Opportunity to Buy Into Business for First Time
Discussion
Posting under an alias;
I had an opportunity presented to me almost a year ago now, which I thought had gone away, but with the owner having a bit of thinking time due to Covid-19, the opportunity has resurfaced.
I know a lot about the industry sector in which the business operates (have worked in the sector all my life) but I’ve never even considered buying into a business before so know nothing about that side of life, so would appreciate as much input as possible so I’m going in with my eyes fully wide open.
The company has been going for over 20 years and is privately owned, as they always have been, by a husband and wife team.
As they only turn over between £3-£4 million they are not required to produce full accounts, only a balance sheet. Obviously I will be asking to see the full management accounts before proceeding.
I have been told by the owner that in the past few years they have made net profits of £530k, £560k, and just over £1m on turnover of circa £2.9m x 2, and closer to £4m respectively.
I have seen the balance sheets through companies house, and they have regularly maintained a healthy cash position of over £1m and also own their own premises outright which I would estimate to be worth circa £400k - £500k.
There is a very tenuous link between me and the owner which is how this has landed in my lap. My sisters future father in law is a successful financier and angel investor. He is a long term friend of the owner who I believe approached sisters FIL asking for advice as to how he should exit the business (owner is 66 and has clearly made his money!) and the rest is history as they say!
The owner is looking to take someone on now as a Managing Director to take over the day to day running of the business, and ideally wants that person to buy in now as a show of commitment. He wants to hand the business over to that person as of 1st April next year, with a view to staying involved in a mentoring / consultancy capacity as Chairman, for a further 2 years, before stepping away completely. Hopefully this is where I come in!
So a deal has been put on the table as follows;
Between joining and end of March I would be taking an almost 20% pay cut, which I am tempted to try to squeeze up a bit.
The owner has said I can buy in between 10% and 20% between now and end of March 21, based on a business valuation of £1.5m, so 10% would cost £150k etc, but what he has said is that if I buy in at 20% before end of March he will include me in this year’s dividend, which is on track to be based on net profits of £450k - £500k.
He has also said that as of 1st April 21 he is happy for my salary to go up to match my current.
In terms of raising capital to buy in - sisters FIL (from above) has said in principle that he is happy to look at doing this, but I have no idea how this works from a repayment perspective? I also have not discussed with him (yet) the fact that all of this is based on a current business valuation of £1.5m.
So some questions that I have that I genuinely don’t know the answer to;
1/ What ROI / repayment mechanism would an angel investor normally look for / be considered reasonable?
2/ I can’t work out how the owner has managed to build up such a healthy cash position, and keep paying himself healthy dividends - would it be normal for him to take out part of the net profit as dividend and keep some cash in the business?
3/ The owner currently has a “right hand man” who is well past retirement age and who the owner wants to pay off with a healthy golden handshake at the same time as he steps back. I presume this would come out of the cash in the business, but what influence / control would I have over that, as obviously if, for argument sake the owner decides to give him £500k that is worsening the cash position of the business significantly?
4/ The owner has loosely said he wants to completely relinquish control within 2 years of April next year. If I wanted to take full control of the business Is there a “normal” way of doing this? On the assumption the business was still in a healthy cash position, could this be used to buy his remaining stake out?
5/ Can I reasonably expect there to be some form of agreement that the owner will exit within x number of years, subject to the business being in good health? I wouldn’t want to buy in now at whatever %, then find out in 2 years time that he actually likes getting a dividend off someone else’s hard work, and hangs around for ever.
6/ Is it possible to “fix” the value of the business for any future further investment at the same level I would be buying in at now?
Lastly and perhaps most obviously, should I be taking independent legal advice?
Many thanks for any input on the above, and apologies if this is in the wrong forum.
I had an opportunity presented to me almost a year ago now, which I thought had gone away, but with the owner having a bit of thinking time due to Covid-19, the opportunity has resurfaced.
