New Venture Lab: Equipping Christian Entrepreneurs

Question

I am considering buying a janitorial business, but I have never been a business owner. I have been in the ministry for 20 years, but desire to build a family based business for my children for their future and families. Our desire is to be able to have a multi-generational business and ministry to pass down to our children and grandchildren.  I found a janitorial business for sale online with $2.5M in revenue and $400K in earnings.  The owner is asking $1.25M for the business.  We have no cash and we have not met the owner in person, but we are hoping to do a lease management buyout.  We don't have a clue as to how to proceed in this and could use your advice.

Answer

As I've written about in terms of when a lease management arrangement works well here, it typically works well when you know the seller very well and there is an existing trusted relationship.  This is important, since the seller has to believe that you will run the business well enough for him to eventually realize all of his value in the company over time through your efforts.  This is going to be a difficult sell for you in your case since you do not know the seller and since you do not know the industry and since you have no prior experience running a company.  That is not to say that our Sovereign Lord cannot bless the transaction and make it happen successfully.  I just want to give you fair warning up front that this is not a good situation for a lease management deal to work. 

 

For you to proceed, you need to spend time getting to know the seller and his business.  Consider going to work for the seller to learn the business and to build the relationship and if all goes well, you can then chart out the next steps to a potential purchase.

 

The deal terms themselves are important, because if the deal appears as a sale at closing, (but no money exchanges hands), the seller has just realized a tremendous gain and its associated tax burden as well as the deal costs (CPA, attorney, etc.) but the seller has received no cash to offset those costs -- a pretty difficult position for the seller.  The deal would likely be structured as an employment agreement with a revenue and/or earnings share bonus with a side agreement that says once the owner has realized a certain maximum level of share dollars that the ownership has shifted to you.  The taxable events and consequences are significant, so both sides need to seek competent CPA advice.

 

We are happy to assist as a Mergers and Acquisitions advisor if you choose to push forward on the deal.