Selling or Buying a Small Business/Veteran purchasing into an existing partnership
I am confused about how to equitably purchase into an existing partnership with two family members.
I will buy 51% of the existing business and operate it full time; the two members of my family purchased the business three years ago and have paid approximately 30% of the initial loan. My confusion is how to buy into the business and properly split the profits while I'm being paid on a daily basis AND without affecting my percentage of profit which was paid for in a lump sum.
The advantages of a veteran owned business as well as my ability to manage the business full-time has everyone excited but I'm cautious about how to pay off the remaining loan amount equitably (i.e. not cut into the amount I own)
Thanks for your time and consideration.
Hello, Tim, and thank you for contacting AllExperts. And thanks for your service to the Country.
It appears that you are bringing much to the table by buying into the company. The other side of the coin is, your family members have been operating the business for 3 years, thus reducing your risk, the risk that you would have normally had buying another business yourself.
So, in this situation, it appears that you have paid or will pay a lump sum for 51% of the business. Part of the price you are paying is, unless otherwise specified and agreed on, 51% of the liabilities including the loan. Then, you will work full time in the business, and the other family members will either continue working in it or become passive investors. Your salary is paid to you for your working role in the business, and is not part of the business profit to you. Your business profit will be 51% of whatever is shown of Net Profit on your year-end Profit & Loss statement, and the other 49% belongs to the other family members. Whatever benefits you bring to the company would be considered in determining how much you should pay for your 51%.
To help you further, I need to know the following:
1) How much did the family members pay for the business when they bought it?
2) How much was the original loan, and what are the terms? How many years is it amortized over, monthly payments & payoff due date?
3) How was it determined how much your 51% is worth? What is that amount of your "lump sum" payment?
4) Are the family members going to continue working in the business, or be passive after you take over? If the latter, will they be paid a salary in addition to 49% of the profit?
5) What was the total profit for year end 2013, and how much additionally were family members paid in salaries? (any personal expenses, e.g. vehicles, cell phones, medical insurance are all part of what an owner makes in profit)
6) Is the company operating at the same or better revenue and profit this year-to-date, as last year?
Regarding the debt, buying in at 51% would normally give you 51% of the debt, although everything is negotiable, and whatever everyone agrees on is what the deal is. As long as the business is making the payments on the loan until it is paid, it is not really an issue. There would be an issue if the business cannot make the payments, the business is foreclosed on, and it has to be determined what each owner is responsible for. So, of course it is best to know exactly where everyone stands and what each owner is responsible for prior to completing your purchase.