I know a lot about the industry sector in which the business operates (have worked in the sector all my life) but I’ve never even considered buying into a business before so know nothing about that side of life, so would appreciate as much input as possible so I’m going in with my eyes fully wide open.
The company has been going for over 20 years and is privately owned, as they always have been, by a husband and wife team.
As they only turn over between £3-£4 million they are not required to produce full accounts, only a balance sheet. Obviously I will be asking to see the full management accounts before proceeding.
I have been told by the owner that in the past few years they have made net profits of £530k, £560k, and just over £1m on turnover of circa £2.9m x 2, and closer to £4m respectively.
I have seen the balance sheets through companies house, and they have regularly maintained a healthy cash position of over £1m and also own their own premises outright which I would estimate to be worth circa £400k - £500k.
There is a very tenuous link between me and the owner which is how this has landed in my lap. My sisters future father in law is a successful financier and angel investor. He is a long term friend of the owner who I believe approached sisters FIL asking for advice as to how he should exit the business (owner is 66 and has clearly made his money!) and the rest is history as they say!
The owner is looking to take someone on now as a Managing Director to take over the day to day running of the business, and ideally wants that person to buy in now as a show of commitment. He wants to hand the business over to that person as of 1st April next year, with a view to staying involved in a mentoring / consultancy capacity as Chairman, for a further 2 years, before stepping away completely. Hopefully this is where I come in!
So a deal has been put on the table as follows;
Between joining and end of March I would be taking an almost 20% pay cut, which I am tempted to try to squeeze up a bit.
The owner has said I can buy in between 10% and 20% between now and end of March 21, based on a business valuation of £1.5m, so 10% would cost £150k etc, but what he has said is that if I buy in at 20% before end of March he will include me in this year’s dividend, which is on track to be based on net profits of £450k - £500k.
He has also said that as of 1st April 21 he is happy for my salary to go up to match my current.
In terms of raising capital to buy in - sisters FIL (from above) has said in principle that he is happy to look at doing this, but I have no idea how this works from a repayment perspective? I also have not discussed with him (yet) the fact that all of this is based on a current business valuation of £1.5m.
So some questions that I have that I genuinely don’t know the answer to;
1/ What ROI / repayment mechanism would an angel investor normally look for / be considered reasonable?
2/ I can’t work out how the owner has managed to build up such a healthy cash position, and keep paying himself healthy dividends - would it be normal for him to take out part of the net profit as dividend and keep some cash in the business?
3/ The owner currently has a “right hand man” who is well past retirement age and who the owner wants to pay off with a healthy golden handshake at the same time as he steps back. I presume this would come out of the cash in the business, but what influence / control would I have over that, as obviously if, for argument sake the owner decides to give him £500k that is worsening the cash position of the business significantly?
4/ The owner has loosely said he wants to completely relinquish control within 2 years of April next year. If I wanted to take full control of the business Is there a “normal” way of doing this? On the assumption the business was still in a healthy cash position, could this be used to buy his remaining stake out?
5/ Can I reasonably expect there to be some form of agreement that the owner will exit within x number of years, subject to the business being in good health? I wouldn’t want to buy in now at whatever %, then find out in 2 years time that he actually likes getting a dividend off someone else’s hard work, and hangs around for ever.
6/ Is it possible to “fix” the value of the business for any future further investment at the same level I would be buying in at now?
Lastly and perhaps most obviously, should I be taking independent legal advice?
Many thanks for any input on the above, and apologies if this is in the wrong forum.
Yep, get a good corporate lawyer.
You have raised valid questions. Quick pointers on those:
1 - depends entirely on the risk profile and up to the individual angel as to their terms.
2 - Yes. He may have left cash in due to not needing the extra income.
3 - You want this nailed down tight, until you have overall control of the business your influence is low.
4 - Yes, its basically an option to buy the remaining shares at that point in time written into a contract.
5 - as above
6 - Yes, as above.
Edit - this will cost a bit to sort out and do not try and cut corners by not using paid advisors. Looks like a golden opportunity if things stack up so worth doing correctly.
