Buying an established buisness...

[TenYardFight]

Sounds like an exciting time! You got some good advice and some bad. I hope you're able to see the difference.

For what it is worth, I would offer something like 50% of all revenue for 6 months, 25% for 6 months, 10% for the next 12 months.

I don't have time to go into detail, but you see what I mean. Also, he needs to agree not to compete for a LONG time, and an even LONGER time with these clients.

[pugsport]

+1 For offering him a percentage of revenue over a fixed term.

I was in a similar position 18 months ago, a competitor was emmigrating and was asking a lump sum for his client list, and his trading name, which is well established in the area, all residential and one business, a much smaller scale than your opportunity, however after seeking advice from fellow Thechnibbles I offered him 20% of revenue over 12 months. I am glad I did as paying the lump sum would left me out of pocket, I have only been trading 21 months and clearly, especially in this climate I am currently not making any kind of living. On the plus side I have had repeat business from his existing clients.

There is value in his client list and contacts, put your friendship to one side and wear your business hat.

Good luck.

[SuddenSupport]

Thank you for the replies, comments, and suggestions. I wanted to post an update as I did have my initial meeting today with the seller. I asked several questions and received answers as expected. I have listed them below..

Additionally, I did learn the seller is on the same page as I am concerning "no contracts = no worth." He is on the same page with me for making an offer based on a reverse equity solution. He asserted an idea and request, that once the deal is struck, I retain the name of his business throughout the transition period. He feels this will help me to establish myself with his clients. Additionally, he stated he would also go to each of his clients with me to perform a physical introduction as well get me acclimated with the client and tier needs. Finally, he also stated that we keep the news of me taking over the business quiet and he will not disclose to anyone that I am buying him out. The idea is for the seller to take me around to all the clients and introduce me as the new account manager and I will be assuming all support processes from this point forward.

A couple of other notes before I list the answers to my discovery...

• I did get a NDA signed.
• He did agree to open his books to me completely once we get closer to closing the deal. Right now, he gave me 5 years of P/L sheets which all show a profit.
• The P and L shows a steady decrease in revenue for the last two years.

Now here is my list of questions and his answers:
1. Q. How many hours a day/week/month do you devote to your clients?
A. About 20 per week
2. Q. Out of your client base (50 to 60) how many of your clients are the cash cows responsible for the majority of your sales?
A. 5
3. Q. Do you have any 1099, exemt, hourly, salary employees?
A. No - Two years ago I had several 1099 employees and the P/L shows 96K in wages. Now I have none.
4. Q. Why such a reduction in workforce?
A. Sales were down. These people were no longer needed.
5. Q. How much of your work is on-site work verses remote work?
A. 75% On-site
6. Q. Why are there no contracts in place?
A. I feel like I give my clients the option to not use my service if they are not satisfied with me. I feel that locking clients into contracts is less the genuine.
7. Q. Why are you selling?
A. Because I am working too much. I need to spend more time with my family.
8. Q. Is there any bad debt?
A. No. All bills are current.
9. Q. Are there any assets to the business? Equipment, buildings, etc...
A. Other then old computer parts, NO.
10.Q. Do you have any support tools in place.
A. No. I use Join.me
11.Q. Does anyone know you are going to sell?
A. No.I don't want my clients to know during the transition. This is to protect you from the clients going elsewhere until you can prove yourself.
12. Q. What do you want out of the deal?
A. Someone to take over the business and give me an diminishing equity shares.

[Parkwaytech]

Looks like you got some good answers. To be honest, it sounds like he lost interest/got burned out a couple of years ago. If you can negotiate a low price, it sounds like it could work out well, as long as you can get those clients to move mostly to remote support instead of onsite.

[oldtech]

Hmmm I would be rethinking this deal right now - I would have to see his tax returns for at least the last 3 years before another step was taken - generating a P&L worksheet is much too easy to fudge/fabricate.

20 hrs a week is too much work???

90% of the revenue comes from just 5 clients? Pay him a fee for assumption of those 5 clients and forget the reverse equity deal.

I also would not agree to being introduced under his business name...he is willing to lie to the customers in this regard but signing contracts is not genuine???

I accept you know and trust this man but from where I sit it looks like you are being snookered. That'll be 2 cents please

[SuddenSupport]

Originally Posted by oldtech

Hmmm I would be rethinking this deal right now - I would have to see his tax returns for at least the last 3 years before another step was taken - generating a P&L worksheet is much too easy to fudge/fabricate.

20 hrs a week is too much work???

90% of the revenue comes from just 5 clients? Pay him a fee for assumption of those 5 clients and forget the reverse equity deal.

I also would not agree to being introduced under his business name...he is willing to lie to the customers in this regard but signing contracts is not genuine???

I accept you know and trust this man but from where I sit it looks like you are being snookered. That'll be 2 cents please

2 cents! it's a deal!....You accept paypal?? LOL Yes I too believe there is something not quite right here. However with that said, I think I have confused the issue. Let me explain...

When he said he spends 20 hours per week...he was saying he spends 20 hrs per week per each of those cash cows. So it is more like 5 X 20 hrs a week = 100 hrs.

I am not sure I want to pay any money towards buying him out even if it is the 5 clients only. I would much rather pay him a commission to work each client and share in the profit for each for a predetermined period of time.

Also, I did tell him that it wouldn't be a good idea to start off a new relationship under false pretensions. I said, going to the client under his name would be promoting a dishonest relationship right off the bat and would eventually end up setting me up for failure. So instead I offered this...

We go to each client and state the following: "My company name" is purchasing "the seller's company and name." Additionally, we are planning to retain the seller's services as "account manager" for your account for a predetermined amount of time (haven't figured that one out yet)...you will see no disruption in service and we are going to work hard to make the transition as smooth as possible."

