Would you buy a percentage of the company you work for?

[68style]

Not yet, I haven't figured out how to have slaves (legally)

[bcrdukes]

Badhobz has a good idea on how to run a "professional services" company and you would be the perfect guy to run and operate it. Check in with him.

[Badhobz]

my whore business isn't up to snuff. cant IPO it.

Plus if 69stylez is there, he'll damage all the goods. LOUSY STYLEZ

[bcrdukes]

Originally Posted by Badhobz

my whore business isn't up to snuff. cant IPO it.

Plus if 69stylez is there, he'll damage all the goods. LOUSY STYLEZ

I think this is where you need to see the bigger picture, my friend.

You see, there is pent up demand globally for these professional services and you can expand or open franchises on various business models to become profitable. With that, you can go to IPO I predict within 4 to 5 years (or less) and achieve both of your goals.

But like you said, with 69style at the helm, he may end up cannibalizing his own profits and potentially destroying the business.

[Hehe]

The way I’d do this if someone comes to me about selling their business is to discuss about the exit strategy.

IPO is by nature an exit strategy. But the companies that actually go there is like finding a needle in haystack.

Now, if there’s a clear defined exit strategy, the idea wouldn’t be selling his shares to you guys but rather getting you guys to invest into the company, use the proceed to greatly expand the business and then reach the much bigger payout of the more lucrative exit.

From the information provided, all I’m seeing is that you guys are his exit strategy. Which is no bueno.

[Badhobz]

awww booo booo!!! deeper analysis plz.

[donk.]

I would not say he is looking to offload and reap the profits as his only goal.
You can usually tell when an owner just wants to cash out for max profit not giving a shit about the staff, vs when they actually care about the history, and future of their company, along with the people that helped them build it.

I always read threads and posts about people working for a company for 30 years, and once they retire they are handed a snickers bar, and a 50$ gift card to target.

This company + owner is far from that, or so I will find out......

Once things sizzle out, il report back on how things went. As for now it seems like he was just tossing the idea in the wind, to see if there is interest and if it's even worth it

[Gerbs]

On the other side, there could be good value if the owner is not willing to seek external valuation. Especially if you can land a number that will give ya 20%+ returns on profit/dividends. But then shares might be useless if company dissolves into nothing and no exit strategy.

[underscore]

I've been told that a lot of companies go under shortly after the original owner leaves and ownership changes hands. I don't know the actual numbers on that but it would be something to look into.

I'd also factor in how easily you could find a new job should you need one. iirc you're in HVAC which is probably pretty easy? But if not then having both your investment and your income tied to the same company might be riskier.

[Hehe]

Originally Posted by Badhobz

awww booo booo!!! deeper analysis plz.

I haven’t done this in a long while as I ceased the practice after I moved back to BC.

Plus this used to be something billable.

Anyway, I’ll dig my old forms and show you guys an acquisition 101 on what goes into our basic maths later when I get home if you guys are interested seeing how M&A firms work.

[Euro7r]

My previous company had something like this where the employee can own a % of the company. But they structured it where every employee that has worked full time for X years were allowed to buy shares into the company. Quarterly dividends were paid out. You can buy shares if someone retired and cashed out, also can only sell when you quit. So it forces the employee to be working for the company committed.

I worked almost 10 years at the previous company, but never became a shareholder. The time when I joined the buy in price was when the company was performing at peak, now its lowest. So you would be stuck working for a long time in order for the price of the share to become great before you quit (Sold). I think the ROI was like 10% dividends if I recall, pretty good if you think of it as a retirement investment if you plan to stick working for life (quarterly dividends).

[Hehe]

Ok. So, acquisition 101 time. There aren't much information from Donk., so I'd just try to come up with some (educated) hypothetical numbers as I go along.

I can't find my models after a quick search and I'm too lazy to dig through my backups. But it doesn't really matter because I don't think anyone here is interested in seeing me geeking out on all numbers and excel forms try to explain what each number means as it would take too much time. I'd explain it as if I were to sell this business to a dumb Joe6Pack with money to burn.

But the usual idea we use is a discounted cash flow model to calculate the NPV, or Net Present Value. It's a very interesting tool and I suggest anyone who is looking to get into this field or just to geek out on it to google it.

So, at 4M valuation, I'd expect that DonkCo is generating $600k in operating profit (EBIT, Earning Before Interest and Taxes). In Canada DonkCo would pay roughly 15% in taxes or 95k, and I use a basic 10% capital expenditure or around 60k assuming they are in an industry that doesn't require heavy CapEx.

The net cash flow comes down to 445k. I assume a 19.5% of weighted average cost of capital (interest rate to borrow for business, this is normal unless you are Fortune 500).

When extending this cash flow model into a 25yr horizon (just an usual amount of time we like to use back then, as it's neither too short, nor too long), and an expected annual growth of 10%, we get a nice NPV of $4,093,662. (this is all calculated by using a DCF calculator, you can read on it, but I won't get into technical detail) This is assuming there's absolutely no change in account payable, receivable, inventory or any other potential changes.

-----------------------------------------

Why do I call it a bad deal?
Of course, I'm basing solely on the information donk has provided thus far. But supposedly his boss sell it at NPV, or trying to get roughly 2M for the 49% of shares. Let's suppose that donk is the only one who invest in it for simplicity. The opportunity cost of 2M in 25yr horizon, is currently sitting at roughly 5% (Canada bond or US bond for similar terms).