You have raised valid questions. Quick pointers on those:
1 - depends entirely on the risk profile and up to the individual angel as to their terms.
2 - Yes. He may have left cash in due to not needing the extra income.
3 - You want this nailed down tight, until you have overall control of the business your influence is low.
4 - Yes, its basically an option to buy the remaining shares at that point in time written into a contract.
5 - as above
6 - Yes, as above.
Edit - this will cost a bit to sort out and do not try and cut corners by not using paid advisors. Looks like a golden opportunity if things stack up so worth doing correctly.
Wow what an amazing opportunity, I’d love to know what field those figures are possible in.
My 2p are lawyer up properly, expect a minimum 5 figure bill if it all goes through - and ongoing. Interview several choose carefully.
The valuation seems low, it might be market sector but it’s a low multiple of profit.
A good indicator of business stability is have they used the same accountant for years? If so your due diligence will be easier.
£150k to get your foot in the door of this money making machine sounds golden - best of luck.
My 2p are lawyer up properly, expect a minimum 5 figure bill if it all goes through - and ongoing. Interview several choose carefully.
The valuation seems low, it might be market sector but it’s a low multiple of profit.
A good indicator of business stability is have they used the same accountant for years? If so your due diligence will be easier.
£150k to get your foot in the door of this money making machine sounds golden - best of luck.
Thanks for the input thus far - much appreciated.
And yes, have used the same accountants since they were formed over 20 years ago.
The Moose said:
I'd want to know what caused the revenue and profit to double for one year and then reduce back down again
In the industry that the business operates there is a long line of people trying to grow their business and profits by taking on larger projects, and massively failing. The owner volunteered that in that particular year he went on a bit of an ego trip and took on more projects than he normally would, but increased profits at the same time, almost to prove to himself and others that he could. But after that year went back to type, which is what he has maintained since. Hence the “odd” results for that one year.DSLiverpool said:
The valuation seems low, it might be market sector but it’s a low multiple of profit.
A good indicator of business stability is have they used the same accountant for years? If so your due diligence will be easier.
I agree and have questioned this. The answer was that he has made his money and is more interested in handing the business to someone who he feels will maintain the company name, and keep it going as close as possible to its current form, than maximising what he takes out of it. So is putting a lower valuation on to allow me to buy in, than he could sell up for, but lose the business as it currently is.A good indicator of business stability is have they used the same accountant for years? If so your due diligence will be easier.
And yes, have used the same accountants since they were formed over 20 years ago.
The valuation doesn’t make sense. From what you have said they have 1 million of cash and 500 K of premises on a business that makes about 500 K a year. At a valuation of 1.5 you are paying at assets only and nothing for goodwill. Or a business generating that sort of return one would expect the goodwill to be considerable.
Due diligence is everything. It is helpful that you know the sector but see who their customers are, particularly their largest customers, and what the risks are of them moving somewhere else. What’s sort of “moat” does the business have - how easy would it be for key employees to leave and set up a rival operation. In reality if you are only paying net assets for the business then even if this is a risk that risk is low.
I assume the owner would rather be paid for his shares with the cash in the company as he may benefit from entrepreneurs relief. You and he are going to both need good advice.
Due diligence is everything. It is helpful that you know the sector but see who their customers are, particularly their largest customers, and what the risks are of them moving somewhere else. What’s sort of “moat” does the business have - how easy would it be for key employees to leave and set up a rival operation. In reality if you are only paying net assets for the business then even if this is a risk that risk is low.
I assume the owner would rather be paid for his shares with the cash in the company as he may benefit from entrepreneurs relief. You and he are going to both need good advice.
As said above the valuation looks odd, a business that makes £500k net, with assets (property and cash of £1.5M) would normally have a valuation closer to £4m than £1.5m.
However it sounds like a great opportunity, get professional support from an M&A advisor, they can help structure the deal and make sure all the safeguards are in place.
Let's assume the business is worth £1.5M (a typical deal COULD be)...
