Employees taking over a Small Business

[Charlie78]

My Brother-in-law just called me with the following scenario, here are the limited details I know-

He is an employee at a small, successful auto body repair shop. The owner is nearing retirement and wants out. He owns the building it's housed in and this is presumably the largest asset. He'd be selling this and the business, but I'd think if he finds a buyer for the building but not the business he'd take this and let the business dissolve. This leaves my BIL out of work.

He and 4 other employees were potentially interested in taking over the business but they have limited capital between them. He mentioned a co-op and finding a way to take over the business without having to put $ in. I don't think there's any way (you either have to put your own $ in or get a bank to loan you the capital). Also, without getting out my insurance textbooks (I'm an underwriter by profession), my guess is that the co-op exposes it's members to personal liability and would be a bad form of ownership for a body shop. He believed that the current form of ownership is a corporation (private) with only one owner.

I'd think that if and when the owner decides to sell the best course of action would be to have the interested employees go to a bank and present a business plan showing the current revenue streams (as mentioned before they are doing well) and expenses and get a business loan for purchase of the business. Maybe they could convince the owner to keep the building for lease to them.

To be blunt my BIL is not the most business savvy person and probably does not have good credit. He does not have a college degree (not that that's required but it's helpful).

I don't know if there's a business manager who'd be staying on as part of this deal, but that's gotta be a requirement right? Also I'm assuming those getting the loan would need excellent credit and some assets (equity in a home etc..) as well. Small business loan underwriting I'm thinking is tight these days.

Any thoughts, advice or observations are appreciated. This isn't my personal hope or dream so feel free to stomp all over it I would like to help him out though.

[Harold Mansfield]

Let's see. No one has any money, and from what you have said it doesn't appear that anyone has any business skills, knowledge or education.
Personally, I wouldn't do it. Not just because of those things, but because I'm not sure that I would go into business with that many people who have no idea what they are doing.

If there was at least one manager that had experience running this or another shop, I could see it, but not 4 employees merely looking to save their jobs.
That's just my opinion.
I don't think I would go into business with 4 people under any circumstance. That's a lot of personalities.

That's not to say that it wouldn't work, depending on how dedicated each is. But the odds that 4 people with limited funds can take on debt equally and responsibly is a big leap of faith.

[Spider]

The first step is to talk with the building/business owner and find out his intentions and interests.

Bare these points in mind--

1. A person who has taken a lifetime to develop a business often hopes that the business will survive him. It's an ego thing! But one must consider the seller's more immediate needs. You need to know what they are.

2. Someone retiring is concerned about having enough money to live out their days. If the seller is otherwise sufficiently wealthy, his intentions and hopes for the business will be different than if he needs the money from the sale to retire with. You need to know this.

3. You need to know for sure if there is only one owner, or if there are other parties whose decision is necessary. And if there are others, you need to know who they are and to what extent their decision matters.

4. The seller may have other considerations than simply his own retirement. He may be wishing to pay for a grandchild's education, for example. Considerations in this realm could determine whether he needs cash or whether rental income would be better for him. You need to know as much as you can on these possibilities.

5. As a retiree, the seller will need a regular income, so a combination of sale and rental might be a possibility. You need to know all this.

The more of these things you know, the better you can understand what the seller really wants and this will help you devise an successful offer.

The most important point I can recommend to you is this - in working your numbers, be thinking more of how MUCH you can offer the seller rather than how little you dare offer. This is the trick to winning negotiations like this.

I would also suggest you not bother with approaching a bank for a loan. By all mean meet with a banks's loan officer to get a feel for what they need, but you will be better off by dealing through a loan broker who will have far more resources and be far more helpful than a bank.

Have fun!

[TotalPC]

Even if they had the money and the skills, i still wouldn't recommend a 5 way partnership. It can be tricky enough managing a partnership with just 2 people.

[Steve B]

I think your BIL should go find a job at another body shop. Unless he and the others had a burning passion to own their own body shop before this situation came up, they will likely not make good business owners. And, it's already been said about how difficult partnerships are, so I'll just echo that thought. A partnership with one can be a nightmare.

[jpohl]

TotalPC has a good point, I have seen a couple business partnership disasters with only 2 partners because there was no escape strategy at the beginning of the deal. One partner wants out...does he sell to whomever? Do the other partners get to vote on the new partner? Do the old partners get right of first refusal? If your BIL really wants to start a business, if the business dissolves, I would try to get the "old" customers to be my "new" customers.

[Spider]

Oh, boo-hoo! I'm sorry that all we seemed able to provide was doom and gloom, Charlie. I think your brother-in-law - and yourself, if you are part of this - are being presented with a fantastic opportunity. Once the motives and attitude of the seller are more clear, you (or the employees) will be able to determine the best course of action. The seller may be really happy that his employees want to continue the company and will likely be prepared to stay on for a while to help the transition. He may amend his price or find some way to make it easier for the emplyees to buy it, and I'm sure he will always be available as a consultant.

The first step is to open up a dialog with the seller, get his advice and enlist his help. There is nothing wrong with partnerships - most of todays most successful companies started as partnerships - Microsoft, Apple, Cisco, HP, Ford, Sears - the list goes on and on.

Maybe none of the employees have any management skills, but management skills can be learned - nobody is born with the skill or the knowledge. And, management can be hired - what a tremendous opportunity you could offer another of your friends who is already a manager and ready for the next level in his career.

Don't look a gift horse in the mouth!

[Harold Mansfield]

I think the deciding factor for me would be how much do I trust the other 3 "partners". If I thought that they would do what ever it takes to make this business a success and overturn every stone and take an equal amount of risk for the financing...I may do it. All the tech, management and money issues aside.
Who are these people and can I trust them not to screw me over or leave me holding the bag when things get tough?
If you can answer that confidently, that will help you move on to the next step.

[huggytree]

from what i know about business id say w/ 5 partners that there is 0 chance for success

tell the boss to find 1 buyer

if the manager wanted to buy and take over you might have a chance since its 1 person and he may have some business skills....the employees? no way...they will never agree