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I am looking to buy a woodworking company for about 450k
i will asume a current loan of 200k
and a friend is will to put up 75k to help with the purshase
he would perfer this to be a buy in for % instead of just a loan
what do you think.
he does not know anything about this type of business nor does he want to be involed at all.
There are pros and cons to either, so the two of you will have to weigh them and make a choice. Since he has expressed his preference - you should give that serious consideration.
There are other choices which might be more appropriate - depending upon what he wants to accomplish. This might influence the optimum structure you want to set up to acquire this business.
Is this a personal loan you are assuming or is it to the company?
Also, you didn`t mention how the $175K balance is going to be handled.
If you want to discuss the specifics of your situation (in confidence) send me a PM or feel free to contact me directly.
it is a business loan.
75k i will put up as working capital
as a cushion i hope
the last 100k will be held by the current owner to be paid later, not decided on how much later yet.
still working on the details.
the offer is not on the table just yet., We would like to have my first offer to the owner next week.
thanks for any advice you can offer
As Robert pointed out correctly, there are pros & cons to both deal structures.
While a loan is typically more secure and less rewarding from an investor’s point of view, an equity investment generally reflects a higher risk and bigger financial return, if the venture turns out to be a success.
Since you’re indicating in your post that you will be purchasing an existing woodworking business for $450,000, I am assuming that you have done your due diligence, reviewed financial statements of the business (both historical and pro forma), and perhaps even did a formal valuation of the business. If you didn’t, doing so will be essential to accurately assessing the most suitable financing options.
For instance, if the business is flourishing and generating relatively predictable cash flows, financing the deal with a loan is usually the better option because it involves a lower cost of capital.
On the contrary, if the business is a potential turnaround candidate and with no cash flow, a history of losses, or any other signs of distress, an equity investment might be a more suitable alternative because an investor (i) typically shares a portion of the risks, (ii) won’t tie up scarce financial resources to service debt, and (iii) is probably in for the long run. But remember he will also be there and ask for his share in the profits for as long as he holds an ownership interest in the business. The latter typically makes equity financing the most expensive form of financing there is.
Well, this sound pretty cut and dry, but it isn’t. Corporate finance can become extremely complex and thus, there are equity and hybrid deal structures that have more characteristics of debt financing transactions and vice versa. So, it will be key that you do your homework or work with a professional who helps you minimize risks and maximize deal benefits.
With that being said, there are also a number of risk factors that come with acquiring an existing business versus acquiring just the assets. This can have widespread implications and quite possibly even make you liable for liabilities incurred by the previous owner. Be careful.
Please feel free to send me a PM if you have any more questions or if you wish to discuss your options in greater detail.
I hope this helps.
Mark
very sound advice, so first of all thanks for your time
you brought up some good points about liabilites, i have been told that there is not any outstanding debt or any jobs incomplete, but of course that is no proof.
the business was founded in 1985 and bought by the current owner 2 1/2 years ago, he has problems ,no back ground in wood work at all. and the preivous owner promissed to help train him but didn`t . So the business has gone down hill for about 2 years, but still has enough cash flow to break even each month untill now it has shown a profit of about 10% of gross
Sounds like a great opportunity, but again, there are many details to be looked into before you can make a sound decision. While it appears that you have insights into the company’s financial situation, at least to some degree, I’m not sure if they are based on what the owner told you or whether the owner in fact supplied you with verifiable financial statements. Gathering these statements should be part of your due diligence and become the basis of your decision-making.
This will not only protect you against potential liabilities (e.g. liabilities for income, sales, or payroll taxes after an audit), it will also enable to select the most suitable framework to position the company for further growth.
If you think that the company’s current cash flow may be sufficient and predictable enough to service the loan provided by your partner, than that is in all likelihood the route to go. If your partner wants to have some skin in the game, you can include incentives such as warrants to purchase stock, profit sharing, and the like for as long as you maintain the key characteristics of a loan.
Again, please feel free to send me a PM if you’re interested in exploring your situation in greater detail. I hope this helps.
Mark
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