Agree to buy 100% and fund as follows
You could take out a mortgage on the property £400k
Use 60% of the cash (assuming it is not needed for working capital)
and ask the owner to give you a loan note for £500k (very typical in a business sale), let's say over 5 years (interest only) and a typical rate of 12%.
He gets £1M in cash, day 1 (as capital and therefore will pay only 10% tax on it)
and has a £500k loan note that pays him £60k a year interest.
You can then pay him for his consultancy days, as you see fit.
Assuming the business is still chucking out £500k in profits, the loan note would cost £60k, the mortgage around £40k, leaving £400k for you to pay yourself, and replenish the cash so you can pay his loan note off in the future.
A couple of years ago I took a 6 fig minority investment in a very good friend's business. As part of the deal, we drew up a number of explicit clauses to cover, earnings, expenses, and investment decisions, all of which give me more 'say so' than my % shareholder would normally permit.
Furthermore, we also drew up a process to deal with if we fall out, whereby I could force him to buy my stake, or he could force me to sell to him, (the valuation calculations to deal with the two different scenarios was also written down).
Needless to say, his business is going really well (as he planned it too), I have seen too many minority (and in some cases 50%) shareholders get trapped in poor deals, therefore the need to ensure the right exit plans are in place.
However it sounds like a great opportunity, get professional support from an M&A advisor, they can help structure the deal and make sure all the safeguards are in place.
Let's assume the business is worth £1.5M (a typical deal COULD be)...
Agree to buy 100% and fund as follows
You could take out a mortgage on the property £400k
Use 60% of the cash (assuming it is not needed for working capital)
and ask the owner to give you a loan note for £500k (very typical in a business sale), let's say over 5 years (interest only) and a typical rate of 12%.
He gets £1M in cash, day 1 (as capital and therefore will pay only 10% tax on it)
and has a £500k loan note that pays him £60k a year interest.
You can then pay him for his consultancy days, as you see fit.
Assuming the business is still chucking out £500k in profits, the loan note would cost £60k, the mortgage around £40k, leaving £400k for you to pay yourself, and replenish the cash so you can pay his loan note off in the future.
A couple of years ago I took a 6 fig minority investment in a very good friend's business. As part of the deal, we drew up a number of explicit clauses to cover, earnings, expenses, and investment decisions, all of which give me more 'say so' than my % shareholder would normally permit.
Furthermore, we also drew up a process to deal with if we fall out, whereby I could force him to buy my stake, or he could force me to sell to him, (the valuation calculations to deal with the two different scenarios was also written down).
Needless to say, his business is going really well (as he planned it too), I have seen too many minority (and in some cases 50%) shareholders get trapped in poor deals, therefore the need to ensure the right exit plans are in place.
You do need a lawyer and you will need someone to independently verify the accounts. Find people that specialise in transactions of this scale and nature and ask to speak to their recent clients who've been through a similar process. This expertise will cost, but less than you buying a lemon.
You should also get ready for your expectations to change as he's currently in sales mode and you're the buyer so you'll be getting lots of smoke and mirrors and a lovely story. As things become clearer it will likely emerge that he intends to take all of the cash out as 'he's earned it', plus he may expect the business to capitalise on the value of the property as he'll also feel he's earned that. The important thing to remember is to not get too upset by this - try to get all of these facts on the table ASAP and then see if the deal stacks up. If it does then the whole process including valuations, payments, transfer of voting rights, treatment of assets, future dividend profiles etc. should be wrapped up into a single binding agreement so that you both know where you stand both now and as this plays out.
I've done some M&A deals (big businesses buying other businesses so not quite the same as your position) and the biggest lessons are definitely that the envelope of the deal will change considerably between now and a Sale and Purchase Agreement being ready and that a lot of people struggle to get their head around this being part of the game and therefore not worth getting upset about.
You should also do some reading around becoming a business owner, the responsibilities you will take on as a Director and the tax implications of how you reward yourself. Your salary comments are very employee biased; you'll not be maximising your monthly PAYE contributions once you're an owner!
