Small Business Expansion Update 10/2017

Small Business Expansion Update

Hello $wanigans! How are you all today? I know some of you have been looking forward to an update on my small business venture which I’ve coined the pseudonym of The Green Condor. Since my last update in mid-June, I’ve heard from a couple folks wondering how the potential opportunity to acquire another business has developed. Well today is your lucky day as I am here with a long awaited update! Plus, if you caught me on the Choose FI podcast last week (and the roundup podcast) I talked in more detail about my small business. Be sure to check it out!

Why did it take over 3 months for an update? The short answer is that the acquisition process has been really slow with a number of twists and turns! Shortly after posting the article I thought the deal was dead. We had a number of meetings and emails with the owner, to be referred to as Sean for anonymity, but ultimately he wasn’t happy with our price. But the deal came back around…therein lies the update today!

Background

I’d recommend going back to read my June post if you haven’t already just to catch up on all the details, but by way of a quick recap, Sean approached us about potentially buying him out. There were a number of very interesting prospects related to his business:

  • It is well run and stable. He basically has been serving as an absentee owner in recent years and the managerial staff responsible for the operations will remain intact.
  • The business he ran is very similar to ours. Having gotten up to speed on our own business in the last year, we feel equipped to being able to pick up his operations.
  • Due to the similarities of our two businesses and the close proximity of them, there would be a number of known cost savings that we could implement to help boost our profitability. The most significant of which would be combining our respective properties into one location.

The Twist

As I hinted above, shortly after my business expansion post in June, Sean walked away. He wasn’t happy with our price and said that his existing business operations manager would be willing to buy the business for more. We were very bummed with Sean’s decision, but this was a critical moment in the whole deal. We offered what we thought was a very fair price, but we could have stretched to make it happen. After all, the acquisition represented a very appealing business opportunity for us that could be very lucrative.

But we didn’t. We stayed true to ourselves, and our belief in what the value was, especially since we do recognize a few risks in the deal (there always are…). I’m very proud of our discipline here as we were truly tested. We wanted this business…badly…it made so much sense financially, but only at the right price. So we wished Sean best of luck and headed in our opposite directions.

Of course we hoped that the deal would fall through with his business manager…but that would be just too optimistic…too good to be true…

Almost three months after walking away though Sean came back to us hat in hand…a perfect situation for us to get the deal done on our terms. The deal didn’t work out with his business manager after all. Sean wanted to know if we still had interest at our proposed price! With some good fortune for us, the deal was back!

Another Twist

So the deal was back…but with a new timeline. Sean wants out as soon as possible. Like I said above, he’s been an absentee owner for the last year or so he has had a taste of living the good life. He has been working maybe 10 hours a week and taking time off whenever he wants it; meanwhile he has the staff in place to keep it running like a well oiled machine.

He’s had the taste of the good life (retirement…funny since that is something I talk about quite a bit here on The Green Swan in terms of my own pursuit…:) ) and he’s ready for the whole thing now.

He’d like to close the deal in January 2018! As I mentioned in my June update, we would want to drag it out for a while to help get our finances in order a bit more, improve the operations of our own business, and not have to take on as much debt to buy his business. But that isn’t how it will work out this time, he’s wanting to close right away.

While this makes it difficult for us and quite a stretch financially still, we definitely want to appease him. As I’ve said before, we want his business.

The Deal-Maker

While the timeline is a stretch, there were a couple other aspects he was interested in appeasing us on. To make it work for us financially still, we needed him to take a seller loan from us. For those of you not in the business finance world, what that means is we agree to buy his business for said price, but a portion of it will be paid out over time (five years in this case…) which is known as a seller financing. Seller financing…as in he is helping us finance the purchase.

He’s agreed to seller financing of 50% of the purchase price which is quite significant and a big relief for us. We just wouldn’t be able to swing it otherwise.

The seller financing along with coming around to our proposed purchase price are ultimately the deal-makers here!

How about the other 50% of the purchase price though? I’m glad you asked…:)

Without getting into all the nuts and bolts of it, the other 50% will come from a combination of the following:

  • Bank debt in the form of term loans secured by basically all of our business assets (accounts receivables, inventory, and equipment). Think of this as a mortgage loan, but with a much shorter timeline to pay it off (i.e. 5 years rather than 30).
  • Our pocket. Between the four of us siblings, we will scrounge up about a third of the purchase price in true equity into the deal. This comes basically from our taxable brokerage accounts.

The Last Hurdle to Jump

As a result of the new equity necessary to be infused into the business, our four ownership percentages will change. How they change exactly is still to be determined. As you can imagine, there are some differences in opinion on this matter and honestly is the one major hurdle left to figure out.

This is often the sort of thing that can come between owners and commonly lead to relationship issues. Even for family members, perhaps I should word that as “especially for family members”.

We are all cognizant of this and want to be fair to everyone involved. The issue comes into play in that two of my siblings are active in management and so therefore collect a salary. As such, there can be differences of opinion as to what is related to fair compensation for management vs. their ownership risk. In a sense, it is the root of the agency dilemma.

Needless to say, this is a big risk in all small businesses. I knew this going into the venture last year, especially considering other folks in my immediate family have had these very same issues break up their family.

You can expect a follow-up post once the ownership percentages get squared away and if any other issues come up. Wish us luck on getting ‘er closed!!

Thanks for taking a look!

The Green Swan

Facebooktwittergoogle_pluspinterestmail
share on:

16 Comments

  1. I would’ve suggested you lower your offer price when he came back to the table but 50% seller financing is a pretty sweet deal. Hope it all pans out for you guys.

    Lee W.
    The Dividend Times

    1. Thanks Lee! I hear ya, I was thinking the same thing. But we were glad he came back to us and didn’t want to give him a reason to go another route such as listing it with a business broker.

  2. I love following this journey of yours, JW. I gained a great deal of useful insight in your recent podcast interview with ChooseFI. Keep it up!

  3. Sweet that “Sean” came back, hat in hand. Great job on the ChooseFI podcast, interesting to hear more about The Green Condor(s)? Good luck getting the deal done – concerning that it’s creating stress in the family, keep the important things first, it’s not worth a long term Family Feud!

  4. Good luck. You’ve come this far, I’m sure you and your brothers will work things out fairly. Any plans for the Cygnets to join the Condor in the future? Hah, just kidding. Let’s not rush things — enjoy them while they’re young.

    Mr. G is taping an episode of Choose FI next week. We’ll keep you posted. Let’s get together soon?

    1. Never too early to get the some good old manual labor! 🙂

      Great for Mr Groovy on the podcast! There great guys and you have an interesting story to share. I look forward to hearing it.

      Yes you bet! I look forward to hearing about your recent travels out west.

  5. Loved the podcast the other day. Really got me thinking of potential businesses that I could buy. Nice job sticking to your guns on the purchase price. Good luck with this transaction. Looking forward to hearing how it turns out.

    1. That’s great Jason! It’s an interesting and unique path to take but if done right can be a very suitable path to FI and also a great career path. I’d love to hear more if you continue down that path and don’t hesitate to reach out with any questions.

      Thanks!

Leave a Reply