To buy or not to buy?

Hey guys. I'm in a bit of a dilemma to an extent... The company that me and my co-worker work for (Photography & Design firm) is being sold. The Co-owners were bought out and hired by one of our top tier retainer clients and they are required to sell the company.

Well, we were offered the company for $20,000-$25,000 + $1,720 lease of the studio.

We've been somewhat managing the company, doing most of the back end work and dealing with clients so we're good to go in that sense but we want to make sure that buying the company is a smart financial decision.

This is what the company makes grossly:
Design division: $7,550 per month
Photography division: $3,050 per month

This is our overhead + wages + monthly expenses..etc: $5,635.24

We were also given the option to make payments to buy the company for around $2,000-$2,500 for 10 months.

This would then bring the overhead up to about $7,635.24 - $8,125.34 per month

The company would then have $2,964.76 - $2,474.66 left per month.

I spoke with another co-working (space renting) business owner and he said it wasn't worth it and to just take over the lease in order to obtain the company. It's really hard to project a company's earnings when the gross earnings are inconsistent because the work isn't repeating to an extent. (Retainer clients are by month or contracted 3 months+)

Essentially, we're buying a store front, branding and retainer clients. My bosses will be moved out to Texas so they will have no physical involvement with these retainer clients.

I'm excited to be a new business owner but I want to make sure my first business choice isn't a bad one. Is the higher overhead worth it? We have a lot of room to expand upon in this company and everything is basically laid out for us to work with. I'm just not too sure paying the lease and then an additional overhead is worth it.

Essentially, the current owners are tied into the lease and really, the ball is in our court. We can easily opt out and start our own similar business without hurting theirs. Any thoughts? For the most part, I had a lot of fun working for this company and if we were to focus on our strengths, we'd do better than the current owners are doing now.

Thanks for reading this!

Another thing. My business partner and I really don't think buying the company for that much is worth it. We were given the idea about taking the lease and handing over 5% gross earnings instead.

Input on this would be awesome!

sounds like something you should jump on. You keep your job and instant profit sharing benefits. I would just have an attorney involved and make sure you got your butt covered and there is nothing hidden that you dont know about. Also, make darn sure you guys still retain the clients. sounds pretty good to me but spend $2500.00 or whatever they are going to charge and have an attorney involved....CYA

Definitely get an attorney!

Also, one thing to work out (or have the lawyer do it for you), is to make sure there is a 'no compete' clause with the owners in your purchase contract.

Purchase price can be negotiated, but I'd purchase outright, and avoid any gross earning percentage.

Thanks for the input! It would definitely be smart to have a professional evaluate the situation and make sure there aren't any underlying details.

Someone brought up a great point to us today saying that the co-owners are legally tied to the lease. We're doing them a favor by taking the lease. In turn, that should cancel out the buyout for $20-$25k because the lease is worth $20k+ over the course of a year. What we get in return for accepting the legal burden is the company.

We can easily walk out and use that buyout money in developing our own company while the co-owners are stuck with paying an empty lease. The company would then disband leaving the current clients open for us.

Win win basically. We take the lease, they're gaining their losses and we get a company out of it.

noxcuses1 wrote in post #11809287
Definitely get an attorney!

Also, one thing to work out (or have the lawyer do it for you), is to make sure there is a 'no compete' clause with the owners in your purchase contract.

Purchase price can be negotiated, but I'd purchase outright, and avoid any gross earning percentage.

Not sure what you mean by non compete clause. They'll be in a separate state working with another company who I'm sure requires them to sign a non compete clause upon hire. They're basically Chief art directors and marketing executives.

EOSBoy wrote in post #11809304
Not sure what you mean by non compete clause. They'll be in a separate state working with another company who I'm sure requires them to sign a non compete clause upon hire. They're basically Chief art directors and marketing executives.

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Sounds pretty good. I'm assuming that your counting your salary in with the expenses when you make your calculations?
Also, you keep using the word "we".....who exactly is "we"?

What is there about those figures that you don't understand? You're in the hole $2,585.24 from square one?

There you go!
I wonder what you needed a studio for? Could you get by without a studio? With a smaller one that's cheaper? Maybe cherry-pick the clients that need location shots & expand on that base.

PhotosGuy wrote in post #11815131
What is there about those figures that you don't understand? You're in the hole $2,585.24 from square one? There you go!
I wonder what you needed a studio for? Could you get by without a studio? With a smaller one that's cheaper? Maybe cherry-pick the clients that need location shots & expand on that base.

But you left out the 7,550 that the design side of the business brings in a month. I'm assuming that as it's mentioned they keep that going.

And I don't see why you wouldn't. In 10 months you've bought the company, which then gives you the profits.

10 months to cover your start up costs= not bad at all. Especially if you can pay the money out of the business funds every month and not really have to invest any of your own money.

jra wrote in post #11811712
Sounds pretty good. I'm assuming that your counting your salary in with the expenses when you make your calculations?
Also, you keep using the word "we".....who exactly is "we"?

Yup! And for "we" my business partner who is currently my design coworker.