ETA: my overriding point is that the deal will change but may well still be an epic opportunity. He may have tried to sell out before and struggled as exiting an owner-run business is often very challenging so it is not beyond the bounds of reality that he is seeking a sensible exit that gives him some upside rather than having to wind down. His position in life and the age of his right hand man seem to support that.
You should also get ready for your expectations to change as he's currently in sales mode and you're the buyer so you'll be getting lots of smoke and mirrors and a lovely story. As things become clearer it will likely emerge that he intends to take all of the cash out as 'he's earned it', plus he may expect the business to capitalise on the value of the property as he'll also feel he's earned that. The important thing to remember is to not get too upset by this - try to get all of these facts on the table ASAP and then see if the deal stacks up. If it does then the whole process including valuations, payments, transfer of voting rights, treatment of assets, future dividend profiles etc. should be wrapped up into a single binding agreement so that you both know where you stand both now and as this plays out.
I've done some M&A deals (big businesses buying other businesses so not quite the same as your position) and the biggest lessons are definitely that the envelope of the deal will change considerably between now and a Sale and Purchase Agreement being ready and that a lot of people struggle to get their head around this being part of the game and therefore not worth getting upset about.
You should also do some reading around becoming a business owner, the responsibilities you will take on as a Director and the tax implications of how you reward yourself. Your salary comments are very employee biased; you'll not be maximising your monthly PAYE contributions once you're an owner!
ETA: my overriding point is that the deal will change but may well still be an epic opportunity. He may have tried to sell out before and struggled as exiting an owner-run business is often very challenging so it is not beyond the bounds of reality that he is seeking a sensible exit that gives him some upside rather than having to wind down. His position in life and the age of his right hand man seem to support that.
Edited by Hitch on Monday 8th June 10:03
Sounds too good to be true to me.
I would urge serious caution. Just because someone has made their money does not mean they are willing to give a business away, especially one that makes c.25% PM. If anything the reverse happens, IME!!
FWIW when I bought my business I paid around 4 x ave profits over 3 years. That was for the LTD, no property so just the name and the customers.
I appreciate probably very different sectors and very different times but unless they are into something very volatile or the current directors have special skills which they take with them then £1.5M for a business that at bottom end is making £500k PA PLUS a property that's worth maybe £400k to me that's a bargain. 2 years for 100% ROI....
The fact they are trying to tempt you in too with salary and DIV...… as they say softly softly catch the monkey!
I would urge serious caution. Just because someone has made their money does not mean they are willing to give a business away, especially one that makes c.25% PM. If anything the reverse happens, IME!!
FWIW when I bought my business I paid around 4 x ave profits over 3 years. That was for the LTD, no property so just the name and the customers.
I appreciate probably very different sectors and very different times but unless they are into something very volatile or the current directors have special skills which they take with them then £1.5M for a business that at bottom end is making £500k PA PLUS a property that's worth maybe £400k to me that's a bargain. 2 years for 100% ROI....
The fact they are trying to tempt you in too with salary and DIV...… as they say softly softly catch the monkey!
Hitch said:
You should also do some reading around becoming a business owner, the responsibilities you will take on as a Director and the tax implications of how you reward yourself. Your salary comments are very employee biased; you'll not be maximising your monthly PAYE contributions once you're an owner!
Just wondering, anything specific recommended to read up on? ThanksEdited by Hitch on Monday 8th June 10:03
megaphone said:
StevieBee said:
Is the premises included in the sale or is the current owner keeping this?
This. Who actually owns it? The business or the individuals? Or possibly another company or pension scheme? This is where I was caught out. The seller (family!) wanted us to pay rent into their pension. At market value. Ok we agreed but with the agreement after n years we would have option to buy at market value. All fair and square. Then after n years we got a mortgage offer and..... they refused to sell.
So here we are 13 odd years later still paying rent having paid close to 100% the value of the building back in rent.
Go in with your eyes open!
Thankyou all for your input - it is very much appreciated.
