Selling or Buying a Small Business/Buying into a Business
I am a licensed Home Inspector in three states and I currently work for a company that is highly recommended in the home inspection industry. I now have the option to buy this company. The owner of the company knows that coming up with $160,000 is tough so he agreed to accept a $50,000 down payment and then he and I would work out a seller finance deal ($20,000 a year plus prime rate). I have met with three private investors and my local bank with no luck. I am getting ready to start paperwork for a home equity loan to get the down payment when a friend of mine mentioned a partnership between the owner and myself. I am not familiar with partnerships. Would this be a good idea? Coming up with money upfront is tough right now so what other options might I have? What would be a good equity split with myself as the general partner and he as the limited (silent) partner?
Hello, and thank you for contacting All Experts. First, let me say that the purchase terms offered to you by the seller are very fair. Your alternatives to that are: 1) If you have enough equity in your home, to get an equity loan against it for the down payment; 2) I don't know your cash situation but if you have any amount, try to negotiate a lower down payment with the seller; 3) Again, depending on your cash situation, apply for an SBA loan but that would require approximately a $40,000 down payment. #1 is the best choice here. If none of these alternatives can work for you, then you have to take a different path entirely.
I do not normally suggest partnerships. They are much easier to get into than get out of, plus, it is a real marriage of two people complete with many of the problems of a normal marriage. Many work well, but the point is, if it doesn't, your life could become miserable, and the business would suffer. To create a partnership, one most popular way, besides creating the partnership agreement, is to, again, put in a certain, agreed upon amount of cash. In other words, you have to buy in, and you cannot expect to have an owner simply bring you in as a partner for no investment into the business; or as they commonly say, "with no skin in the game". Your equity split usually depends on how much money you put in, and that might also determine how much you are able to take out in profit. A partnership is not some type of ideal solution here, and has countless potential complications. Why be legal partners when the seller is willing to sell you the company, and it's 100% yours?
An equity loan, in my opinion, is your best bet out of everything you, or I, have mentioned.
Best to you in your new venture!