PhotosGuy wrote in post #11815131
What is there about those figures that you don't understand? You're in the hole $2,585.24 from square one? There you go!
I wonder what you needed a studio for? Could you get by without a studio? With a smaller one that's cheaper? Maybe cherry-pick the clients that need location shots & expand on that base.

Well, I'm not basing numbers off the photography side only, we're incorporating design as well which makes more money than photography. The thing about our studio is, it's a store front in a historical part of town. It's a great spot...Each month, there's a festival of over 10,000 people right in front of our doorstep! Talk about easy marketing.

As for studio size, our building consists of 2 suites. I'd love to get rid of one suite but that's dealing with leasing issues so if we take the deal, we'd probably end up setting up a co-working area. (It currently is but we haven't advertised heavily.)

I'd love to be a cherry picker but starting out, I want to accommodate most shoots to bring in some cash flow in case we run into slow business periods.

Marlfox wrote in post #11815351
But you left out the 7,550 that the design side of the business brings in a month. I'm assuming that as it's mentioned they keep that going.

And I don't see why you wouldn't. In 10 months you've bought the company, which then gives you the profits.

10 months to cover your start up costs= not bad at all. Especially if you can pay the money out of the business funds every month and not really have to invest any of your own money.

True! One thing to keep in mind is, we're taking the financial burden off the owner's backs. In return, we'd love to receive the company for no additional cost. We can easily walk away and they'll be in the hole for over $20k over a period of a year (Lease ends in a year). If we were to take their offer as is, we'd end up paying over $40k in 1 year. I feel we have the advantage at this point. We're not legally bound into anything but the owners are.

With a company consisting of 2 people (+1 project manager) that would mean, we'd have to work have 5+ retainer clients and shoot constantly to make sure we make ends meet. I don't know about you guys but I'm not a big fan of doing a huge amount of work just to support overhead which is much higher than our salaries!

The only downside to walking away is losing brand awareness, a prime store front, retainer clients, temporary joblessness, legal documents and contract forms. I just don't think all of the above mentioned is worth a buyout of $20-$25k when our profits fluctuate and can't be projected.

Honestly, I'd be stoked to own the business but I'd be more stoked to own the store front's lease!

Thanks for the input everyone. My ranting has given me more insight into what I should propose when the time comes to negotiate!

Just a couple thoughts and opinions.....I wouldn't enter into a joint partnership where you co-own a business with another individual. I've heard a ton of horror stories when it comes to partnerships. Instead, one of you buy it and the other work as an employee. I would much rather be an employee than a joint owner of a business.....but that's me.
I would advise you to avoid borrowing money to buy the business. Going into debt does nothing but stack the odds against your success. By going into debt, you're basically taking on additional risk. I think you had the right idea as to offer the previous owner a certain percentage of profits for an agreed upon time frame.....just get the agreement written up by a lawyer and should the business fail, make sure that the previous owner can not pursue you for any additional money.....or pay cash.

Another part of the equation I didn't see mentioned, how much in assets does the company hold? If the assets of the company don't amount to much, you can probably buy out or take over the lease (considering that they won't need it anymore) and simply start your own company in the same location. Just change your name. You'll loose some brand recognition but you'll be in the same spot as the previous business which will make up for a good bit of that. In other words, I wouldn't spend 20K if all you're getting is a name unless that name is making huge profits or is absolutely key to keeping the business in operation (which I don't think it is from what you've said).

Good luck.

I've always been a fan of the "earn-out" method in this kind of situation. They claim the company will bring in $X over the next year(s) and therefore is worth $Y as a purchase price. So you agree with them, and form a contract that says something like: "For every dollar in income for the first year, 50% of it will to to the seller, to a maximum of $Y". That way, if the company makes no money, they get nothing, and if they're correctly predicting the revenue, they get paid full price.

It's a great way to handle a situation like this where the value of a company is hard to predict in advance.

Good luck, it sounds like a nice opportunity.
Dave

As jra asked what are the company assets? That is, what is the value of the equipment/studio? In my business is not worth much more than the value of the equipment.

The business volume seems to based totally on short term contracts/agreement. Based on the values I surmise that there aren't many clients so the loss of one client would be significant. How much of the business is based on the personal relationship of the current owners with the client? Can you substitute that relationship?

In short, there is not much there there to warrant paying any more than the current depreciated value of the equipment and possible the leasehold improvements.

If your are going on your own I would do something like jra said; Buy the assets at fair market and negotiate directly with the landlord for NEW lease after the current business settles. DO NOT assume any terms or obligations of the current company. Remember, both the current company and the landlord are possibly at a financial disadvantage. The company wants to get out of the lease obligations; and the landlord, unless he has another waiting tenant, will be anxious keep the space occupied and generating income at the lowest cost in time and money.

You can open the business with a new name without any of the old baggage.

As to the 50/50 partnership: as said above, this can be tricky but a good lawyer can help you set up an arrangement that is fair to all. One mechanism that I have advised my clients is a "shotgun clause' (I am a management consultant, not a lawyer) do a google search.

Marlfox wrote in post #11815351
But you left out the 7,550 that the design side of the business brings in a month. I'm assuming that as it's mentioned they keep that going.

It wasn't mentioned above my post & I don't assume anything when it comes to money.
I did assume that the design division was going to Texas since this is a photography forum, though.