About to buy a $4MM company!
Hello,
I am studying for my General Insurance / Management exams, and plan to enter into the Insurance Brokerage field.
I currently have a connection to a firm that will be for sale shortly (Valued at $4MM, with annual sales of $1MM and profits of $600,000 CAD).
Being a student entering university in September, I do not have the capital to purchase this corporation up front. I have prepared a presentation to the current owner offering the following:
He will maintain an 80% stake in the company for 3 years.
After which, he will maintain a 60% stake in the company for 3 years.
After which, he will maintain a 40% stake in the company for 3 years.
After which, he will maintain a 20% stake in the company for 3 years.
Finally, he will maintain a 10% stake in the company for the remainder of it's existance, and will be entitled to 10% of the profits when I sell the company in 20+ years.
** As I have also been studying investments, I will be expanding the business to both insurance and investment brokerage (expecting 5% annual growth of profit).
My questions are,
Would you take this deal if you were the owner of the company?
Would I be better off finding a VC firm or angel investors group to fund this?
What (typically) to VC firms require in return for such an investment.
As the owner, not sure what my goals would be. If I want out...well then your deal doesn't sound too great. I need money up front.
Who did the valuation? Will he be taking a salary/staying on with the business? What sort of company is it? (I assume some sort of retail insurance brokerage)
Terrible for the buyer. First of all, he is selling is brokerage, so I wouldn't expect growth. Aside from that, your break-even point is in 13 years! It is an average rate of return of 8%. There are much better deals out there right now.
I only gave the post a cursory glance but what exactly is your value add? You have no capital and no experience, correct? What is your role in the process?
.
Yea i dont follow this plan either. If i was an owner who wanted to sell, I would firstly not want the prospect of getting out in 20 years, and secondly I wouldnt want to keep risk in the company with a college student running it.
As someone said about, what exactly are you adding to this process?
Not to burst any bubbles, but that is not likely going to happen...though it's probably worth a shot.
Like some of the other members have said, you are young, lack experience and capital...which makes this such a long shot for a VC or investors. The problem with equity is it could end up being worth zero, so in your payout scenario, as well as the VC/investor idea...promising some a percentage of something is only worth their time and money if it is likely to be worth more than what it was when they bought in...and truthfully, they are going to look at you (young, inexperienced, etc.) and think it is too great of a risk (most likely).
Like I said before, it's worth asking, it's just a tough sell...especially if the owner is looking to sell the business...which probably implies he just wants to retire/slowdown and/or invest the cash someplace else.
Regards
.
thanks for all the replies! The owner is a close family friend, I call him 'uncle'. His motives for selling are wanting to have more lengthy stays at his vacation properties without worrying about the business. What I bring to the table is a young bright-eyed spirit with interest and the ability to learn and adapt quickly.
My 'uncle' would be willing to wait a few years (or so he has said several times) before he finally sells the business, giving me enough time to finish my commerce degree (going to Queen's if it matters).
Also, he has sponsored me for the licensing through RIBO (registered insurance brokers of ontario) and said he would be willing to spend ample time helping his buyer and clients progress from one owner to the next.
So, I don't feel that there would be any issue here beyond the money, and (so far) this is the offer I have come up with
Truthfully, you are in a good position then. If he is willing to wait and has enough cash in the bank, he might be willing to do a structured earn-out like you outlined (or something similar). You have the benefit of knowing him, it's a small business which likely means he's attached to it and doesn't jut want to ruin the relationships he has built over the years, etc.
You could potentially do a "seller note" in which he would essentially transfer the ownership to you (because you don't have cash to "buy" the equity now) at whatever percentage you and he decided to. He would collect interest on the note for a given period of time and then at some point in the future you would have to start paying down the principal at a rate that is supported by the current FCF of the business. I don't know if this is much better than the way you outlined but as a debt security, he would have legal recourse should you default on your payments and could potentially recover some of the money through liquidation of assets (PPE and AR)...or just take back over the business.
Anyhow, seems like there are some possibilities given his relationship to you and your family. Good luck.
Regards
The way I see it, the first 2 "transition years" will return him more than the 20% equity I will own, and after this point he will always be ahead with regards to equity vs. cash. I guess I would be willing to take 0% equity for the transition years, and then go from there = 0,0, 10, 20, 40, etc.
I have a better idea. Why not have him hire you as the CEO. You figure out what your time is worth (say $25/hour for most new financial professionals outside NYC), figure out how much work the job is (maybe 60 hours/week), and say you want $75K/year from him to work on his business. $35K/year to be paid in cash and $40K/year to be paid in equity. Or maybe $20K/year in cash, $40K/year in equity with a performance bonus.
Hate to say it, but if you're a recent college grad, that's really all you're worth. And if the business is worth $4 million and everything stays constant in terms of value, pay, and income, you'll probably own the business in 20-21 years.
Don't quite understand. How much are you paying him up front? 20% of $4MM? And then you'll buyout his position after say 3 year increment until his ownership goes down to 10%? First like the other posters said the timeline is way too long for someone who wants to sell his company. Also your valuation is not gonna hold for even 6 months not to say 10 years! So, if this is a staggering payment the valuation would need to be evaluated at each point.
Rerum voluptatum alias qui doloremque possimus dolor. Id expedita rerum quidem quo accusamus excepturi. Sit vero enim rem facilis atque dolore quidem. Delectus in deserunt dolores in.
Debitis aliquam quia aut laboriosam doloribus aut vitae. Porro ut aut ullam. Officia quae consequuntur quaerat aut magnam soluta odit. Expedita adipisci molestiae et consequatur eligendi natus id. Quos iste odit et officiis quod unde qui. Dolor occaecati qui et illo hic et.
Hic voluptatibus consectetur nihil recusandae. Eius laborum eaque quis vero quidem.
Tenetur soluta ut nesciunt neque qui nesciunt qui voluptatem. Repudiandae dolorem esse autem sequi non molestias tempora. Optio necessitatibus necessitatibus veritatis culpa sit dolor amet delectus. Adipisci et quam est amet quis consequatur id. Iste excepturi voluptatibus voluptatum ea et tempora amet ex.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...