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    Quote Originally Posted by Mcgyver View Post
    yeah sure, try to find a vendor smart enough to have run a business that would do that deal.
    Can you elaborate why thatís a bad deal for the original owner? Seems that leaves him with the most control, even to fire the kid and go test drive another one.

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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 ?
    Gary Balough, car 84 garage, comes to mind. 1st arrest was pot (lots of it), 2nd cocaine i think

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

    The short answer: he doesn't.

    The long answer: as mentioned, unless you can climb under said shops owner's wing, and give him a big warm fuzzy? Probably not gonna happen.
    You can try the bank. But, don't get your hopes up. I had an 800 credit score, decent chunk of money in the bank, great employment history.
    And, still couldn't get an SBL.

    There are people (who have LOTS of money) who will lend money (my last boss was one of these people).
    If you can find one, this may be an option. But, get ready to put up EVERYTHING you own (including said shop and all contents) for collateral.
    And, pay absurd interest. This could work for a couple years. After you have two years in business with good profitable books, bank may then listen?
    Then you may possibly borrow from the bank to satisfy rich guy? And, owe the bank instead. But, these are dangerous muddy waters.

    A silent partner who is just basically the bank is another option. Again, very very muddy water.

    There is no easy way.

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    You dont, get a job, learn a trade, save your money, work hard and smart, then think about buying a run down shop or starting your own from nothing. You don't get to be king of the hill without paying the dues...my 2 cents...Phil

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    Marry his daughter.

    Mr Bridgeport

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    Quote Originally Posted by wheelieking71 View Post
    You can try the bank. But, don't get your hopes up. I had an 800 credit score, decent chunk of money in the bank, great employment history.
    And, still couldn't get an SBL.
    I know quite a few folks who have done this, though none of them are in manufacturing. From what I can tell it's exponentially easier to get them to loan money for the purchase of an established businesses.

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    Quote Originally Posted by vmipacman View Post
    Can you elaborate why that’s a bad deal for the original owner? Seems that leaves him with the most control, even to fire the kid and go test drive another one.
    Forget he's the previous owner, and just assess it as investment. Would you give a small business about to be run by a newbie money, with no fixed or security debt instrument or payment obligation and no ranking as creditor ahead of an owner's substantial block of equity, just give them the money because they say they'll pay you back if things go well. Because that is all you get, a promise....and a sorry if they don't.

    What Ries proposed is called an earn out, after closing (ownership is transferred) you, the previous (his word) owner gets paid over time by a percentage of profit. This is worse than debt financing because its contingent. i.e. if you give someone a VTB you are now in an investor in their business; a business you no longer control which is a horribly risky investment - but at least it debt, its going rank, have set payments, interest etc. You don't even get a VTB if you don't have some equity that you stand to lose first.

    What Ries suggested is even worse, there no set payment schedule or promissory note, just a payment stream that is contingent on profit. A few reasons why that is fail for the vendor they are unlikely to accept: In a small business, success is highly dependent upon the owner, so you getting any money for your business is dependent on how well the buyer will do? Odds are, they're not going to do as well, (and at a minimum your ego is inclined to have you believe that). In most small business with little IP, most of the profit (if not the revenue) is there because of the owners knowledge, relationships etc.

    Secondly, the new owner is in charge of the business which means its very easy for him to make sure there is never a profit.

    Earn outs occasionally happen, but it would be a small bit icing on the cake to make the vendor feel like he's got a shot at some upside. Frankly I've always tried as a buyer to get a bit of the price as an earn out, but haven't come across a vendor dumb enough to buy into it (I've done a few deals as principal, but have worked on lots more as an intermediary). There's a saying in corporate finance, its not what you pay but how pay and earnouts are the holy grail of a one sided buyer deal....if you can pull them off, power to you.

