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Taking over a business2/22/14
I have a very unique and exciting opportunity before me that I need some advice on from you guys. I have been following these forums for quite some time and I thought who better to ask than the pros.
Sounds like it could work out quite well. But it really all depends on how things go with you developing relationships with his clients. I bought an existing business 5 years ago. Several big clients have stayed. Some other didn't stick with me very long because my quality and demeanor didn't match what they were used to with the previous owner.
As a 1-man shop, there is basically no value in his business other than what his machines would sell at auction. It still could work out great for you should the transition go well. I would guess it would take about a year or so of working with him to figure out if it's going to work. And there's an opportunity cost to that.
You won't get a business, you will get the tools and a lease for renting the building. A one man business is not a business when the one guy leaves. People are paying for him, his skills, and his expertise. They will not have any loyalty or trust in you after you purchase it. The skills and connection with the craftsman will be retired. It is generous of him to give you the tools. How can you get all the woodworking skills and business abilities in the next 5 years. Will he teach you over the 5 years? Helping build your cabinets will teach you nothing about running a business. Have you ever run a business before? It takes an incredible amount of passion and ability to run a small woodworking business. Actually running the business is tougher than the woodworking. But, in a one man business, they are buying your skill. Ask how long a lease he wants. $1,000 / month is really tough if you don't have customers.
I guess I should've added that yes, I do have experience running a business. My wife has ran her own business for the past 6 years. As far as my business background, other than helping my wife with hers, I'm currently in a management position. I continuously deal with customers, potential clients, production issues, and over an average of 60 employees. The current owner of the business will work beside me for the next 5 years teaching me along the way. While I'm sure I will never learn everything I need to in those 5 years, I think it will great experience that will help me get started. I will also be working very closely with his customer base to prove to them my skillset.
Find out what happens if he dies. How long of an agreement would he want? What happens if you decide it is not for you? Could you get a 6 month window working for him first before making the final decision?
That sounds like a good opportunity for but...
He's a great guy and a good friend and wants to give you his equipment in return for future rent payments.
Sounds like a great opportunity. Entirely possible that it is a great opportunity.
But, think about it. Say, for instance, on a handshake deal you quit your job to start your 5-year apprenticeship.
4 years later, for whatever reason or no reason he decides he can't retire the next year, he may work 5 more years. Maybe he just decided he likes to work more than he thought he did. Or, he has to. Now, absent a written contract that at least says "for $1 and other good and valuable consideration" you own the equipment at 5 years, you've got nothing.
Before you quit your job or agree to anything (especially to pay future rent) you simply must get a lawyer and perhaps a CPA involved to reduce to writing the rights and obligations of both parties. You know, a written contract. That will stand up in court.
There are just too many dozens of things that can go wrong (and some of them almost certainly will) to simply fly by the seat of your pants and hope everything works out perfectly over the next 5 years.
I have no love lost for lawyers or CPAs, but having a third party (or more than one) with some expertise asking questions about what happens in this event, that event or the other event would almost certainly be useful to both of you.
A few potential problems have already been mentioned above, but there are dozens, maybe hundreds more, many of which might never occur to either of you. Or me. Or anyone on this board. Free advice is not a substitute for professional advice.
Something like this is too important -- spend whatever is needed to nail everything down in writing before you obligate yourself. It's virtually guaranteed that it will save you a lot of aggravation, and maybe a lot of money in the next 5 years.
With any luck it will be an easy process and both of you will wind up better off. He'll be happily retired and you'll be the happy new owner of a shop, doing what you want to do.
If not, you'll have learned some or many things about the other guy that you didn't know before trying to nail (so to speak) everything down in writing. Which might amount to a good reason not to do the deal.
Best of luck to you, hopefully everything works out smoothly.
You guys have made some great points and given me some great advice. Economics, you are correct, I would never quit my job to start this without everything in writing. I have many questions for him when we meet next week. But one thing I know is certain, if this does go through a lawyer will be involved to draw up the paperwork to protect everyone involved, especially me and my family.
I have seen this happen before when a friend of mine made a similar agreement. He keeps extending the time frame. As with the younger motivated guy gives my friend something he has never had before, which is somebody to free him up to do planning and selling.
Even if you don't lawyer up (which you should) you are essentially joining his business as an employee. If you aren't being offered a paycheck while you are learning, walk away. If he has never had an employee and has no idea how to withhold taxes, follow labor laws, and provide a safe workplace, walk away. I think that 5 years is plenty of time for a motivated person to learn both basic woodworking skills and how his business operates. If you have learned anything from your current job, compare carefully his competence as a business man against the behavior of the company you work for. Does he keep any kind of records? Does he understand his finances? How does he pay himself, and when? Does the business make a profit? If he doesn't actually know how to run a profitable business, you will learn very bad habits, or you will have to basically invent a new business out of the pieces of his operation. In your favor, he seems to have a lot of goodwill in the community, and a steady stream of customers. So all you need to do is impress all of those people yourself, and make them comfortable with the idea of you replacing him. That's not impossible - I have eased myself out of many critical operations in my business over the years, and as long as those tasks were taken over by good people (they were) then it went fine with the customers.
