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At what point would you let someone purchase a piece of your company...
Posted on 8/28/15 at 2:23 pm
Posted on 8/28/15 at 2:23 pm
Had an interesting offer come across today.
I am trying to purchase the property that my business operates out of. The business is dependent on this specific building, and if I were to purchase it at appraisal price, my mortgage payment would be less than my current monthly lease. Seems like a no brainer to purchase the property.
Now the current landlord is offering to sell it for much cheaper than what I am offering, if he can have a percent of the business's profit. Is this ever a good idea, and if so, what would be a good formula to determine an amount for percent in the business.
I am trying to purchase the property that my business operates out of. The business is dependent on this specific building, and if I were to purchase it at appraisal price, my mortgage payment would be less than my current monthly lease. Seems like a no brainer to purchase the property.
Now the current landlord is offering to sell it for much cheaper than what I am offering, if he can have a percent of the business's profit. Is this ever a good idea, and if so, what would be a good formula to determine an amount for percent in the business.
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Posted on 8/28/15 at 2:27 pm to jsquardjj
Could be a win win. I'll let the buisness value guys chime in.
Posted on 8/28/15 at 2:30 pm to I Love Bama
Could be a deal, but I would want to put a total $ cap or a time limit on the profit share.
What % of your business' value is the amount he is offering to discount it?
What % of your business' value is the amount he is offering to discount it?
This post was edited on 8/28/15 at 2:31 pm
Posted on 8/28/15 at 2:49 pm to Chris4x4gill2
I must be missing something, because presumably he is going to have a capital gains issue, and ordinary income tax issue to the extent he wrote depreciation off the real property. And he wants to have an ongoing ordinary income issue, unless you're a C Crrp and issue dividends, which you don't have to declare in any event.
On the other side, I'd guess the business is more valuable than the building. At least I hope it would be, and could never envision a scenario where this would be a good idea.
What am I missing here?
On the other side, I'd guess the business is more valuable than the building. At least I hope it would be, and could never envision a scenario where this would be a good idea.
What am I missing here?
Posted on 8/28/15 at 2:56 pm to jsquardjj
quote:The mortgage payment is not the only operating cash outflow associated with owning the building.
my mortgage payment would be less than my current monthly lease. Seems like a no brainer
Posted on 8/28/15 at 3:04 pm to LSURussian
And it's a fixed term, either leasing or buying. Giving up part of your businesses profits seems to me like a forever proposition.
Someone needs to help me understand this, because I must be missing something obvious.
Someone needs to help me understand this, because I must be missing something obvious.
Posted on 8/28/15 at 3:06 pm to Iowa Golfer
I've heard of lease deals that contain % of profits, but never anything like this.
Posted on 8/28/15 at 3:16 pm to sneakytiger
Business value = $1MM
Building value = $500K
Bldg sale's price = $100K
Annual revenue - $2MM
Net - $1MM
Maybe I gave up 3% of net profits, never to exceed $400K, payable on the same schedule as the note on the bldg if you borrow money. And I'd start with $150K.
Maybe retail business are leased this way. I can't imagine this in a building's sale however.
Building value = $500K
Bldg sale's price = $100K
Annual revenue - $2MM
Net - $1MM
Maybe I gave up 3% of net profits, never to exceed $400K, payable on the same schedule as the note on the bldg if you borrow money. And I'd start with $150K.
Maybe retail business are leased this way. I can't imagine this in a building's sale however.
Posted on 8/28/15 at 3:37 pm to jsquardjj
Dude, you got Russia and Iowa up in here giving you advice. You better take notes.
Posted on 8/28/15 at 4:06 pm to white perch
I've never seen this type of deal either.
I'd be very cautious about what you are giving up.
At some point, he wins if you do really well which I suspect you do.
I'd be very cautious about what you are giving up.
At some point, he wins if you do really well which I suspect you do.
Posted on 8/28/15 at 4:15 pm to Iowa Golfer
Where did that $1mm valuation come from and how confident are you in it? I only ask because it seems awfully low at 1x ebitda (assuming ebitda and net profit are similar numbers). Would hate for you to give a percentage based on an inaccurate valuation.
Posted on 8/28/15 at 4:23 pm to rlanders23
I made it up as an example. The only things needed to be considered are net profits, which the guy is asking for a percentage of, buildings net present value, building's discounted sale's price, and terms of the ongoing % of net profits he is asking for.
Businesses are valued differently. My business market rate is 12 times ebitda, or 4 time top line, plus cash, furniture fixtures etc. EBITDA is probably a better measure.
But doesn't matter here. The simple method is how much of a discount on the building, versus how much profit am I giving up. Whether he is borrowing would determine if there is an interest savings.
The baffling part for me is why the building owner would ever exchange a lower tax rate for a higher tax rate, unless depreciation recapture is huge and he wants to defer ordinary income taxes on de facto installments.