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    Quote Originally Posted by Mcgyver View Post
    Forget he's the previous owner, and just assess it as investment. Would you give a small business about to be run by a newbie money, with no fixed or security debt instrument or payment obligation and no ranking as creditor ahead of an owner's substantial block of equity, just give them the money because they say they'll pay you back if things go well. Because that is all you get, a promise....and a sorry if they don't.

    What Ries proposed is called an earn out, after closing (ownership is transferred) you, the previous (his word) owner gets paid over time by a percentage of profit. This is worse than debt financing because its contingent. i.e. if you give someone a VTB you are now in an investor in their business; a business you no longer control which is a horribly risky investment - but at least it debt, its going rank, have set payments, interest etc. You don't even get a VTB if you don't have some equity that you stand to lose first.

    What Ries suggested is even worse, there no set payment schedule or promissory note, just a payment stream that is contingent on profit. A few reasons why that is fail for the vendor they are unlikely to accept: In a small business, success is highly dependent upon the owner, so you getting any money for your business is dependent on how well the buyer will do? Odds are, they're not going to do as well, (and at a minimum your ego is inclined to have you believe that). In most small business with little IP, most of the profit (if not the revenue) is there because of the owners knowledge, relationships etc.

    Secondly, the new owner is in charge of the business which means its very easy for him to make sure there is never a profit.

    Earn outs occasionally happen, but it would be a small bit icing on the cake to make the vendor feel like he's got a shot at some upside. Frankly I've always tried as a buyer to get a bit of the price as an earn out, but haven't come across a vendor dumb enough to buy into it (I've done a few deals as principal, but have worked on lots more as an intermediary). There's a saying in corporate finance, its not what you pay but how pay and earnouts are the holy grail of a onsided buyer deal....if you can pull them off, power to you.
    Altogether informative!
    Is there a purchase system you do like, but still involves financing, either owner or bank?

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    My last employer had a good idea that came with the blessing of his accountant, I had been running the shop for several years, worked there about 8, I was to buy a life insurance policy on him with half my money and half company money and when he wasn't around his wife would get paid, I would own the shop. The problem came when he found he was stage 4 lung cancer while getting tests for the insurance policy. 6 months later he was gone.

    Why are you broke, often folks in that position tend to stay that way making running a machine shop problematic

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    So, this is hard. For a multitude of reasons.

    For the long and short though, this is why private equity exists....because banks won't touch it.

    The business is split in to three componentns. One is the physical assets (capital and expendable equipment, inventory, A/R less than 30 days old). Two is the land/building it is contained on. Three is the good will of the company.

    The real estate portion is the easiest to appraise.

    The physical assets you need an appraiser, and intricate knowledge of how the company works so you aren't buying inventory/raw materials that are just dead weight.

    The good will is the one where you need forensic accounting to determine how much the owner has been cooking the books to make the company appear more profitable than it actually is. The good will of the company is it's client list, contracts, expected sales that should transition to you.

    Now....real estate is generally the easiest to finance, but also the least risk for the previous owner to hold on to and self finance.

    The physical assets and good will are what you'll need help financing. If it is the owner self financing, it's in their best interests to work to make you profitable, since usually it's done as a few years of payments with a balloon.

    So all in all, selling cocaine is easier...

    The biggest advantage however, is that his business, without a second in command, has zero value to private equity. A good business with retiring owner AND young second in charge, with the blessing of the owner, can find private equity.

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    One thing I didn't mention is that you also have to have a sizeable war chest, as it's going to be a while before money really starts coming in. So you have to be able to float the business for at least a couple months.

    If you lack that money, you can forget about it. You haven't shown the determination needed to be able to make decisions and follow through.

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    Within the last year to year and a half, there have been postings on here of people looking to retire and sell their shop + product line to someone younger. As I recall, the terms were pretty flexible. Out west somewhere. It was presented as a multi-year deal. Do some searching (with Google, not with PM's own search engine.)

