Buying/Helping to buy an established business.....questions!

GreenMint

GreenMint

GreenMint

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Not sure if anyone can help or point me in the right direction, just going to bullet point it and hope not to get crucified!

  • Fiancee's brother (sister helps out alongside her regular job) works for her Dad & his partner at their Coffee Shop
  • Dad wants to sell to them (Business value in the real world ~£70k, offered to them for £40k to get the son started)
  • Neither are home owners, asking us to be guarantors for a business loan
  • Not massively keen on that idea, seen some paperwork and the business is making money, considering asking to go 4-way on the business loan, and either 4x25% on business ownership or 33.3% each with those 3, which I am fine with, then my Fiancee & I sit back as silent partners and she takes 20-25% as a wage from monthly profit, we do have faith that they can run it (Sister wants to quit her job and put her time into this)
  • All getting together at the weekend for a chat about it all, go through books in depth etc..
  • Obviously this can't really happen if we say no, but we are not being railroaded into it if it doesn't seem a good idea/work out financially.
Again, just putting the query out there as its been in my head for a few days and needs some thoughts to bounce it off, I've not looked into anything like this before, so I'm not wanting to get blindsided, althoguh hoping family wouldn't do that, but not sure what we really need to ask to see aside from main accounts etc.. So looking for some guidance and general opinions on the situation.

Please be gentle :)
 
kinobestew123 said:
Do they have any cash themselves that they are putting in?
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No, they're literally looking at a £40,000 business loan to finance buying the business & everything contained within (Its a working coffee shop so I'd think with it being a family sale they'd stock it with a few months of supplies, too)
 
Don't do it if they have no skin in the game. They need to feel it is imperative to make it a success and only through their personal investment will they make it so, imo.
 
The Running Man said:
Don't do it if they have no skin in the game. They need to feel it is imperative to make it a success and only through their personal investment will they make it so, imo.
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Understandable, that is something I'll definitely need to go through with them at the weekend, the brother isn't the type who wouldn't try at this, but at the same time, you're fully right in where you are coming from.
 
From their point of view, I'm not sure how I'd feel paying out 20-25% of profit as a "wage" to somebody who isn't contributing? Does this over time decrease your equity stake? Does this form part of dividends and they will also be entitled to take their share from profit?

What is their upside going this route? That monthly wage (assuming shop is relatively profitable) is likely to outweigh any potential interest charges on a business loan.

Edit: I should say, if you need some help with the books feel free to trust me. I'm an accountant and my other half runs a coffee shop.
 
No way. All the risk and none of the reward. You say "family wouldn't do this" but family frequently means nothing when there is money involved.

In the words of the Dragons, I'm out.
 
Rids said:
From their point of view, I'm not sure how I'd feel paying out 20-25% of profit as a "wage" to somebody who isn't contributing? Does this over time decrease your equity stake? Does this form part of dividends and they will also be entitled to take their share from profit?

What is their upside going this route? That monthly wage (assuming shop is relatively profitable) is likely to outweigh any potential interest charges on a business loan.
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This would be for the 5 year duration of the business loan.

The business loan is not something that they can do without us, neither are home owners and would either need a guarantor or someone on the business loan who is a home owner, we were of the feeling by going in on it with them for the initial 5 year period until the business loan is paid off it would be "safer" than being a guarantor (again, I am new to this so open to any education on such matters).

The wages etc.. are not set in stone yet, obviously, just trying to put figures out there to make this viable for all, not ripping them off, but also not putting us as the ones with the most risk involved without "compensation".

As said, I welcome any education and thoughts on this, especially as the Dad's partner can be "persuasive" at times and really want to be able to counter her at any place I feel she may be stepping out of line.
 
Another thought I've just had - do you have any plans to move in the next 5 years? I know we have a resident property legal expert here so he'll know more about this than me, but I imagine having a secondary charge against your property sitting behind the mortgage will make it more awkward to move in the event you decide to do so.

Agreed that there is a lot of risk and downside for you, with limited upside, for me the financial incentive would have to be pretty large before I'd even consider it.
 
If it isn't family then it is a no, this is business, treat it like a business. Would you be a guarantor to a stranger for £40,000 with no incentive?

From my point of view, surely if you were to do this, there has to be enough in there to

1 - Cover their wages
2 - Pay the loan back + interest
3 - You take a share of the profit until loan is repaid, something like 50%?