I am meeting my potential investment partner tomorrow morning, and am hoping to meet up with the owner in the afternoon to go through various bits and pieces including many of the questions / comments raised here.
I will keep this thread updated as things develop and more information becomes available.
I am meeting my potential investment partner tomorrow morning, and am hoping to meet up with the owner in the afternoon to go through various bits and pieces including many of the questions / comments raised here.
I will keep this thread updated as things develop and more information becomes available.
red_slr said:
This.
This is where I was caught out. The seller (family!) wanted us to pay rent into their pension. At market value. Ok we agreed but with the agreement after n years we would have option to buy at market value. All fair and square. Then after n years we got a mortgage offer and..... they refused to sell.
So here we are 13 odd years later still paying rent having paid close to 100% the value of the building back in rent.
Go in with your eyes open!
Why couldn’t you exercise the option? If it was a condition of you purchasing the business, your lawyer should have ensured you were able to do so. If you weren’t, I’d suggest that your lawyer was negligent and you would be able to make a claim against them.This is where I was caught out. The seller (family!) wanted us to pay rent into their pension. At market value. Ok we agreed but with the agreement after n years we would have option to buy at market value. All fair and square. Then after n years we got a mortgage offer and..... they refused to sell.
So here we are 13 odd years later still paying rent having paid close to 100% the value of the building back in rent.
Go in with your eyes open!
General update for those interested.
The first and most important point is that the owner intends to take out the majority of the cash, leaving an agreed amount of working capital (likely to be circa £200k). He is also intending on keeping the property, so his current £1.5m valuation is purely reputation, goodwill and a small amount of cash. My gut feel is that the £1.5m valuation is about right if the business was keeping the property, but if that is not up for negotiation I feel between £1m & £1.25m is more accurate, taking all things into consideration.
The 2nd important thing, and possibly the point that concerns me the most, is that having discussed with him in person, the intention / vision of my sister’s FIL (we’ll call him Paul for these purposes) is to buy the majority of the shares from the owner himself, effectively making it a 3 way business partnership for the time being. This is because he has the (significant) profits of a previous sale investment which he is looking to reinvest to benefit from entrepreneurs relief. My concern here is that I would be buying in at 20% and he has significantly more access to capital than I do, so I am concerned that he is looking for a nice easy investment he can sit on indefinitely and collect the dividends of someone else’s hard work (mine) and I would be stuck at 20% forever.
You may say that as he is holding the purse strings that is his prerogative, but this is not the way the opportunity was sold to me at any point. I would need assurances that there would be an agreement of some form which sets out my rights to purchase future shares and a timeline for that to happen. Long term, I do not have an issue with there being other shareholders, but I do not wish to remain as the minority shareholder.
I’ve had some independent professional advice through friends and family, and the general advice seems to be that it is a good opportunity, subject to agreeing the 2 main points above.
The first and most important point is that the owner intends to take out the majority of the cash, leaving an agreed amount of working capital (likely to be circa £200k). He is also intending on keeping the property, so his current £1.5m valuation is purely reputation, goodwill and a small amount of cash. My gut feel is that the £1.5m valuation is about right if the business was keeping the property, but if that is not up for negotiation I feel between £1m & £1.25m is more accurate, taking all things into consideration.
The 2nd important thing, and possibly the point that concerns me the most, is that having discussed with him in person, the intention / vision of my sister’s FIL (we’ll call him Paul for these purposes) is to buy the majority of the shares from the owner himself, effectively making it a 3 way business partnership for the time being. This is because he has the (significant) profits of a previous sale investment which he is looking to reinvest to benefit from entrepreneurs relief. My concern here is that I would be buying in at 20% and he has significantly more access to capital than I do, so I am concerned that he is looking for a nice easy investment he can sit on indefinitely and collect the dividends of someone else’s hard work (mine) and I would be stuck at 20% forever.