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    I didnt say no contract no set sales amount.
    I just said the monthly payments are based on income.
    I have seen this done- it works- but the only time it gets used is when the business is not, really, "saleable".
    A fair amount of restaurant owners do this with rent- the rent floats, based on the net, and often they have private investors (its very hard to borrow the million bucks it takes to start a fine restaurant in a major city from a bank). and the private investors, similarly, only get paid back their investments when the business is making money. A lot of people, both landlords and investors, are eating it right now on restaurant deals- and they had contracts.

    If the business owns a million dollar building and a couple million in late model machines, and has fixed contracts that make a hundred grand a year, then no, of course an earn out type sale wont work- but, in that case, the business would be saleable on the open market.

    But most small machine shops are not like that- they have equipment that is worth not much at auction, and not much in assets, so if the owner wants to see ANY money, he has to be open to deals.

    I have had an SBA loan, to buy an industrial building, and they still basically want you to have money- at least as much as a conventional down payment would be, and they are actually tighter on paperwork than a mortgage would be for a home.

    If the business is really worth a lot of money, which means provable profit AFTER paying a manager, then the kid aint getting it with no money.
    But many many small manufacturers and job shops are not like that. Take away the founder, who typically works far more hours than any employee would, and you suddenly have a losing propostion.

    If you want to buy a shop and have no money, you are not getting the one that does tier 3 work for automakers, Boeing parts, and Medical implants, with the 30 pallet horizontal.
    You are buying the shop that (like an old neighbor of mine) had maybe 5 grand worth of ancient machinery at auction, and contract to build all the small searchlights for the coast guard, which only paid if you had no employees. Thats the kind of shop you can buy without cash up front.

    Remember, unless the financials are waay better than most small shops I know, the banks arent lending- you will as an owner, be expected to carry a contract yourself for five years or so.
    Flexible terms, indeed.

    Assuming you really have no money, not even 20 grand for a downpayment, you are looking for the small funky shop that has potential- a product line, a small town unique relationship to repair or rebuild something for a local industry, something like that.

    Many times the building is the only real thing of value- without contracts, and without current machinery, the kids, when they inherit, usually have a quick auction, and sell the real estate.

    There are no more cast iron platen tables made in the USA, for example, because the family that inherited Acorn found the profit margin was negligible, but the real estate grandpa bought in downtown Philly was worth, literally, tens of millions.
    You need to find a company like that in Bumfuck Indiana, where the land is worthless too...

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    Quote Originally Posted by Mcgyver View Post
    What Ries proposed is called an earn out, after closing (ownership is transferred) you, the previous (his word) owner gets paid over time by a percentage of profit. This is worse than debt financing because its contingent. i.e. if you give someone a VTB you are now in an investor in their business; a business you no longer control which is a horribly risky investment - but at least it debt, its going rank, have set payments, interest etc. You don't even get a VTB if you don't have some equity that you stand to lose first.

    What Ries suggested is even worse, there no set payment schedule or promissory note, just a payment stream that is contingent on profit. A few reasons why that is fail for the vendor they are unlikely to accept: In a small business, success is highly dependent upon the owner, so you getting any money for your business is dependent on how well the buyer will do? Odds are, they're not going to do as well, (and at a minimum your ego is inclined to have you believe that). In most small business with little IP, most of the profit (if not the revenue) is there because of the owners knowledge, relationships etc.

    Secondly, the new owner is in charge of the business which means its very easy for him to make sure there is never a profit.

    Earn outs occasionally happen, but it would be a small bit icing on the cake to make the vendor feel like he's got a shot at some upside. Frankly I've always tried as a buyer to get a bit of the price as an earn out, but haven't come across a vendor dumb enough to buy into it (I've done a few deals as principal, but have worked on lots more as an intermediary). There's a saying in corporate finance, its not what you pay but how pay and earnouts are the holy grail of a one sided buyer deal....if you can pull them off, power to you.
    A similar technique is used very frequently in businesses where much of the value is in the client relationship, like accounting firms. The sale price is $x plus y% of the billings from current clients. It mainly serves to protect the buyer. It give the seller an incentive to make the transition work well. The seller is protected by the % of billings; you can't fiddle with those numbers like you can with profit.

