safety net.
Owner only gets X amount and after 1 yr, if business still sustains and doesn't have any issues the owners gets the remaining amount.

There are owners where they have right to buy back business if new owners Y screws them over etc.

I have seen owners selling and realize some shady stuff.

I have also seen owners selling to Y, then claims Y did a bad job and bought back the business from their business clause.

Very werid and sort of screw owners Y as well.

[bcrdukes]

Hehe, how would you calculate the assets and depreciation of assets going into this? Please educate us including any pointers you have on tax implications and survivability strategies. Thank you

Edit: Do you have a process matrix that you can share to document how the business is run?

[Hehe]

Hehe, how would you calculate the assets and depreciation of assets going into this? Please educate us including any pointers you have on tax implications and survivability strategies. Thank you

Edit: Do you have a process matrix that you can share to document how the business is run?

I didn’t go too much into details as I was trying to be as simple as I could possibly do to show how off the top of my head, I’m seeing the whole deal.

As far as depreciation is concerned, unless you are in industries where depreciation is a major component, such as commercial RE, it just get factored into the taxation. And I used a rough 15% figure for simplicity.

Further on this taxation issue, I don’t think donk has other business ventures where depreciation is beneficial in order to balance his tax exposure as a whole. That’s another topic and suitable for a very specific group of people. For example, there are investment opportunities that focus solely on the accelerated depreciation such as solar or other renewable energy projects where one gets to invest in a project and achieve massive amount of depreciation due to favorable government policies.

I’m not in liberty to share docs that are used in my previous life even though it has been over 10 yrs since I was part of it. But the reasoning that goes behind these M&A project are simple, NPV either based by cash flow or asset value. Where we get creative are strategies that set a common ground for both seller and buyer. As an example, if I were to advise donk on this deal, assuming everything stays as is, I’d add clause where they (the new shareholders) get a preferential dividend payout for the first few years. Assuming the owner is confident in the business, it’s not too much of a problem. He’s got a fair valuation for his shares already. Just set the whole plan to be worthwhile for both parties. Negotiation is about making both parties unhappy, but something they can both work with. The business of M&A relies on deals actually getting done. So we spent a lot of time and resources to address concerns from both sides of the deal. After all, we want the deal to be done.

Without getting access to full information, it’s hard to say whether it’s a good deal or not. But from purely my instinct working on acquisition, the info provided so far is too 1-sided (benefiting the seller mostly). That’s why I said I didn’t think it was a good deal.

[Gerbs]

Hehe, how would you calculate the assets and depreciation of assets going into this? Please educate us including any pointers you have on tax implications and survivability strategies. Thank you

Edit: Do you have a process matrix that you can share to document how the business is run?

Ask for the financials and inspect the actual quality/useful life of the equipment / assets. For simplicity since it's $4M in valuation, I'd probably take 2022 depreciation and call it a day assuming no addition to capital assets :lawl:

There's no way Hehe would calculate much the depreciation and asset with on info given.

If you wanna go further into it you could look at industry % of revenue that goes to deprecation/amortization. Use that as a benchmark when info isn't known.

[bcrdukes]

bro are you even a cpa?

[Gerbs]

bro are you even a cpa?

it's 80% passrate :lawl:

[GLOW]

i thought you said "bro do you even cpa?" :lol :lawl:

[Badhobz]

WHAT THE FUCK, ALL THESE NUMBA's.... 1+1 = 11