Otherwise why would you put yourself in the line of fire for no reward, they might be grateful to you for doing it for them and they might resent you for not doing so. The alternative is if you do, and it goes bust, there is no skin off their nose, you can't recover your cost as they have no assests and you might end up losing your house.

I am struggling to think of an upside.
 
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Let the Dad and business partner take the risk as they get the benefit - E.G Give the son the business and then get the payments they would have got at the same rate as a 40K business loan over 60 months.

Or look at other loans? Im not a a homeowner and I can borrow 40K at a very low rate
 
Rids said:
Another thought I've just had - do you have any plans to move in the next 5 years? I know we have a resident property legal expert here so he'll know more about this than me, but I imagine having a secondary charge against your property sitting behind the mortgage will make it more awkward to move in the event you decide to do so.

Agreed that there is a lot of risk and downside for you, with limited upside, for me the financial incentive would have to be pretty large before I'd even consider it.
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Very valid point, that is something that we were looking into possibly in the near (2-3 years) future (relocating rather than a local move) so yep, you could be onto something there.

Raymond Lin said:
If it isn't family then it is a no.

From my point of view, surely if you were to do this, there has to be enough in there to

1 - Cover their wages
2 - Pay the loan back + interest
3 - You take a share of the profit until loan is repaid, something like 50%?

Otherwise why would you put yourself in the line of fire for no reward, they might be grateful to you for doing it for them and they might resent you for not doing so. The alternative is if you do, and it goes bust, there is no skin off their nose, you can't recover your cost as they have no assests and you might end up losing your house.

I am struggling to think of an upside.
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Thats very true, from the figures we've seen so far, they are currently clearing 3-5k a month in salaries, (based on 72-95k annual turnover) so if they can continue to clear that then there would be enough to clear a loan (£800ish a month) then it MAY be viable, also depending on what money they are looking to get from the business, how much we would get and how much the feel they could increase revenue, obviously a business like this going through new ownership could fluctuate rapidly during any settling in period.
 
BongoHunter said:
Let the Dad and business partner take the risk as they get the benefit - E.G Give the son the business and then get the payments they would have got at the same rate as a 40K business loan over 60 months.

Or look at other loans? Im not a a homeowner and I can borrow 40K at a very low rate
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They won't do that, they want to sell the business, use the money to clear some debts they've had for ages (and want to convert their garage to an "air B&b..." which to me screams crazy!) also they are not home owners, so couldn't do the guarantor method (Partner's parents own the house).
 
BongoHunter said:
Let the Dad and business partner take the risk as they get the benefit - E.G Give the son the business and then get the payments they would have got at the same rate as a 40K business loan over 60 months.

Or look at other loans? Im not a a homeowner and I can borrow 40K at a very low rate
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The alternative is to lease everything to the sister/husband direct from Dad.

Dad gets a slice of money every month, the details are up to them, you stay out of it. I wouldn't get involved.
 
Raymond Lin said:
The alternative is to lease everything to the sister/husband direct from Dad.

Dad gets a slice of money every month, the details are up to them, you stay out of it. I wouldn't get involved.
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Does make sense, but they just want a lump sum and if they can't get it here they'll just sell it to someone who can pay for it, which is what I can possibly see happening right now.
 
I would keep well clear. very high risk for almost no return. You would do far better simply investing in a FTSE tracker
 
What about the assets of the business. Does the business have anything close to £40k of assets? If so then presumably a bank could secure a loan against these. Even if they don't come in that high, it could reduce the amount of personal liability.
 
Rids said:
From their point of view, I'm not sure how I'd feel paying out 20-25% of profit as a "wage" to somebody who isn't contributing? Does this over time decrease your equity stake? Does this form part of dividends and they will also be entitled to take their share from profit?

What is their upside going this route? That monthly wage (assuming shop is relatively profitable) is likely to outweigh any potential interest charges on a business loan.

Edit: I should say, if you need some help with the books feel free to trust me. I'm an accountant and my other half runs a coffee shop.
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They are putting in no money.

He is going to be the security for the £40K loan.

Without his security they get nothing. Zilch. No business.

His wife also works there so he was suggesting 25% would be their combined cut with the brother getting 75% I assume.

This sounds like a bad deal personally. I would say I am putting up all the money I could get my wife to run the place and take 100%. I don't need you guys at all.

Therefore as you can see 25% is nothing.

If I am putting up all the money I would want that money repaid with interest and a share in the business. I would say 20%. I would also want my wife taking home a decent wage on top if she is giving up her job to help them. Certainly a wage increase from her current job.
 
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