Business Purchase - 80%

[rufmeister]

In Autumn last year a business came up for sale which I enquired about, but at the time, was a stretch too far for me.

Circumstances changed, and the business was still up for sale, so I enquired again.

The owner of the business has since given his foreman of 15 years a 20% share of the business, so the sale is now of 80% of the business.

Initially I saw this as a negative, thinking that I would have to give someone 20% of "my" business, however, I have looked at it, and if all is as described by the owner, it should be a positive.

The foreman runs the day to day operations of the business, allowing the owner to concentrate on new enquiry, customer relations and oversee the ares of the business he used to run on a daily business. It frees him up from being the business, to running the business. This is part of the reason I am looking at the business, as currently I run every aspect of my business, and have peaked to the point where I am struggling to push on on my own, and need some support.

The line of business is the same as my current business, but with a higher turnover and profit, which would take me another 5+ years to get close to.

My question is, would you consider this as a positive or negative?

Also, if I do go ahead with the purchase, can I have it written and enforced, that if the foreman was to ever want to sell his share, that I would get 1st refusal?

It's really thrown a spanner in the works, as without the foreman, it would be very difficult to take over the reigns, so the fact he has an interest in the business, in place of a salary, will drive him on to take his role seriously, or it could have the opposite effect of "new owner comes in, old boss gave me 20%, so I will sell to new owner and have £100k or whatever for nothing."

My minds all over the place with this one.

[stuart-b]

Tough call, but my first thought would be - no business should be reliant on any single person to operate effectively, regardless of what he brings to the table.

One option you have is to buy the business and then if he doesn't play ball, transfer all contracts over to your current business and shut the one down you've purchased.
I think it largely depends on the team and how things are setup.

[singlecoil]

How will he be remunerated? It's an important question because as the majority shareholder you could decide to pay all the profits out as wages, mostly to yourself, which would leave no money in the company to pay a dividend which he would then be entitled to 20% of.

If you want to keep him then you will need to think about his position from his point of view as well as yours.

You could, for instance, pay him a wage that he would be satisfied with, and offer to buy his shares back from him by instalments as the money came in to fund that. That would return the relationship to a much more satisfactory position.

[anonymous-user]

stuart-b said:

One option you have is to buy the business and then if he doesn't play ball, transfer all contracts over to your current business and shut the one down you've purchased.

That's one option but pretty unethical and could possibly land you in hot water.

Having an employee as a minority shareholder can be a great advantage or a PITA, depending on both the deal and the employee.

You can definitely ensure that you get first refusal, but in reality 20% has little value without the support of the 80% so it's work a lot less the one fifth of the value of the business unless the whole business is sold.

You should also consider a clause that would compel him to sell if you find a buyer who wants to buy the whole shebang.

[trickywoo]

I'd not touch it with a barge pole.

Hire your own foreman and if equipment is part of the equation make an offer on that aspect alone.

Without more details it's hard to be definitive but you've said your business is in the same area as the one for sale and you are doing ok to the point of being too busy.

Whats to stop the foreman paying nothing for the business and continuing to run it?

[stuart-b]

desolate said:

That's one option but pretty unethical and could possibly land you in hot water.

Having an employee as a minority shareholder can be a great advantage or a PITA, depending on both the deal and the employee.

You can definitely ensure that you get first refusal, but in reality 20% has little value without the support of the 80% so it's work a lot less the one fifth of the value of the business unless the whole business is sold.

You should also consider a clause that would compel him to sell if you find a buyer who wants to buy the whole shebang.

Yes that is worst case scenario but it gives him the advantage. The foreman wants to protect his 20% (We can assume) and perhaps worked very hard and contributes significantly. In which case the 20% could be seen as an advantage as the OP said. No one in your business cares as much as the stakeholders (usually). It's a bit more than a normal job for them - during the due diligence it would be worth investigating the relationship and how the chap is. Then you can make a more informed decision. business moguls usually have key people around them with interests in various businesses - it keeps them loyal and committed. They won't stick around watching you get more wealthy and they get their usual pay cheque. The foreman can keep his 20% but he doesn't have to have anything with your current business. Then it could be seen more like a franchise - anyway you play it, as long as the foreman knows the investment you are making to secure the 80% (and the benefits of a larger concern - marketing, sales, admin consolidation, reduced operating costs etc).

Edited by stuart-b on Wednesday 15th February 08:47

[Monkeylegend]

Do you plan to continue to run them as two separate businesses or will you incorporate them into one bigger business. If you do that will the foreman then get 20% of the bigger business?