Buying Businesses

Hello PC Family,
Myself and a few friends have decided to sit on the sidelines of property for the foreseeable future but are also not keen to sit on our hands.

Whilst almost all of us run a small business we have started to discuss the idea of buying businesses. A lot of us have unique skills that we know we could incorporate into businesses to make them more profitable but it's not something we have ever done before.

It's only very early talks at this stage and TBH we know very little.

So my post is just a general one to the PC community to see who has done this, is doing this? Success, Failures? How you went about it? What you bought and why? And so on.

Just as an example we stumbled across a local paint store whose financials looked very strong. What was even more attractive with this offering was that the owner wanted to continue working in and running the store.
The selling price was 250k and our aim would have been 10 of us putting in 25k each. The accountant of the group did the sums and said it would have been something like a 20% ROI at its current operation.

Another mate is talking about buying vending machines but I put that one too rest pretty quickly. Don't get me wrong I think it could be good business but all the premium spots are already owned by a monopoly.

Anyways over to you all

 

10 going into anything is bad news already

 

Care to elaborate? Have you had personal experience investing with 10 people before?
I personally believe investing with 10 people would be far greater than investing with 1.

 

It will be like 'herding cats'.

Have you ever gone out in a group of 10 people and tried to decide where to eat dinner for example? Either everyone will want to go somewhere different or one person will dominate and decide (or a mixture)

 

10 investors. 1 is a manager.
Then lean on the other 9 for their skills and reimburse for their time, a "wage" for extra input

still could be messy

 

I can send you our due diligence guide to help with looking at a business.

One person will need to act as the controller of the business and co-ordinate the shareholders with clear instructions for breaches. That person needs to be paid for their work.

And that controller does not work in the business.

Think of a chairman and a board of non exec directors.

It is difficult to do in a micro business (sub 2m turnover). I have never seen it done well at that level except for tech startups that are growing fast.

And for the number of shareholders an audit would be a good idea to placate some who will disagree with the accounts.

 

In 2007, two business associates and myself bought equal shares in a business. Supposedly one of us had good people skills (became managing director), one of us had good sales skills (became national sales director) and then there was me (strategy and finance).

The first 12 months was fine. By August 2008, I was getting very concerned about the financial performance of the business. I wrote a detailed dissertation on this with an action plan for returning to profitability (mainly reducing costs). The only response I received from my two co-owners was FNP (f.cking negative prick).

Two months later, Lehman Brothers went belly up and the GFC was underway. Six months later, our business had posted $1M loss.

My two co-owners finally saw the light and we took corrective action to reduce costs - sacked staff, everyone took a 5% pay cut, ... This action had the desired affect and the business slowly returned to profitability.

One needs to remember that, when a business gets into financial difficulties, the business debt is NOT shared as per ownership. The lawyers go after the owner with the highest net worth first (in the above case, that was me).

So, in my case, I owned:

• 33% of the business,
• 33% of the voting rights (in reality, it was 0% as I was often over-ruled by the other two),
• 100% of the business debt.

Over time, we became more dysfunctional at board level and I become more and more concerned about the long term financial prospects of the business.

In 2010, I sold my share to the other two co-owners. In 2012, the business went into liquidation, 80 staff lost their jobs, the two co-owners lost everything and reportedly still owe $12M.

Yep, the risks are certainly greater with 10 than 1.

My thoughts are:- Be very careful who you jump into bed with when it comes to owning a business.

 

I can not understand this.
An owner willing to give up full ownership a profitable business with strong financials, only to want to continue running and operating the business as an employee for wages?
This makes absolutely no sense at all.

The only exception would be that the owner is absolutely desperate for a quick 200k, but even that does not make sense as there are many alternatives to this.

Something does not add up.

 

I totally agree and we didn't explore it much further to dig deep but it was my very first thought when it was said to me.

Perhaps the figures were fudged, perhaps he was going to sell it as that and then open one around the corner and keep his customers, perhaps he was going to sell it like that as a benefit and then retire 3 weeks later. Obviously many questions!

 

"Why"?..

 

A larger consensus for decisions. A partnership is 2 people's views and if they clash then their is major issues. A group of 5 or 10 then their is a larger chance their will be a majority and a minority and a higher chance those grouped views can swing the others (O.J Simpson trial anyone? )

You also get additional skills on a larger scale and less funding is required (lower risk).
Take the paint store above. 25k as 10 people, if it failed then you could live with that.
A partnership with 125k capital is a much scarier proposition.

 

How many ASX listed companies have 10+ Directors steering the ship?

Food for thought.....

pinkboy

 

I know a lot of guys who have done this.