You may say that as he is holding the purse strings that is his prerogative, but this is not the way the opportunity was sold to me at any point. I would need assurances that there would be an agreement of some form which sets out my rights to purchase future shares and a timeline for that to happen. Long term, I do not have an issue with there being other shareholders, but I do not wish to remain as the minority shareholder.
I’ve had some independent professional advice through friends and family, and the general advice seems to be that it is a good opportunity, subject to agreeing the 2 main points above.
secretsquirrel2 said:
General update for those interested.
The first and most important point is that the owner intends to take out the majority of the cash, leaving an agreed amount of working capital (likely to be circa £200k). He is also intending on keeping the property, so his current £1.5m valuation is purely reputation, goodwill and a small amount of cash. My gut feel is that the £1.5m valuation is about right if the business was keeping the property, but if that is not up for negotiation I feel between £1m & £1.25m is more accurate, taking all things into consideration.
The 2nd important thing, and possibly the point that concerns me the most, is that having discussed with him in person, the intention / vision of my sister’s FIL (we’ll call him Paul for these purposes) is to buy the majority of the shares from the owner himself, effectively making it a 3 way business partnership for the time being. This is because he has the (significant) profits of a previous sale investment which he is looking to reinvest to benefit from entrepreneurs relief. My concern here is that I would be buying in at 20% and he has significantly more access to capital than I do, so I am concerned that he is looking for a nice easy investment he can sit on indefinitely and collect the dividends of someone else’s hard work (mine) and I would be stuck at 20% forever.
You may say that as he is holding the purse strings that is his prerogative, but this is not the way the opportunity was sold to me at any point. I would need assurances that there would be an agreement of some form which sets out my rights to purchase future shares and a timeline for that to happen. Long term, I do not have an issue with there being other shareholders, but I do not wish to remain as the minority shareholder.
I’ve had some independent professional advice through friends and family, and the general advice seems to be that it is a good opportunity, subject to agreeing the 2 main points above.
On the basis that the property is valued at circa £500k, I'd be pushing the business valuation closer to £1m. I'm assuming he wouldn't permit you to operate there rent-free so this should be taken into account when predicting future profits as it will be a cost that wasn't there previously (unless he owned the property under a different entity and did charge rent). The first and most important point is that the owner intends to take out the majority of the cash, leaving an agreed amount of working capital (likely to be circa £200k). He is also intending on keeping the property, so his current £1.5m valuation is purely reputation, goodwill and a small amount of cash. My gut feel is that the £1.5m valuation is about right if the business was keeping the property, but if that is not up for negotiation I feel between £1m & £1.25m is more accurate, taking all things into consideration.
The 2nd important thing, and possibly the point that concerns me the most, is that having discussed with him in person, the intention / vision of my sister’s FIL (we’ll call him Paul for these purposes) is to buy the majority of the shares from the owner himself, effectively making it a 3 way business partnership for the time being. This is because he has the (significant) profits of a previous sale investment which he is looking to reinvest to benefit from entrepreneurs relief. My concern here is that I would be buying in at 20% and he has significantly more access to capital than I do, so I am concerned that he is looking for a nice easy investment he can sit on indefinitely and collect the dividends of someone else’s hard work (mine) and I would be stuck at 20% forever.
You may say that as he is holding the purse strings that is his prerogative, but this is not the way the opportunity was sold to me at any point. I would need assurances that there would be an agreement of some form which sets out my rights to purchase future shares and a timeline for that to happen. Long term, I do not have an issue with there being other shareholders, but I do not wish to remain as the minority shareholder.
I’ve had some independent professional advice through friends and family, and the general advice seems to be that it is a good opportunity, subject to agreeing the 2 main points above.
On the 20% issue.... it all comes down to risk. The only way you can fully secure a higher percentage is to take a higher risk - i.e. raise the money from your own means. There are ways that your intended future can be protected but none them provide total protection and you are going to be exposed to the risk of share dilution or removal until you get a majority shareholding. Until then, look at it less of owning a business and more 'owning a job'.
It is still a good opportunity but the parameters have changed slightly so just a case of adjusting your immediate expectations.
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