Businesses are valued differently. My business market rate is 12 times ebitda, or 4 time top line, plus cash, furniture fixtures etc. EBITDA is probably a better measure.
But doesn't matter here. The simple method is how much of a discount on the building, versus how much profit am I giving up. Whether he is borrowing would determine if there is an interest savings.
The baffling part for me is why the building owner would ever exchange a lower tax rate for a higher tax rate, unless depreciation recapture is huge and he wants to defer ordinary income taxes on de facto installments.
Posted on 8/28/15 at 4:49 pm to jsquardjj
I've seen a lot of tenants purchasing the building they lease. I've never seen a deal that included this.. Sounds like a complete pain when it comes to accounting for both your business and the current property owner.
Posted on 8/28/15 at 5:04 pm to jsquardjj
Thank you for the input. It could very well be a terrible idea, but here are a few more details to better understand the situation.
Business has been open for 1 year.
Current lease is 5 year. We initially spoke about me outright purchasing the property and he was interested, probably because he thinks the real estate market is at a peak right now which very well could be.
At the purchase price we discussed, with my note, taxes and insurance, I would be coming out about 1k a month cheaper than what I pay now. I would also be able to fix a few things I have been wanting to update on the property, which would enhance the business and the value of the building.
Due to the business only being open for a year, I couldn't get approved for the loan at the purchase price and this is where his backup offer came in.
This honestly took me by surprise and we have not discussed a percent yet. I was trying to figure out a formula to find the win/win even though there might not be a win/win.
Lets say I make 100K in profit a year, and he discounts 300K on the building, what percent of profit would it be worth it for me to give away.
Business has been open for 1 year.
Current lease is 5 year. We initially spoke about me outright purchasing the property and he was interested, probably because he thinks the real estate market is at a peak right now which very well could be.
At the purchase price we discussed, with my note, taxes and insurance, I would be coming out about 1k a month cheaper than what I pay now. I would also be able to fix a few things I have been wanting to update on the property, which would enhance the business and the value of the building.
Due to the business only being open for a year, I couldn't get approved for the loan at the purchase price and this is where his backup offer came in.
This honestly took me by surprise and we have not discussed a percent yet. I was trying to figure out a formula to find the win/win even though there might not be a win/win.
Lets say I make 100K in profit a year, and he discounts 300K on the building, what percent of profit would it be worth it for me to give away.
Posted on 8/28/15 at 5:16 pm to jsquardjj
Percentage doesn't matter the way I see it. Only thing that matters is that you never give up more than the building discount as a total dollar figure. Now, since you are borrowing, he might come back with the obvious question, what about the interest you're saving on the funds you didn't have to borrow? That seems fair.
So just don't give up more than his $300K discount.
So just don't give up more than his $300K discount.
Posted on 8/28/15 at 9:00 pm to Iowa Golfer
I guess the question is ask is if he's doing this because he wants out of the property (to your point about value peaking), wants to help you out since you couldn't get approval (is okay holding the paper, essentially) or wants in on the upside of your business. And then obviously you have to see if your interests align.
To Iowagolfer's point, capping his return is great if he isn't looking for an equity investment with upside, but if he is, he's probably not going to be thrilled with a cap, or at least not the one suggested. If he's simply trying to help you out or get out of the property, then I think the cap has a chance of catching his attention.
Best of luck and please do keep us posted. Would be interested to hear how this turns out.
To Iowagolfer's point, capping his return is great if he isn't looking for an equity investment with upside, but if he is, he's probably not going to be thrilled with a cap, or at least not the one suggested. If he's simply trying to help you out or get out of the property, then I think the cap has a chance of catching his attention.
Best of luck and please do keep us posted. Would be interested to hear how this turns out.
This post was edited on 8/28/15 at 9:01 pm
Posted on 8/28/15 at 9:33 pm to jsquardjj
If he wants to sell the property and you can't get a loan why doesn't he just owner finance it with a decent down payment?
Do a 30 yr amort schedule with a 5 or 7 yr balloon at like 6%?
Do a 30 yr amort schedule with a 5 or 7 yr balloon at like 6%?
Posted on 8/28/15 at 9:54 pm to jsquardjj
Sounds like you have the credit lined up and with terms that are beneficial without doing a deal with the current landlord. I see no compelling reason to accept a partner in your business (which is basically what would happen). Keeping the building mortgage clean with simple terms is a whole lot easier than some profit sharing scheme that could get complicated if lawyers get involved (both now and then later if there is a dispute over what "profit" means, how much you made, etc.
Posted on 8/28/15 at 11:45 pm to CajunTiger92
Only sell business as a last resort to grow cash to grow business.... Always a last ditch effort to raise money by a degenerate who doesn't have any faith in said business
Posted on 8/29/15 at 7:27 am to CajunTiger92
quote:
Sounds like you have the credit lined up and with terms that are beneficial without doing a deal with the current landlord.
He already said he can't get financed for the undiscounted purchase price.
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