How does a young (broke) person purchase a well established (expensive) shop?
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    Default How does a young (broke) person purchase a well established (expensive) shop?

    I’m curious what typical methods for doing this are. It must happen somehow. A “right” younger guy without the many millions that an outright purchase would take meets an older gent looking for a way out. What might some typical provisions and specifications of the deal be? Things that make the original owner feel secure as he phases out, but that give the new guy the ability and security to make changes that might not be popular. I’ve heard lots of horror stories of verbal promises of future equity forgotten soon after.
    If owner financed, Do years of work gain equity, or owner financed purchase with profits going toward payoff?
    Any previous forum stories or helpful posts to search for?

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    Quote Originally Posted by vmipacman View Post
    I’m curious what typical methods for doing this are. It must happen somehow. A “right” younger guy without the many millions that an outright purchase would take meets an older gent looking for a way out.
    The usual method is to hang out in the bus station bathroom of a red state, where Republican congressmen hang out.

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    Wheeling cocaine has been tried to bankroll new large endevours in the past.
    Not sure there's as much profit in it today as there was in the early 80's, but it's worth a try.


    ---------------------

    Think Snow Eh!
    Ox

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    The Alan Parsons Project - Time (Official Audio) - YouTube

    Is the usual method that I have seen, either seller financed, or bank.

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    Quote Originally Posted by digger doug View Post
    The Alan Parsons Project - Time (Official Audio) - YouTube

    Is the usual method that I have seen, either seller financed, or bank.
    First generation builds the business, second reaps the rewards, third pisses it away on booze and wild wild wimmen

    Ox, didn't some really popular nascar driver get busted for supporting his team by selling coke ?

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    Work well for Delorian...maybe??...Phil

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    Some go to work for the potential seller, with an option to buy the business.... and mine them for every iota of experience and wisdom they can. Sometimes it works out, other times; not so much.

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    Quote Originally Posted by EmanuelGoldstein View Post
    The usual method is to hang out in the bus station bathroom of a red state, where Republican congressmen hang out.

    That's really helpful.

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    What usually happens is that after a number of years seeing him as an employee an older business owner who wants to retire arranges a buyout over time. Regular payments are made from the earnings and usually the owner hangs around as a mentor/coach for a few months, helping the younger person gain experience as an owner.

    Without that proven track record as a competent, dedicated and loyal employee I don't see much chance of that happening.

    I know of several such cases including a black man who started life in the deep South, worked his way up through several jobs after moving North (and a major setback from the closing of a factory) and became a millionaire after several years running (and improving) the business. When he died several years after selling the business the line of former customers paying their respects stretched for over a block from the funeral home.

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    ESOPS are similar, but the post-retirement company is owned by all the employees, rather than just one of them.

    Selling it for fair market value with seller financing is another option. The deal needs to be carefully structured so neither side gets screwed.

    Depending on how big the shop is, valuation can be tricky. One of the problems valuing smaller businesses is that they often aren't actually worth as much as the owner thinks they are. The owner thinks of the profit as what they take home at the end of the year (i.e. owner's salary + actual profit). The profit that is used to value the business is what's left at the end of the year after you pay someone to run the company.

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    Quote Originally Posted by EmanuelGoldstein View Post
    The usual method is to hang out in the bus station bathroom of a red state, where Republican congressmen hang out.
    ok thats funny!

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    Quote Originally Posted by vmipacman View Post
    I’ve heard lots of horror stories of verbal promises of future equity forgotten soon after.
    knowing that you're in a better position than most. The reason is the vendor is two people; they guy who knows he should start the succession process and his other self, the guy that when push comes to shove can't let go because being the owner has become his identity. Almost means you have to chase ambulances for some of these small deals to work. Having the acquisition strategy being the hand off from the old boy is very risky....sure you'll hear about the odd one that comes off without a hitch, but the odds are steep and you can spend years in a situation not knowing.

    As general advice, you to need differentiate yourself. how and to who? the more ways the better to improve your odds. For example (key ones off the top of my head, brainstorming would produce dozens more)

    1) become indispensable in a business, be the guy who makes it happen and is there whenever need
    2) get educated in finance and accounting, its the language of business....if you're illiterate you're at a real disadvantage to try do a deal, especially one that doesn't bite you in the ass
    3) if possible, get management experience - even lead hand on second shift, whatever. Showing you've experience in that area will matter a lot
    4) if possible, get experience dealing with customers, service, sales, quoting, etc. that's a whole different skill set and is core to any business - business starts with a customer
    5) get a nest egg. Live by meager means and save. They guy who has something to put down on a business is head and shoulders above the wanna-be flakes who just want to but never sacrificed.

    Why imo this is great advice is all off the above accrues to you. Buying the first one falls through? Your time wasn't wasted and you'll be in much better position to try again.

    Aside that you'll need these skills to run the business, the key reason for the above is small deals almost always involve vendor financing and to a much lesser extent bank/angel/whatever financing. Anyone of these investors (the vendor is an investor) is going to be much more confident in taking the risk if you have demonstrable skills in the above areas.

    Place you work won't let grow in any of the above areas? move on.

    If you do get to a place with potential, force becoming indispensable quickly and work on your education immediately. Raise the subject of your intents early-ish (once its clear how much owner depends on you), find out his intentions and either move on or set some deadlines to get to a deal. Move on when the excuses make the deadlines fall away.

