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Finance for Buying into a business

Discussion in 'Business & Startup Funding' started by BennElnEz, 13th Sep, 2016.

  1. BennElnEz

    BennElnEz New Member

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    Adelaide
    I am currently talking with my bosses, along with another colleague about buying into their current business. At this stage it is unclear as to whether it will be a 25% or something smaller, with the view to increase over time. The current business structure is a partnership, so we will be looking at company or unit trust, possibly with discretionary trusts are share/unit holders.

    As I am currently on a salary, what sort of things do we need to consider when trying to finance the purchase of shares in a new company? I would assume that my salary would significantly increase and possibly receive dividends etc. Does that fact that it is an established business get taken into account even though there is a change of entity? Can we use the businesses past trading figures

    Obviously will be talking to a broker but just want to get a bit more background knowledge. Your thoughts would be appreciated.
     
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  2. 2 Dollar

    2 Dollar Active Member

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    Are you going to be getting 25% profit share from the biz?
    If so, don't see why your salary would increase significantly.
    Lots to consider before jumping in.
    What if the majority shareholders want to reinvest all profits into growing the business, then your cash flow in the short term may actually go backwards due to your invested funds being tied up.
     
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  3. George Poullos

    George Poullos New Member

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    I would suggest seeking legal advice about this. It's a big move with significant legal consequences. You need to be sure that all aspects are covered to protect yourself. This would be my first step. Once this is done then I'd see a broker about financing the buy in.
     
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  4. hobo

    hobo Member

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    No expert here, so just general comments:

    As mentioned by other posters, before you even get to the financing part of it, I would be spending a fair bit of time and effort in working out the specifics of what this deal will look like. The change of operating structure from a partnership to a company will mean changes to certain aspects of how the business is run as well (ie red tape), and everyone needs to be ready for that and, most importantly, be on the same page.

    Some questions to think about / discuss implications of with your lawyer:
    - Who will be the director/s of the company? <- these people will have a lot of power in terms of both running the business AND distributing profits
    - How will the new company be valued? (ie How will the existing owners come up with a number that the business is currently "worth", so that you know how much your (eg) 20% is going to cost?) Do you agree with this valuation?
    - How many shares will be issued when the company is formed?
    - Will all the profit be distributed to shareholders or is there a plan to re-invest in the company to try to grow the business? If so, does everyone agree with this plan?
    - Will your responsibilities within the business change/increase once you buy in? Is this why you think your salary will increase "significantly"?

    .... and lots more.

    Just don't act hastily, and be sure you seek professional advice. Good luck!
     
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  5. Terry_w

    Terry_w Active Member

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    You have to consider the terms of the company constitution carefully. See how the directors are elected - maybe you could argue for the power to appoint yourself or someone else as director, otherwise it may be majority rule.

    Is there a shareholder's agreement? If not there should be. What happens if one wants out - can they sell their shares to anyone. Should other shareholders be able to buy these shares ahead of others. How will it be valued. etc
     
  6. BennElnEz

    BennElnEz New Member

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    Thanks for your advice, will certainly be seeking my own legal advice as I have a young family and there's quite a few associated risks involved in our industry.

    We haven't gone too far in terms of valuation yet but the current owners have thrown out a general figure using an earnings multiplier, however I'm not sure that the current business with its current systems and setup is a great representation of what other businesses in the industry would be worth, so we will look to get an independent valuation done.

    There will certainly be a fair bit of legal consultation needed due to the fact that the current owners are older, and the 2 coming in are much younger so we all have our own personal situations to consider now and in the future.