Buying a Share in a Private Business - Help

[gronk007]

Hi

Could be worth investigating. But why are the current owners offering you this? Do they want to free up some time and bring you on to run the business whilst they aren't in attendance?

Or are they that good of a friend they want you to be a partner as well?

If it is just for the money well then I think something doesn't add up in this case. For someone making that sort of money I am guessing they are looking for an urgent lump sum of cash to cover something you haven't been told as yet.

It would be interesting to know what response you get if you tell them you are keen but will pay after 12 months of operation with 15% interest. Try that and see what response you get.

Regards,

alicudi

Yes, they do want to free up some time - the growth in the business is stretching them to the limit, both have just had newborns as well come into their families, so 60 hour working weeks aren't desireable at the moment.

I helped them out a fair bit 10 years ago, have always kept in touch, valued my opinion...

Thanks for the tip re: deferred buy-in

 

[gronk007]

300K is less than 2 months earning according to the figure you given, they can go on holiday and come back and they have 300K they don't need your 300K

something doesn't add up sound like 900K Gross revenue, 180K Gross profit
yearly rather than monthly so 5-7 times Net earning sound about right for a private business.

ASX business trades around 8-12 times net earning but better business command 15-20+ times earning.

probably need to find out what the business do first, this is important you dont want to get into a business that are in decline or model that about to get killed by technology or some other emerging start up etc...

I have reasonable knowledge evaluating ASX business so if you tell me what they do and some other information I can give you my opinion

They provide high end telecommunications solutions to corporate/enterprise level organisations - margins are high, overheads relatively low.

They are thinking of moving into the NBN arena because acquisition possibilites are huge if targeted properly, so I think they're in the right direction at the industry level. They're growing quicker than they thought, they've almost stopped onboarding new customers because their service delivery would suffer if they kept acquiring given current staff levels, and the talent at this level isn't easy to find.

Thanks for the offer - I know in 3-4 years time he wants to list to access more funds, and not to pump and dump.

 

[gronk007]

How long's this business been trading at this level?

At this level, 6-12 months, but the businesses entry point was in 2011, with industry experience (as non-directors) since 2000, so they know the SWOT pretty well by now.

No regulatory risk, plenty of competitive risk in telco overall however, the climate can change pretty fast, but at the top end of town, corporates would have to find themselves in recessionary mood before the $$$ dry up, and even then, Service Agreements at this level mean recurring revenue on reasonably long term contracts.

 

[mrdobalina]

Hi there,

Yes, sorry, $900K a month in gross revenue
$400K is in gross profit
$180K net profit

Most good small business sell at 3-4 times net earnings. At 0.42 times net earnings... then go for it before they change their mind. You'll make your money back in 5 months.

However.... if it's too good to be true... it usually is.

 

[eeho]

Sorry, this is off topic.

MrDobalina - every time I see your username that song gets stuck in my head...third day in a row now...

For those of you who haven't had the pleasure: http://youtu.be/9Bku7gXlkoo?t=18s

Mr Dobalina Mr Bob Dobalina.....

 

[robboat]

Yes, they do want to free up some time - the growth in the business is stretching them to the limit, both have just had newborns as well come into their families, so 60 hour working weeks aren't desireable at the moment.
I helped them out a fair bit 10 years ago, have always kept in touch, valued my opinion...
Thanks for the tip re: deferred buy-in

If you know the other owners, know what they are looking for, know what the business does, the figures seem correct, you know why you are being brought in, you know what commitment you will be required to give - then go do it.
Everything has risk...this seems to have less real risk for you as you know so much about this business anyway.

Good luck!

 

[landlubber]

Gronk, three things to consider. One. The numbers. You need an independent auditor to confirm. Two. The business risk. Sounds like you understand the basic proposition and the future prospects. Three. The personal. You're getting married...in effect. Make sure you "like" the bride. But the numbers sound fantastic , so don't dilly dally. I hope it all works out for you. Be brave!!!! My son in law had a deal like this put before him. And it has gone great. So it can happen. LL

 

[mrdobalina]

Mr Dobalina Mr Bob Dobalina.....