I think you should proceed, cautiously. The best part of the deal is the goodwill, which isn't worth any cash, but can be valuable, if you can transfer it from him to yourself. Good luck!
This could be a really good deal; it has the potential to go wrong for both parties. Contrary to the above advice, I don't think that lawyering up will helpful. I do think that writing your agreement down is a good move though. Pass it back and forth, until you feel the bugs are worked out, and you've addressed the 5yr plan and as many contingencies as you can think of. Read through it together and sign two copies. The main point is for both of you to be on the same page. The overwhelming value of the deal can only be transferred if you are both acting in good faith, so if it comes to lawyers, you've already lost.
Mark, I said nothing about "lawyering up," my comments were directed to the need for professional advice.
That you are availing yourself of outside advice isn't something that you ever need to (or should) disclose to the other party while any deal is being worked out.
Many times I've sought advice from lawyers during a negotiation that I was personally conducting. Only when things were supposedly nailed down did I even think about directly involving the lawyer to write formal language.
More often, I wrote it myself and ran it by my lawyer for approval. The last example of that was a 10-year triple-net lease on 20K sq ft with a year of free rent and 50K of improvements to be paid by the lessor and an option to buy that ran 20 pages. (Not wood related -- it was for retail and administrative space -- I wish it had been for a cabinet/wood-shop, I'd of been in hog-heaven.)
As for asking a question about "sales for the last 5 years," the request should be for both financials and tax returns for the last 10 years to be sent to Justin's CPA. You know, someone who can analyze the stuff and come up with any questions that need to be asked.
If he's been in business for 10 years and doesn't have 10 years of records and tax returns, you have a problem. If he's been in business for 10 years and won't disclose the records, you have a problem. If he's been in business for 10 years and isn't profitable or is only marginally profitable, you have a problem.
I could analyze those records because I have experience in accounting and financial analysis. Could you? Could Justin? If not, that's why a CPA needs to be involved.
Does he have any other contingent liabilities? Has he made other similar agreements in the past? Is he being sued by anyone? Hundreds of questions arise. Due diligence ain't either simple or easy.
As for "Pass it back and forth, until you feel the bugs are worked out, and you've addressed the 5yr plan and as many contingencies as you can think of. Read through it together and sign two copies," quite frankly, that's ridiculous.
Never mind that there's no way all contingencies will have been addressed, the two parties don't have any idea what all of them are. Playing amateur lawyer is never, ever a good idea.
If you have an agreement in principle, presumably worked out after getting professional input, the next step is to run it by your lawyer who can put it into a form that can stand up in court, the only place that matters in the event of a dispute. Anything else is total nonsense.
Free advice like you gave is exactly what I was warning against. This whole DIY "on-the-cheap" attitude sometimes found on this and other boards is the entire reason that I made my initial post.
Not so much because I thought Justin wouldn't seek professional advice, his original post told me that he was no dummy.
It was because other people might get the idea that "free" legal/accounting/business-acquisition advice on any board might somehow be a good idea in the absence of competent professional advice. Especially when life-changing decisions are involved.
One man shop... Lesson number one: you can always do more, if not, you'd be broke.
I just met a guy who worked for 30 years at a local flooring company, essentially running the whole operation in recent years. He was told several years back by the owner that he would be able to take over the business when the current owner retires, in an unspecified purchase deal. When the time arrived the owner said he wanted $400,000 to take over the business, which meant just continuing the business under the owner's well-established name. He would have to rent the showroom from the owner. After talking to banks and getting independent valuations of the business, it was clearly an impossible deal for the employee, and he had to say so to the owner. The owner fired him on the spot. So much for his 30 years of service.
We are all capable of changing our minds, or having it changed for us by circumstances.
Before taking the leap, why not try working for him part time, on weekends perhaps? Maybe a taste of the drudgery side of the trade will offset the romantic sentiments. And even if it turns out be a great introduction to the nuts and bolts of the trade, you'd be starting from scratch in terms of the business--getting the work, marketing, drafting, purchasing, hiring and managing help, etc. Those things are probably more important than what you produce in the shop in determining whether you can make a living or not.
But many of us have taken different versions of this same leap of faith--mine was 30-plus years ago, quitting a career-track job after college to go into woodworking. But my wife was working, no kids yet, and I only had to convince her we wouldn't be completely broke. Minimum wage at the time was $4.25 / hr. and that's where I started.
So good luck.
Get real clear on who is going to be responsible for any depreciation recapture when/if actual ownership changes.