The short answer is that they want a break from the stress of running a business, take cash to diversify their wealth and also not be exposed to the risk of operating a business.

So while they will still be involved they invariably stop the high end management and finance related work. The new owners will do this.

The old owner will often just focus on the "tools" which they probably enjoy doing. Nasty horrible parts of their job will be put onto the new owners.

If the previous owner is old they often get cranky about what the new owners are doing. They soon quit or get pushed out.

 

Sounds like you have had experience in this,not something i would do but good luck..

 

250k buying price is cheap. You would expect to see a profitability of around 100-150k for that. Divided by 10 people, it is a small number. Any small increase in cost (some money for the person selected to manage on behalf of the team, some costs for directors, directors insurance.... Also, paying the manager - have you included salary and all the other costs. profit will disappear fast.

My guess is the profit will get eaten up by your management costs. My own experience (I have been looking for a business to buy for the last 18 months) is:

• What is presented is definitely not what you get in the end (in around half of the businesses I have seriously reviewed, the financials have changed dramatically).
• The best businesses are sold to friends and associates - the stuff that gets to brokers is often troubled in some way
• 20% ROR is good, but does that rely on "growth"?
• Retail margins are generally not great - due to tough competition. Its a tough sector unless you have a branding advantage
• Is the business franchised? Are all their costs properly included in the financials.

Ensure you have a good accountant and do your research thoroughly. There is as much more money to be lost as there is money to be made in small business.

 

Going 10x splits on a 250k business is lunacy.

You say the risk is reduced because it is split 10x ways but so is the profit. Running a profitable business requires a lot of energy and ideas. If only one or two of the directors is putting up the energy and ideas for 10k, can't see that lasting long.

 

This is exactly what did over 30 years ago when we bought our first business, a 7 day/week 12 hours/day takeaway food business. The previous owner was grey-hair and no longer enjoyed working 84+ hours per week.

We were in our late 29's, childless and driven to get ahead. So, we bought the business but I kept my day job in IT and only worked after hours and on weekend in the business.

We hired the previous owner as a full time employee. Even though he was our oldest employee, he was the most dedicated, loyal and hardworking out of all of the employees we employed while we owned that business.

So, he worked from 9am to 5pm Monday to Friday and left us with all the night and weekend work plus all the stress of dealing with suppliers, the landlord, the bank, ...

The wife fell pregnant and we had our first child while we owned that business. That was definitely not part of our original plans. Someone slipped up .

We would have been in dire straits if it wasn't for the previous owner working for us. TBH, I don't know what we would have done; he definitely saved our bacon!!!!

So much so, we made him an honorary grandfather (so our daughter had three grandfathers).

 

As per my initial post, this is not something I am familiar with hence why I brought it to my PC family. Many of my friends and myself included have grown small businesses, some make a small profit to complement a normal PAYG some have done really well, some have failed.

Push aside the paint store and 10 people as that was just an example.
I do not think anyone was serious into buying into that but wanted to raise it as an example.

I was more trying to get the experience and advice from others who have played in this area before. I have said and always maintain to be truly rich, you need to invest and be involved in business. Property which we are all here for, can make you comfortable (less likely these days) but it will never make you truly rich.
Buying a paint store I very much doubt will make you rich but having your hand in 10 successful paint stores might.

Does any member on here have that? Does anyone have their hands in a few pies, earning passive income?

Obviously with business you have a few options:
1 - Build it from the ground up.
2 - Buy a very small portion of the business (shares)
3 - Own a larger percentage of the business by purchasing it externally (where my post was more focused).
4 - Own a larger percentage of the business by purchasing it internally.

I have a few friends who have been lucky enough to fall into number 4 and their dividend payments are enough to make me cry when they show me. Sometimes 2 years salary (pre-tax) in a single dividend.

 

@kierank thanks for sharing your posts, they have been great to read!

 

In business, you can lose a lot more than the original capital you put it.

Take my story in my earlier post. My two co-owners lost the business, everything else outside the business except their Super (PPOR's, a commercial property, cars, cash, ...) and I understand they are short by $12M.

When we bought the business, we paid no where near that sort of money.

As I have stated many times on PC, I am a big fan of one starting/owning a business especially from a cash cow perspective but one needs to go into such a venture with their eyes wide open and not take on anything that could destroy you.

I knew my two co-owners very well for years prior to going into business together. I thought I knew them very well, knew their strengths and weaknesses, etc.

I am an advocate for risk analysis and I thought I knew the risks, had migration plans, etc.

They turned out quite differently to what I was expecting and would have destroyed me if I hadn't gotten out before the **** hit the fan.