So, 49% of the profit as a dividend (218,050) - opportunity cost (100,000)=119,050 or 5.95%

Suppose donk uses leverage and only puts 1M in, the rest is borrowed from bank at say 7% over the course of 25yrs. The math becomes
218,050-50,000-80,000=88,050 or 8.8%

Of course everything would be adjusted year after year, but it doesn't deviate too far from this. In any professional M&A firms' model, they'd include everything down to expected inflation rate, but I'm just here for quick math.

-----------------------------------

I don't know about the business so I can't comment much. But unless there is a clear viable exit strategy (say, sell it to x entity), the cashflow model is the only thing that we can discuss the business valuation from an objective point of view.

IPO IMHO is way too far-fetched of an idea. This is a 4M valuation company we are talking about here. It'd have to grow exponentially in the next 5-10yrs to be remotely close to be viable candidate for an IPO.

-----------------------------------

What would make it a good deal?
1.
The owner selling it for cheap - Say if its current net cashflow is not 445k that I estimated (using ~4M valuation) and instead at 700k, then the NPV would actually be at 6.3M instead. And in such case, getting it at 4M valuation makes a lot of sense.

2.
Viable exit strategy - Have to be careful with this one as the owner can say a lot about it. But unless he's got something in writing, these strategies are at best wishful thinking.

3.
Cash goes into the company to expand - instead of the owner cashing out, the money goes into the company in order to grow the income substantially.

Of course there are strategies that go beyond the three points mentioned here, but I'd leave at that.

Honestly, my suggestion is that if you and your co-workers are serious, get some professional counsel ASAP. Either way, you are going to have to hire lawyer to help you with the legal, why not go the extra mile and have someone who specializes in M&A negotiate on your behalf? It might be a few additional billable hours, but can make this either the deal of the lifetime, or the regret of lifetime.

[6793026]

There are also exit safety net.
Owner only gets X amount and after 1 yr, if business still sustains and doesn't have any issues the owners gets the remaining amount.

There are owners where they have right to buy back business if new owners Y screws them over etc.

I have seen owners selling and realize some shady stuff.

I have also seen owners selling to Y, then claims Y did a bad job and bought back the business from their business clause.

Very werid and sort of screw owners Y as well.

[bcrdukes]

Hehe, how would you calculate the assets and depreciation of assets going into this? Please educate us including any pointers you have on tax implications and survivability strategies. Thank you

Edit: Do you have a process matrix that you can share to document how the business is run?

[Hehe]

Originally Posted by bcrdukes

Hehe, how would you calculate the assets and depreciation of assets going into this? Please educate us including any pointers you have on tax implications and survivability strategies. Thank you

Edit: Do you have a process matrix that you can share to document how the business is run?

I didn’t go too much into details as I was trying to be as simple as I could possibly do to show how off the top of my head, I’m seeing the whole deal.

As far as depreciation is concerned, unless you are in industries where depreciation is a major component, such as commercial RE, it just get factored into the taxation. And I used a rough 15% figure for simplicity.

Further on this taxation issue, I don’t think donk has other business ventures where depreciation is beneficial in order to balance his tax exposure as a whole. That’s another topic and suitable for a very specific group of people. For example, there are investment opportunities that focus solely on the accelerated depreciation such as solar or other renewable energy projects where one gets to invest in a project and achieve massive amount of depreciation due to favorable government policies.

I’m not in liberty to share docs that are used in my previous life even though it has been over 10 yrs since I was part of it. But the reasoning that goes behind these M&A project are simple, NPV either based by cash flow or asset value. Where we get creative are strategies that set a common ground for both seller and buyer. As an example, if I were to advise donk on this deal, assuming everything stays as is, I’d add clause where they (the new shareholders) get a preferential dividend payout for the first few years. Assuming the owner is confident in the business, it’s not too much of a problem. He’s got a fair valuation for his shares already. Just set the whole plan to be worthwhile for both parties. Negotiation is about making both parties unhappy, but something they can both work with. The business of M&A relies on deals actually getting done. So we spent a lot of time and resources to address concerns from both sides of the deal. After all, we want the deal to be done.

Without getting access to full information, it’s hard to say whether it’s a good deal or not. But from purely my instinct working on acquisition, the info provided so far is too 1-sided (benefiting the seller mostly). That’s why I said I didn’t think it was a good deal.

[Gerbs]

Originally Posted by bcrdukes

Hehe, how would you calculate the assets and depreciation of assets going into this? Please educate us including any pointers you have on tax implications and survivability strategies. Thank you

Edit: Do you have a process matrix that you can share to document how the business is run?

Ask for the financials and inspect the actual quality/useful life of the equipment / assets. For simplicity since it's $4M in valuation, I'd probably take 2022 depreciation and call it a day assuming no addition to capital assets

There's no way Hehe would calculate much the depreciation and asset with on info given.

If you wanna go further into it you could look at industry % of revenue that goes to deprecation/amortization. Use that as a benchmark when info isn't known.

[bcrdukes]

bro are you even a cpa?

[Gerbs]

Originally Posted by bcrdukes

bro are you even a cpa?

it's 80% passrate

[GLOW]

i thought you said "bro do you even cpa?"

[Badhobz]

WHAT THE FUCK, ALL THESE NUMBA's.... 1+1 = 11