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2 Replies Last post: Aug 22, 2008 4:01 PM by BRMcHenry

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Company buy-in and looking for feedback

Aug 22, 2008 3:07 PM

Start-up

Pocketchange 2 posts since
Aug 22, 2008

I have an opportunity to buy into a company. Trying to get folks thoughts on the buy-in. The company is a service business in the construction industry. Company background:

-Company is $4M in sales.

-Margins after overhead and expenses are in access of 20%
-Less than 10 salary employees and 4 sales people who are all commission
-Sales commission is 25% of profit

Readers digest version of the buy in:
-Complete three years of service
-During that three years, take the average profit and multiply it by the percentage of buy-in (between 33-40 percent)
-Five years financing at 0% interest. financed by the company and taken out of commissions

Company Assets
-Zero (no physical assets such as equipment, building, ect.)

I estimate the average three year profit to be $1.5M. This means my buy-in would be between $500,000 and $600,000. There is a definite financial upside but does this sound like a reasonable buy-in offer. Thoughts and comments are appreciated.

Regards

Pocketchange

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Mogul

Bridge 364 posts since
Jun 3, 2008

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1. Re: Company buy-in and looking for feedback Aug 22, 2008 3:41 PM

If I understand your facts right:

Average yearly profit of $1.5 MM (37.5% profit margin on $4MM of sales)

You would buy 33% of the business for $495 M

If you own 33% of the business, and you are entitled to 33% of the profits, you are in essence buying a $495M cash flow (33% of profit) for $495 financed over five years!

You are getting a cash on cash payback of a year disregarding the leverage of the financing!

Is there something you left our here? This is a too good to be true scenario. Why are they selling? What is the downside?

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Mogul

BRMcHenry 39 posts since
Aug 20, 2008

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2. Re: Company buy-in and looking for feedback Aug 22, 2008 4:01 PM

in response to: Bridge

When I "bought in" to ownership of my franchise store (bought the whole thing but still) my CPA gave me one interesting bit of advise - what is the worse case scenerio?

You said its a construction company? If I read that right what happens if they don't get the jobs necessary in this slowing economy? Were there any 'special" jobs that were done to bring those numbers in to place that might not be there - in a worse case scenerio what do you see revenues and margins being? You should know before you buy in and not after.

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