Buying Into A Family Business

[Frewyn]

I have been working at a surf shop for about 10 years now and I am the manager/buyer of goods for the said shop. The sole owner is one of my best friends, he is married and he and his wife both work in the shop as well. He is the PR guy and deals with marketing and she is the buyer of the female clothing(the only category of goods I don't buy). We have been talking about me buying into the store for about 2-3yrs now as I am getting a bit "long in the tooth" and if partnership doesn't happen in the very near future then I would need to move on to something else. I enjoy my job and would thoroughly love to stay there and further build the business.

My main question is where and how to begin the process. It seems like such an open canvas as to how a partnership like this can work out. The main things for me are obviously how to negotiate a price, as in how to formulate what a business like this is worth, and some tips as to how to go about it so that my friendship stays intact! We do not clash at all with ego or attitude, which is the only reason that he is even entertaining the thought of me as a partner, however some tips as to how to keep it that way would be appreciated or more to the point what to avoid!

ANSWER: I am going to assume your purpose in wanting to become partner is to help make strategic decisions to help grow the business, and partake in the benefit of that growth.

Step one is to get access to the books of account for your selected accountant.  Make it clear to sole owner that you are asking for this because you want to make a proposal to buy in.  He can either say at that point he isn’t interested, or give you access.  You need about the past three complete years.  Select the accountant as one with experience doing business appraisals, if necessary referred to you by another accountant you know.  It cannot just be the one who does the company’s books now.

Once you have an appraisal in writing you can decide how much of a portion you are interested in, based on the appraised value and your available resources in cash and funds you can borrow.  A big part of the appraisal will be net cash flow steadily generated, but there are other factors.  Make the proposal orally and then follow up in writing with a copy of the appraisal, and include a decide-by date.  Get a local lawyer to go over the writing with you.  If a deal is made, you will want the lawyer to go over the agreement with you, too.

I need to caution you that nothing other than 50% ownership can work, since you will not really be participating in decisions or even getting timely financial information.  If you cannot afford 50% then don’t make an offer.  If, say, you have 1/3, then there will never be profit for partners as such because the 2/3 owner will take it as salary.  If you do not get some profit there will be no money even to pay the debt service on the part you borrow.

Negotiating the price will focus on whether your appraiser or his is closer to accurate, unless happily your offer is agreeable.

---------- FOLLOW-UP ----------

First of all, thank you very much for you speedy reply! I have a couple of more questions now...

I am not sure I understand why less than 50% will not work. The owner currently takes a salary, as do I, so I am not sure how the owner would take the rest of the profit as salary. I do understand that I need to see some profit to pay off the debt however. Also, to make sure I understand correctly, if I am not 50/50 then ultimately it is the owners decision which is final when it comes right down to it no matter what my input and financial information will always go through him before me.

Also in picking an accountant and lawyer, do I just look some up in the phone book? or is it best to get a referral. Should I pick an accountant that has experience doing business appraisals with this specific type of business or all types. Would the accountant be a good person to get a lawyer referral from?

Thanks again.

[Amold]

I have been working at a surf shop for about 10 years now and I am the manager/buyer of goods for the said shop. The sole owner is one of my best friends, he is married and he and his wife both work in the shop as well. He is the PR guy and deals with marketing and she is the buyer of the female clothing(the only category of goods I don't buy). We have been talking about me buying into the store for about 2-3yrs now as I am getting a bit "long in the tooth" and if partnership doesn't happen in the very near future then I would need to move on to something else. I enjoy my job and would thoroughly love to stay there and further build the business.

My main question is where and how to begin the process. It seems like such an open canvas as to how a partnership like this can work out. The main things for me are obviously how to negotiate a price, as in how to formulate what a business like this is worth, and some tips as to how to go about it so that my friendship stays intact! We do not clash at all with ego or attitude, which is the only reason that he is even entertaining the thought of me as a partner, however some tips as to how to keep it that way would be appreciated or more to the point what to avoid!

ANSWER: I am going to assume your purpose in wanting to become partner is to help make strategic decisions to help grow the business, and partake in the benefit of that growth.

Step one is to get access to the books of account for your selected accountant.  Make it clear to sole owner that you are asking for this because you want to make a proposal to buy in.  He can either say at that point he isn’t interested, or give you access.  You need about the past three complete years.  Select the accountant as one with experience doing business appraisals, if necessary referred to you by another accountant you know.  It cannot just be the one who does the company’s books now.

Once you have an appraisal in writing you can decide how much of a portion you are interested in, based on the appraised value and your available resources in cash and funds you can borrow.  A big part of the appraisal will be net cash flow steadily generated, but there are other factors.  Make the proposal orally and then follow up in writing with a copy of the appraisal, and include a decide-by date.  Get a local lawyer to go over the writing with you.  If a deal is made, you will want the lawyer to go over the agreement with you, too.

I need to caution you that nothing other than 50% ownership can work, since you will not really be participating in decisions or even getting timely financial information.  If you cannot afford 50% then don’t make an offer.  If, say, you have 1/3, then there will never be profit for partners as such because the 2/3 owner will take it as salary.  If you do not get some profit there will be no money even to pay the debt service on the part you borrow.

Negotiating the price will focus on whether your appraiser or his is closer to accurate, unless happily your offer is agreeable.

---------- FOLLOW-UP ----------

First of all, thank you very much for you speedy reply! I have a couple of more questions now...

I am not sure I understand why less than 50% will not work. The owner currently takes a salary, as do I, so I am not sure how the owner would take the rest of the profit as salary. I do understand that I need to see some profit to pay off the debt however. Also, to make sure I understand correctly, if I am not 50/50 then ultimately it is the owners decision which is final when it comes right down to it no matter what my input and financial information will always go through him before me.

Also in picking an accountant and lawyer, do I just look some up in the phone book? or is it best to get a referral. Should I pick an accountant that has experience doing business appraisals with this specific type of business or all types. Would the accountant be a good person to get a lawyer referral from?

Thanks again.

[Cristobal]

With two owners, one less than 50% and one more than 50%, the one with more than 50% normally votes his or her share and wins every vote.  So he or she wins every policy argument.  The only way around that is if the two sides agree to decide everything by consensus.

If one side has over 50% and there is a profit then he could just vote to increase his salary to use all that profit and it’s done.  Under at least US tax law, there is every reason to have no profit or at least no dividend, since dividends are taxable against the corporation.

As for picking a lawyer or accountant, personally I have joined a local chamber of commerce and worked with various professionals on committees, to see how they think and whether they are reliable.  Another source is referrals from people who in turn you believe are wise and reliable.