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    If you have a trade qual,get a job in some 3rd world hellhole,that will pay thousands a week ...like a gold mine,iron mine/tantalum mine.....work for a few years with the hot sun on your back and sweat pouring off you fixing crushers and dozers,and trucks,tools kept in a bucket of water so you can touch them in the heat....Then you will have the experience to start a small shop ,and you will also know how to handle people one notch short of shooting them........I started with two other guys I knew in the army,we all wanted to do the same things,and three is a good number for a starting business.....unmarried guys essential too,no wimmin demanding a say,or more money.

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    Itís all relative. I figure even if you had a couple hundred k, youíre as good as broke trying by buy something thatís several million or more. Edit: and where thereís a will thereís a way. If the owner taps the young kid as the right person then I wouldnít think a down payment would be much of a stumbling block. Just saying

    Lots of this info here and itís super interesting and helpful, but also not really new and Iíve read similar anecdotes in many other forum posts. Iím more interested in the nitty gritty of what an owner financed deal would look like. Terms?

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    The only way to buy the business you want is be adopted by DJT......seems you want to bypass all the hard graft and progress straight to the beach on Gran Cayman getting updates from your accountant on your ever increasing tax free wealth.

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    Quote Originally Posted by john.k View Post
    The only way to buy the business you want is be adopted by DJT......seems you want to bypass all the hard graft and progress straight to the beach on Gran Cayman getting updates from your accountant on your ever increasing tax free wealth.
    You have me all wrong

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    Quote Originally Posted by DanielG View Post
    A similar technique is used very frequently in businesses where much of the value is in the client relationship, like accounting firms. The sale price is $x plus y% of the billings from current clients. It mainly serves to protect the buyer. It give the seller an incentive to make the transition work well. The seller is protected by the % of billings; you can't fiddle with those numbers like you can with profit.
    Thatís an interesting system. What might the y percentage be in real life? Y percentage every year till the loan is paid, or transition is complete, or some other arbitrary time period both sides agree on?

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    Quote Originally Posted by Ox View Post
    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
    Every time I've seen this tried in both the machine shop and race car world it ended badly.
    In fact most sales of a smaller machining businesses to an individual go bad no matter young, old lots of cash and large credit lines or not.
    If you the seller expect to get the down payment and hope and pray for anything more.
    I've been there. The buyer had almost unlimited credit lines and ability to get any loan. Friends up and down in local and state government.
    It did not turn out well. Dad's quote was "I'd have been better off to have thrown the keys into the cornfield".

    How is this new person?
    Can he/she do the sales work the owner did? Devoted to the time needed and sacrifice of family life? Basic understanding of financials, taxes and all that poop.
    Does the owner just want to walk away or be a involved mentor?
    A thousand ways to structure this. All sorts of niffy ideas to get paid but remember one word. Bankruptcy and as a company you can do this over and over and not get any personal bank account hurt.
    In my case it was interesting.
    Judge "Have you ever filed bankruptcy before" .. Person "Not under this name your honor". Judge again with the same question, person with the same answer.
    Judge not happy but knowing this all legal and can't touch this.

    One can sell a 5 million a year manufacturing operation and end up with nothing while spending more in legal than the down payment.

    The flip side is can that new guy make it work or grow it. The first year or three should be a given, the momentum established does that.
    Place your bets. The right guy and all golden, the wrong and not so good. It is hard to know people so many will try to hedge the bet but that can be gone in the blink of an eye.
    Even with this past lesson I still like to believe in people who want the task of taking on a business.

    Not sure here on one point so maybe above wrong side of the tracks, braindead foolish and a waste. Are you buyer or seller?
    Bob

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