    Its not too hard to find small businesses for sale, its really hard to do a deal. Quality intermediaries deal with bigger deals, more zeros, so you end up crappy business brokers who are mostly useless. So you're on your own. imo learning business, finance, how deals are put together is vital, but I'd its the minority that think so as few seem to bother. Some luck out, some don't but the more know, the better will be your odds....that's my message I guess, its a difficult thing and lots of things go into influencing the odds of success. Identify those things and start making changes that better your odds

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    Quote Originally Posted by vmipacman View Post
    I’m curious what typical methods for doing this are. It must happen somehow. A “right” younger guy without the many millions that an outright purchase would take meets an older gent looking for a way out. What might some typical provisions and specifications of the deal be? Things that make the original owner feel secure as he phases out, but that give the new guy the ability and security to make changes that might not be popular. I’ve heard lots of horror stories of verbal promises of future equity forgotten soon after.
    If owner financed, Do years of work gain equity, or owner financed purchase with profits going toward payoff?
    Any previous forum stories or helpful posts to search for?
    In every case that I know of there was a legal agreement drawn up and signed. Usually there is a clause that the original owner can repossess the business the new one defaults on payment.

    The other factor in every case I know of is that the employee who bought out the owner had been a top employee for many years, often several decades. The only other way I can see this happening is if older people who know you will provide financial backing or loan guarantees.

    I don't know you and your work ethic and neither does a business owner you haven't worked for. If you were him would you turn a valuable business over to an unknown without some kind of security?

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    Quote Originally Posted by EmanuelGoldstein View Post
    First generation builds the business, second reaps the rewards, third pisses it away on booze and wild wild wimmen

    Ox, didn't some really popular nascar driver get busted for supporting his team by selling coke ?
    Don't know about NASCAR, but Herb O'Brien lost his water ski company when he got caught making special skis with cocaine cores.

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    This type of transaction is what SBA loans are built around. It would be very possible to draw up detailed financials and buy the business outright with a bank loan.

    A more traditional loan and purchase also avoids the pitfalls of the absurd verbal agreements, empty promises, and wild overvaluation that less legitimate transfers of ownership are notorious for.

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    I agree with Mcgyver, particularly with his point #5. If you're trying to buy a business (or anythgin really) its a whole lot easier if you've got something to put down. Not only will this show that you have the ability to budget your personal finances properly which would translate well to a successful business, but it will also give you skin in the game and a real reason to work hard. Plus it gives the current owner an instantaneous payout and some good incentive to deal.

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    Anyone know some of the actual specifics of such contracts mentioned? Like what typical terms would be, or default or exit clauses? What is the route if one guy up not liking the other or young guy turns out to be a dud? Just do the best due-diligence possible and pray? Older gent may want to let the reins out gradually as new guy grows into the full extents of the ownership, right? Or does it work best to buy it completely (100% ownership) and ask the owner to take the next two years to teach and transition?

    Seriously, these are much more hypothetical questions than actual application, but it is the second time I have been challenged to think about this, and the second time I come up ignorant with more questions than answers.

    This part is more for discussion purposes, but, lets assume that this young guy has the right stuff, but has a lot of learning to do also. Lets say he has a solid track record as an employee (locally) and solid performance as a SB owner a few years in, but without the 25-30 years head start and good gov contracts. More or less gaining ground though. He might get there, he might not (but it wont be for lack of trying). The older gent might recognize some good qualities and deduce that the young guy could either put all his effort into growing a small shop into a medium shop or (if done right) use the same time and effort to grow the medium shop into something more. The young guy loves the idea and attention, but is weary and knows its the longest of shots. The young guy likely will never (hopes not to) be solely an employee again, and he would need some skin in the game to get him to change course, since it would mean effectively ending his biz. Weary too because he also guesses that if they say it is hard having a partner, its probably harder having a transitioning owner; followed maybe by having a transitioning owner parent Idk. Nothing is real, but its fun to think about.

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    Quote Originally Posted by charlie gary View Post
    Don't know about NASCAR, but Herb O'Brien lost his water ski company when he got caught making special skis with cocaine cores.
    I'm no expert, but wouldn't that be bad for the cocaine?

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    Quote Originally Posted by DanielG View Post
    ESOPS are similar, but the post-retirement company is owned by all the employees, rather than just one of them.

    Selling it for fair market value with seller financing is another option. The deal needs to be carefully structured so neither side gets screwed.

    Depending on how big the shop is, valuation can be tricky. One of the problems valuing smaller businesses is that they often aren't actually worth as much as the owner thinks they are. The owner thinks of the profit as what they take home at the end of the year (i.e. owner's salary + actual profit). The profit that is used to value the business is what's left at the end of the year after you pay someone to run the company.
    Having worked at a company that went thru an ESOP, I can tell you the big problem there- the original owner is paid for his shares. Then, the employees "own" the business- and have a debt, whose terms they did not negotiate, nor can they renegotiate, and, in the case of the business I worked for, that meant, the company went bankrupt within a year, because of the unsustainable debt load.

    I think a much better route for the OP would be a "rent to own" system. He pays a percentage of the actual net profit every month to the previous owner. If there is NO net profit, then, most likely, its not worth buying anyway...

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    Quote Originally Posted by Ries View Post
    I think a much better route for the OP would be a "rent to own" system. He pays a percentage of the actual net profit every month to the previous owner. If there is NO net profit, then, most likely, its not worth buying anyway...
    yeah sure, try to find a vendor smart enough to have run a business that would do that deal.


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