I will then keep the seller on board for a period of time (possibly two years) to act as client liaison for these existing clients. In return, the seller will get a diminishing profit share, plus commission(s) for those clients.

What do you think?

[oldtech]

The clarification on the hours helps a bit. Still insist on the corporate tax returns before moving forward.

How are both of you structured? Sole proprieter, LLC, S-Corp, DBA? Be sure to check on the restrictions associated with buying which ever form he is under your form. If you are not buying assets or shares then he may be able to retain the ownership of the company name which could lead to issues down the road.

I would explain/position the deal as a merger with the clients rather than a sale (since it technically is) but other than that distinction I think the approach to the clients is pretty sound as you laid it out.

You probably should transition the old owner out of the client interface as quickly as possible. I certainly would not take more than 3 months to get him away from client facing activities. The sooner you do that the quicker you will discover which of those clients is going to stay long term.

Last point - the percent of revenue he is going to take away is based only on the income from his existing client base correct? That will take some pretty explicit wording in the contract as to what revenue is and whether it is gross or net.

[SuddenSupport]

Originally Posted by oldtech

The clarification on the hours helps a bit. Still insist on the corporate tax returns before moving forward.

I will make sure to get a look at his returns for the past 5 years.

Originally Posted by oldtech

How are both of you structured? Sole proprieter, LLC, S-Corp, DBA? Be sure to check on the restrictions associated with buying which ever form he is under your form. If you are not buying assets or shares then he may be able to retain the ownership of the company name which could lead to issues down the road.

We are both LLC's. I would put verbiage in the deal contract for the transfer of all corporate shares to my company.

Originally Posted by oldtech

I would explain/position the deal as a merger with the clients rather than a sale (since it technically is) but other than that distinction I think the approach to the clients is pretty sound as you laid it out.

You probably should transition the old owner out of the client interface as quickly as possible. I certainly would not take more than 3 months to get him away from client facing activities. The sooner you do that the quicker you will discover which of those clients is going to stay long term.

Very good point. I want him to be removed from the client as quickly as possible. However, two points... 1. I need him to remain in place long enough to establish my own relationship with the client. 2. In the interim, I need to establish a process where the client contacts my company for issues, but it looks like the seller is the one facilitating the service. Make sense? Example...the client calls the sellers phone (the one they are familiar with) to report an issue and the seller contacts me. I am not very KEEN on this idea...but I can't think of another way....yet Maybe porting or forwarding his phone number over to mine....don't really know what to do here...

Originally Posted by oldtech

Last point - the percent of revenue he is going to take away is based only on the income from his existing client base correct? That will take some pretty explicit wording in the contract as to what revenue is and whether it is gross or net.

Yes. All percentages and commissions would only be be deriven from his existing client base. No commissions on NEW business (meaning any vertical business resulting from his existing client base) or any of my existing clients.

One additional point...
I think it would also behoove me to place an expectation out there for the seller, that once we are in transition mode...he works to get the clients under our support contract. I don't know if this will be possible because it will be a "stressed" time for the client relationship anyway....but it would be nice.

[oldtech]

Sounds like you are in a good spot on how to proceed. I would definitely have the phones/website ported or forwarded so as to take him out of the loop. Be prepared for his clients to call him directly anyway since they probably have his cell number. You are going to have to work the logistics of that out with him.

I would wait until you are firmly established with the respective clients before pushing for a contract - perhaps bundle it in with some discounted hardware or software upgrade(s).

I'm guessing that these clients have no backup service from him since there are no contracts, maybe that is your opener for beginning the contract discussions.

The first one is always the best remembered have fun and good luck!

[SuddenSupport]

Ok I am ready to put my deal points together for this opportunity and I would like to solicit any ideas from the group.

This is what I have so far....

SELLER'S OBLIGATIONS

1. Seller agrees to remain on-board for a period of 18 months.
2. Seller agrees to commit 20 hours a week to the existing business.
3. Seller agrees to be active in keeping clients engaged in receiving services.
4. Seller agrees to be active in helping buyer become acclimated with all processes pertaining to operation of business, and support processes for the entire length of transition from seller to buyer.
5. Seller agrees to sign a non-compete for no less then 2 years of a general nature.
6. With regards to existing client base, seller agrees to sign a non-compete for a period of no less then 3 years.
7. Seller agrees to relinquish all business accounts, branding, marketing materials, registered names, domain name(s), phone numbers, and contacts - Phone numbers, email addresses, and any other contacts to buyer.

For the return of these deliverable s, buyers agrees to the following:

BUYER'S OBLIGATIONS

1. Buyer agrees to pay costs associated with transferring the company over to buyer's business structure.
2. Buyer agrees to pay the seller disbursements through a "reverse equity" process of no more then 18 months. Six disbursements will be paid in the form of quarterly payments with the following percentages:
   • 30% of the company's net profits for the period of 3 months.
   • 25% of the company's net profits for the period of 3 months.
   • 20 % of the company's net profits for a period of 3 months.
   • 15 % of the company's net profits for a period of 3 months.
   • 10 % of the company's net profits for a period of 3 months.
   • 5 % of the company's net profits for a period of 3 months.
3. Buyer agrees to service clients with diligence to ensure any disruption of service is at a minimum.
4. If seller's services are needed after 18 months, buyer agrees to pay the seller his normal hourly rate for any services rendered.

This deal is based on review and discretion of the buyer for the following:

• The past five years of the company's tax returns.
• The company's bank statements for the past 3 years.
• A credit check for the company.
• The company's asset's, bank accounts, business name, corporate documents be transferred to buyer at the time of closing.

Any comments and/or suggestions is welcomed.

Thanks,
Matt