About to buy a $4MM company!

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?

What are you paying him for the company? If you think he's just going to hand over 20% of his equity to you every 3 years for free and then take 10% of the profits when you sell the company, you're nuts. Yeah, he'd want more money up front, but on top of that it's a losing investment unless the company is worth more than 10 times its current value (adjusted for inflation, too) when you're done.

VC would only be interested if this were a young company with serious growth prospects. And being as you're a high school kid, you would have to have a VERY compelling vision for them to back you.

But the main thing is this: you want to buy this company and run it for 20 years. That's not a part-time gig; that's a full-time job. Nobody's going to support your purchase of a company that you're going to run from your dorm room, and I would have a hard time believing in the managerial ability of anybody who's so young.

Your situation sort of reminds me of a search fund, where investors back a young person (usually a recent HSW MBA grad) in conducting a leveraged buyout of an existing company; the young dude then runs the company, eventually sells it, and hopefully makes a bunch of money on the exit. The timeline for such a fund, however, is usually less than 20 years. And more importantly, what the investors in the deal are really doing is making a bet on the managerial ability of the young manager.

That's the key point: for someone to bet on you (and someone handing you equity for free is just that), you need to get them to believe in you. That means a compelling vision, impressive experience, or something comparable.

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

I don't know if I conveyed my main point well. This guy currently has 100% equity in the business. So if he sells it today, he gets all of the money. Any deal you offer him has to improve his situation if he's not going to just sell the company to a larger firm for $4 million.

You offer lets him retain some of his equity, but he parts with the majority of his current stake and doesn't get anything in return for it aside from the chance to redeem 10% of the company's (hopefully greater) value down the road - an opportunity that he already has right now, only with 100% of the company. A VC or angel investor will take equity in lieu of cash, but all you're offering the current owner is the chance to lose equity that he already has. There needs to be more in it for him than that.

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

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.