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    5 Replies Latest reply on Jun 17, 2009 12:58 AM by cnstarz

    Considering the Buyout of a company - NEED ADVICE

    EntPre24 Newbie
      I am in the manufacturing business and have 10 years in my field, I have wanted to open up a shop for awhile now but do not have any capital and my personal credit is not good.

      An opportunity has arisen that is very intriguing and I was hoping I could get some advice.

      Heres the deal:

      There is a small manufactuing facility that an older owner wants to get out of an move on, so he is looking for someone young and experienced to come in and take over/buyout his company... he would stay on for awhile until he was comfortable that the company would be able to pay him for the company over the next few years. The company is currently not in a great position and he is at a point where he needs to sell off the assets or do this deal - he is totally willing to get it going again so he can fund his retirement. (the company is not in debt... just doesnt have alot of business, mostly because he is winding it down)

      Obvioulsly I need to do due dilligence and investigate the entire finanacial situtaion of the company, so my main question is on how best to set up the buyout agreement... the max he wants to be with the company is 2 years. Is a leverage buyout the way to go? He owns all of the equipment and has some receiveables.

      Also - the company is a 30 year old corporation, the name doesnt carry a ton of weight so I will be changing it.. should I just start a new corp or llc? or inherit the current corp? I wouldnt want to be liable for anything prior my arrival.

      To start a manufacturing company of this type would require at least 500k so me starting one on my own is currently very far from reality.. this is a unique opportunity where I can purchase a company without having to put any money down, and have owner assit in setting it up to be profitable and successful.

      So - can you guys give me some adivce? please ask additional questions if needed :) and remember I am specifically looking for advice on how to go about buying out and transferring ownership in this situation. I need it to be very secure for me and also need to minimize his risk.

        • Re: Considering the Buyout of a company - NEED ADVICE
          LUCKIEST Guide
          NEED ADVICE, Welcome you also need a lawyer

          Good luck
          • Re: Considering the Buyout of a company - NEED ADVICE
            RanksIntl Adventurer

            It is great that you are ready to start making steps to get into business! So, these are the steps for the buyout of this business. It will be a great deal of work but I can guarantee with the right attitude and the right assistance it won't be that difficult, especially based on the willingness of the current owner.

            Generally, the first step is the letter of intent but based on the fact that you are already in talks with the owner this isn't something that you will have to worry about. The next step is the company analysis which is when you look at all of the financial and non financial elements of the business and create a zero based budget. After that you will start going into the process of setting a value for the business. These steps include calculating an aset and profit based approach to the determination of your business valuation. As well as calculating a cost to replace company assets and looking at the way this factors into the business as a whole. Next is the business purchase and sales analysis which is determining the assets that are
            profitable to purchase and identifying monetary allocations to each of the assets and liabilities. As well as analyzing routes and options for
            purchasing the company's current debt. Finally, is the findings and analysis report which is creating a report including numerical analysis to
            communicate the finding and analysis of the business to the potential seller. This report should also be used for potential lenders and
            investors. After this step if you agree on the price and decide to go through with it you may want to get an attorney involved. If you have any questions or need any help with these steps feel free to email me! My email address is in my profile.

            • Re: Considering the Buyout of a company - NEED ADVICE
              cnstarz Newbie
              I agree that you need to do strict due diligence and were I you, I wouldn't even start that process without having an attorney who specializes in small business buys, a tax attorney or at the very least a CPA who specialized in corporations to go over previous years books, taxes and all corporate reports with me right there. Make sure the money trail truly reflects the business; and consider the future of this business.

              As easy as it is to be excited by the prospect which sits before you, the attorney is going to ask you right off the top of his or her head where you expect to get the money to finance the deal and how you expect to pay for it? If the company isn't profitable now because the owner has been "winding down" and his regular customers have gone elsewhere, how on earth are you going to win them back? Manufacturing is notorious for maintaining contract work, so those customers, (even with the owner on board) may not be available to return to you for years...

              Be aware of the very large pile of paperwork you may be stepping in...Do you have a business plan? Consider the value of the equipment... Are you going to need to update and improve any or all of it? How about the building? Has the facility been maintained adequately? Is the real estate wholly owned or leased? If leased, when is that lease up and what are the terms? What are the utility costs? How is the equipment for the utilities? How is the roof? Are there any warranties in place for any of these items? Who did the previous work and are they still in business to uphold their warranties?

              You said yourself you haven't much money, and your credit is poor. This means you are going to have to

              1) convince the owner that you are still a good risk (do you have the background to prove this? Why should he believe this if you have no money and poor credit?)

              2) take on partners or venture capitalists (They are going to have to believe in you, your idea and they will want a piece of this pie...)

              You say you have been in manufacturing, but in what capacity? Are you a tradesman? Assembler? Bookkeeper? Management? Foreman? Salesman? How does this prepare you to have your own shop? And what exactly do you want to get out of it? If you expect to get wealthy, and you have the owner for 2 years, you need to have exemplary trust in him as well, and he had better be able to back up his own claims. How is his health and committment to you and to this business? Are you going to be able to manage all the necessary functions of the shop? Who is going to do all of the above? What do you invision yourself doing?

              These issues are going to take some work. There are probably dozens more questions I could throw at you... but I would bet that you can come up with many of those on your own.

              Finally, if all of your questions are answered satisfactorily and you still feel the risk is worth the effort (and hopefully others out there will back me up on this), make sure that the buyout is based upon today's value of the operation. If you build up the business and then he takes it back over because you can't obtain financing at the end of this 2 year period; he brings in a dark horse, all you have done is spit into the wind and gotten it back in your face. The attorney will work with you to set it up in your best interest. You can do a lot to improve your creditworthiness in that 2 year time, so that would be another major part of this equation. You will NEVER prove to a bank that they should give you money if you can't put your own money where your mouth is. Prove that you are worth the risk and maybe you'll find the bank or venture capitalist you need to invest. Whatever you do, be very careful!