How Can I Purchase the Company I Work For From the Retiring Owner?

7 years ago · 6 minute read

AMA question #6:

“I am the only sales guy for a small manufacturing company in the soccer industry with $6-7 million annual sales. The owner is 71 years old. I’m considering making an offer to buy the business or walking away before the ship sinks. Have either of you been in this situation?”

Here’s our answer.

Key Points:

• Succession to a retiring owner is a great opportunity to buy a business.
  • It’s something you know
  • You have the skills to take it to the next level
  • The purchase price will probably be lower than if they shop the business to other buyers
  • Seller may carry back
• You can buy with SBA loans and have the seller carry what the SBA doesn’t loan
• Can you open a line of credit for working capital after the closing? Talk to a bank while you are in DD.
• Do your research on valuations.
  • Businesses usually sell on a multiple of EBITDA
  • Might be able to buy at 3-4x and when you do some clean up and put new processes into place it might have a value of 6x, all just from doing things a little better, and getting moved to GAAP accounting.
  • If your seller sells to you on un recast tax books, you’ll get a deal.
• Do your due diligence.
  • Professional investors are merciless with DD. Take your time. Turn every stone. Ask questions. Find the funky stuff that all small businesses have and work that into your calculus of value.
  • Be honest about whether you’ll keep customers or lose them
  • Look for overconcentration of customers, products, etc.
  • Look at bad debt, collections, scrutinize the financials. Sometimes this is good. If the boss is writing off his vacations that means money you’ll have discretion to use for the business. But, don’t let the boss over value those discretionary funds.
  • Look for future risk.
• Once you have a sense of value and you think you want to move forward, get an attorney who has done M&A and write an offer!

Further Reading:

EBITDA Adjustments from Crazytown from Brent Beshore

AMA Video Transcript

Nate Broughton: “I am the only sales guy for a small manufacturing company I the soccer industry, with six to seven million in annual sales,” so, decent sized business. “But the owner is 70 years old. I’m considering to offer to buy the business or I’m thinking about walking away before the ship sinks.” So, old owner, this guy thinks the business might be going south a little bit. He’s thinking about buying it and he asks, “Have either of you ever been in this situation and what’s your advice?”

Dana Robinson: Yeah. I have not personally bought a retiring owner’s business, but I have seen it, repeatedly. I love the questions because I think there’s going to be a lot of opportunity for what we call succession acquisitions. You’re buying a business from someone who’s run it for their whole life and there’s a lot of cool opportunities with this kind of acquisition. Especially from an insider, someone who’s there, who probably knows something about what they could do better and has an existing relationship, and maybe is an easy sale for the exiting owner. The owner might not know they can go out and shop this to M&A firms, and they might not want to because they might get raked over the coals and not get the deal they think they want. So the inside opportunity is pretty cool here.

Nate Broughton: Yeah. I think that’s something he should take advantage of, sooner than later. Every little interpersonal situation and individual small business situation is different, so it’s hard to say specifically if this is a great opportunity or time to bring this up. But I will say, to your point, I worked with a company called Succession Capital, we bought businesses from retiring owners. So I’ve been in the weeds, so to speak, in these situations in the past. And I can tell you that selling owners, especially those of this age who’ve had a business for a long time, care a lot about the transition and the eventual state of their baby. They’re realistic, I think most of them are, about the fact that they’re going to need to sell or pass this down to someone. And because they care a lot about that, I do think someone from the inside is in a great position to carry things on. Assumably, this guy has a great relationship with the owner. He’s been working for him for a while and he should try to play that up.

Nate Broughton: Now beyond that, Dana, I know that there are some creative ways to potentially influence a deal for one of these transactions, we probably touch on a little bit. One of those is an SBA loan.

Dana Robinson: Yeah.

Nate Broughton: You can get SBA financing up to $5 million per person to do a deal on a business of this size, assuming it had traditional margins. That’s going to be plenty, I think, to execute a transaction. So look into the SBA loan program, I’ve seen a lot of people leverage that. The SBA wants to make these loans, especially to an established business, from someone that works inside of it. I think you’ve got a lot better chance of pushing that through and getting it approved. So check out that program. What else?

Dana Robinson: Well, you want to ask the owner to carry some money back. So let’s just say that this business, I’ll just throw some numbers out, if it’s doing $6 million in sales and it has, say, $700,000 in net revenue then you might be able to buy this business for four times that. I mean, it depends on how you negotiate and what the industry is, but you’re going to need a couple million dollars, right?

Nate Broughton: Right.

Dana Robinson: It seems like a lot of money, but the SBA is going to loan you quite a bit of that. They might even loan you 90% of that. But I would want the seller to carry back 20 or 30%, and there’s a couple reasons. You don’t want to have to borrow all that from the SBA and you want some skin in the game for that owner to keep that transition smooth, and if they’ve made any misrepresentations then you have some insurance. So you’ll have in your final purchase agreement, the contract will have some adjustments that get made if things don’t go the way that they’ve been represented. It’s a great way to leverage the selling owner and they’re going to get a big lump sum up front and then they’re going to get the rest over three, five, seven years, and that’s less money.

Dana Robinson: I would also look into pre-qualifying the business for a line of credit, because once you own this business you’re going to need some cash, some working capital, as well. The owner might not leave you with a lot of cash in the bank, so be sure you have a line of credit ready to go.

Nate Broughton: Yeah, and I think there’s some more mechanics behind a SBA loan, financing and creative deal structures, that we can throw along underneath this video with some links. But I also think we should throw in here, really quick, that this is a cool game to play. If you execute this transaction, you’re kind of doing little guy private equity here, right? So if you’ve got a business, especially of this size, perfect size range, you get in there, and if you’re an internal person and you think the ship is kind of sinking I think you’re kind of implying that you know a way to do this better.

Nate Broughton: So you might see this as an opportunity to buy the business, improve it over the course of a couple of years. And a business of this size, you get it to $1.4 million in net income, now you’re going to be attracting acquisition offers from much larger private equity groups, at higher multiples if things stay the same that they are today. So this could be a great arbitrage, leverage up opportunity for you to go from a business that makes 700 grand to one that makes $1.4, and now you’re selling it for six, seven times.

Dana Robinson: Right, so not only is it double the value because you doubled the net income, but you’re adding two more multiples of the revenue to the purchase price. So, I mean, you’re getting millions of dollars in added money, in found money, without having to actually do anything for that but run the business smart.

Nate Broughton: Yeah. So if you’re willing to take the risk, kind of personally guarantee that financing and you really believe in the business, this would be a huge opportunity to make a ton of money in three or four years.

Dana Robinson: One quick note though, due diligence, right?

Nate Broughton: Yeah.

Dana Robinson: This is the thing that a lot of individual buyers miss. Professional buyers are merciless with due diligence.

Nate Broughton: Right.

Dana Robinson: Turn over every stone, ask a lot of questions, discount the business if you’re over-concentrated in one client or in one product, really go deeply into the financials and figure out … It doesn’t mean that you’re trying to find cheating, but that is something that certainly could be revealed.

Nate Broughton: Oh, yeah.

Dana Robinson: So you want to find out everything. And it doesn’t mean you might not still do the deal, but that’s going to help you understand the risks that you’re taking on.

Nate Broughton: Yeah, you can ask those questions, what have you told me that isn’t true, what haven’t you told me, and I think there’s one other one but I’ll add it into the notes on this one. Great question.