I cannot tell you how much I have learned since we started our private equity partnership. In many ways so much went astray that it could and will fill volumes of material. But you want to know right now what are the keys to success. And I aim to tell you all. If I can spare anyone the grief, headache and monetary disaster that may befall an inexperienced buyer of a business. Lets start with a very simple concept buy smart – share risk. The notion of buying smart is generally meant to pay the least possible amount for a business. However, one cannot understand the implications of doing so until they buy a business and it turns out to be less than envisioned. While you are trying to pay off your debt – your competition is cutting prices. While you are reducing compensation – your employees are seeking new employment arrangements and as you hold off vendors to conserve cash – vendors find themselves being strung out and deciding that you are not worth the credit risk. Hence, employees and vendors are disgruntled — competitors gleeful. Lets never put ourselves in this position. Next we’ll take a deep dive into some real worl pricing mistakes. Ughhhhhhhhhh I am going to have to relive it.
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Small Company M&A Insider 
I have a signed agreement to buy a small business, though it’s non-exclusive until I can arrange financing. I haven’t yet found financing.
Including the already agreed upon seller-financing (approx 20%) I can afford to purchase nearly 55% of the company without financing.
Can you suggest a way to structure this kind of deal or do you think this would be a bad idea?
Thanks,
Mike
Mike,
Sounds like you are stretching it a bit – on the surface. So as I read your post you need to finance 45% of the deal. Which depending on the size of the company is very tough. Middle market deals now require 50% equity – that is to say your own money. You are currently at 35%. On the smaller end – because they are very hard to finance you probably need additional money to get the deal done. Having said that – I don’t know the particuliars – what is the multiple you are paying? How dependable the company? Any assets to borrow against? But the down and dirty – financing is tough – but everyone has this problem – you can be a bit a negogiator ask for additional seller financing and maybe offer upside to the seller as an enticement. What I mean to say is that if the business does well then the seller gets x+1 as opposed to x. Maybe wait it out and see if the seller gets a better offer. Wait it out. But in general do not stretch too far – thats what it feels like now. If you want to provide additional details – I can better analyze the deal.
Thanks for your input. I do understand my equity limitations for purchasing and financing 100% of the company, and am open to creative alternatives.
Is there a way you might suggest I buy the 55% stake as a partner and manage it over a short period of time (say 1-3 years) towards full ownership?
It’s a small buy (<500k) of a dependable mfg wholesaler at 3x SDE or 1x Sales. No assets though; a bonus for cash flow and profitability but a financing obstacle.
Mike,
I like the idea of your managing the business for a period of time – but here is what you are really saying: I will give the buyer 35% of the value of the business and take back a seller note for 20%. The other 45% of the purchase will be determined after a 3 year stint. If you can pull this off then great – but lets figure like this. For 35% of the business value you are now managing the business. If you don’t do a good job you have devalued the business and the seller can no longer attain his value – lets say you really screw it up. So for 35% of the value you get 55% of the business and the seller has to wonder a) how does he get his 20% seller note and what happens to the other 45%. If I am a seller I want the deal done – period. I dont know you and I dont know where you are taking the business – good or bad. Not trying to discourage you – but them is the facts. However – note that others may be in the same boat – so give it a shot.
Mike,
Sounds like you are stretching it a bit – on the surface. So as I read your post you need to finance 45% of the deal. Which depending on the size of the company is very tough. Middle market deals now require 50% equity – that is to say your own money. You are currently at 35%. On the smaller end – because they are very hard to finance you probably need additional money to get the deal done. Having said that – I don’t know the particuliars – what is the multiple you are paying? How dependable the company? Any assets to borrow against? But the down and dirty – financing is tough – but everyone has this problem – you can be a bit a negogiator ask for additional seller financing and maybe offer upside to the seller as an enticement. What I mean to say is that if the business does well then the seller gets x+1 as opposed to x. Maybe wait it out and see if the seller gets a better offer. Wait it out. But in general do not stretch too far – thats what it feels like now. If you want to provide additional details – I can better analyze the deal.
+1
Is this where you start a blog. I want to outline a deal I have a letter of intent, any feedback is appreciated.
Service business (construction related), no employees- work is sub contracted
Husband and wife team, out of their home
Husband and wife focus on selling service jobs No recurring revenue
20 years old, established
85,000 SDE 2009 and 2010
125,000 SDE 2011
Purchase price $209,000
My accountant is concerned with a few things;
Can I replace the same volume (sell jobs) like the husband and wife
After I pay to replace the one of the husband and wife team, pay the note (30K a year) and assuming a small drop in business, or if it reverts back to 2009 and 2010 I’m working in the business, full time with a small income
Positive is it is a small business, low debt, and easy to replicate in other cities, so I could grow it.
Basically, I’ll either grow it, hire more staff and be happy, or not be able to grow it and be stuck until I can sell it
Mike,
A company such as this deserves a 2 to 2.5 multiple and 3 if you can tie some of puchase price to performance. So I think you are on the right track. You don’t state what the note is – how much. Is the note personally guaranteed by you? But here is my overriding thought: Do you really know their business? Can you really learn it. Have you spend a week or two or three getting to know it? Remember, because its so small and a home based business – nothing has been institutionized. So good luck, do alot of diligence and try to tie some of the price to performance. Your accountant is in effect correct.