Oooohhhhhh oohhhhh
Mistadobalina Mistabobdobalina Mistabobdobalina

 

[jrc]

As welll as your agreement to buy you will need a shareholders agreement dealing with things like exit, disagreement, death etc

 

[Macca]

If you can reach agreement in principal then also agree on a proper legal contract to protect everyone involved.

I would put in place an agreement that covers every eventuality, what happens if ?

You die, one of them die, you get sick, one of them gets sick, goes bankrupt, wants to retire, gets divorced, how do you sell your share, how do they sell their share etc etc

Many, many scenarios to consider before signing, get a business lawyer to draw up the contract to be clear and fair to all involved.

 

[Biz]

I reckon you guys are over thinking this. Gronk is very fortunate to be offered a once in a lifetime opportunity. Go for it!

 

[sanj]

I reckon you guys are over thinking this. Gronk is very fortunate to be offered a once in a lifetime opportunity. Go for it!

The issue is that if it sounds too good to be true it usually is and the numbers don't make any sense. This is part of what I do for a living, I own stakes in 5 different t private businesses and negotiating on 2 more atm. A multiple of less that 0.5 for such a profitable business makes no sense whatsoever

 

[Mick C]

Numbers doesn't look right....ask for 2 years tax returns or even 3 if possible...

When we finance business for clients what we see is the selling business will push up their books 6 -12 month before selling or sell only whn they have a "big client" or huge injection of business for that year.

Also if the company is making $180k net ( before tax) every month, they can easily easily borrow the $900k that they need from a bank and still pay out that loan within 18 -24 month even with interest. So i can't see why a "profitable" company would want to dilute their business by 1/3 just for a few month pay...

I mean the above is not UNCOMMON but it's more common for accountants and lawyers where the firm will offer partnership for say $1M and the return turn over for that partner is $500k per year net BUT in these situations the partner brings over MORE clients + Experience + network not just cash.

So is this just a cash deal? or do you think they want you in because of exp and network/clients as well...

P.s Get your accountant to go over the books as well. Else you can also hire a professional forensic accountant

 

[Mick C]

I reckon you guys are over thinking this. Gronk is very fortunate to be offered a once in a lifetime opportunity. Go for it!

^ Lol 1st post and nick is "biz" and first section you post in is the "coffee lounge" for a property investment forum...maybe i am over thinking but seems like your the seller hahaha

 

[TMNT]

^ Lol 1st post and nick is "biz" and first section you post in is the "coffee lounge" for a property investment forum...maybe i am over thinking but seems like your the seller hahaha

Yrah, what a turkey!

 

[alicudi]

Hi

The only logically thing that could be in place with these sort of figures is that the current business owner wants this buyer to be involved in running the business due to reasons amounting to their trust in you and if this is the case I don't really think your $300,000 investment into the business is needed for you to take up the 1/3rd ownership of the business. Tell the current business owner you are happy to get involved and just take out the $300,000 plus say 15% interest out of the first 6 months pay.

For a business owner to give away an income of $720,000 per year with a one up payment of $300,000 is not a decision a normal business operator would ever choose to do especially as most people choose to be in business to make money. If this business operator wants you in they will get you in and the $300,000 is totally irrelevant to them with the current figures you have presented us.

Take up this opportunity and if it is a golden nest egg well you will know in 6 months time after you have paid it off and have a good income per month. But please do a thorough check on all the books as I wouldn't want to see you become liable for a $3million outstanding invoice!

Regards,

alicudi

 

[gronk007]

Yrah, what a turkey!

Haha, can assure you "Biz" is not the seller

 

[The Falcon]

Selling 33% of a business producing 2.16M EBIT for 300k is madness. I'd suggest keep digging, generally something like this you'd been looking at paying 4-7 x annual EBIT per share. Based on monthly numbers of 900k revenue, 180k EBIT the business should be self funding unless the shareholders are pulling capital out of it, or, they have a significant debt problem...otherwise banks would be happy to lend to it, a 400k OD would be a piece of cake. So your money would be extremely expensive for them indeed! If they need your help and buy in, dare say a good salary and 10% at a dirt cheap multiple..say 100k would do the job....these guys are throwing away value

As a business founder there has to be more than this, or maybe the guys have just gone nuts from the stress let us know how it pans out and good luck.