Buying out a partner. Just a few questions

[blue-eye-boy]

Hey all, me and my dad is partners in one cc. He has 70 %, I have 30 %. To cut a long miserable story short, we fight a lot, because of financial and staff issues. So with our last fight about a month ago, I asked him if I could buy his share, he retire, and I go on. After a week he mentioned R5 mil for his share, which is steep, but I'm willing to pay him that because it is a good busyness(butchery).

But as it is with him, nothing lasts very long, and for about a week thereafter he talked about retiring, but it was soon forgotten, and now there's no word about that. He even let me cancel the meeting with our attorneys, because as he said, dont rush things". But why, why wait?

How we talked about it, is that I must pay him a installment each month, of lets say R 80 000, he invest a chunk, and live off the rest, and so on. But as things go on I picked up that he worries about me going on alone, as all parents do, their children cant do any thing them selves.

So, the next thing would be for me to try to borrow the money, pay him, and go on with my life. Pay a steep installment, but at least all the problems he cause in the business will be away too.

I know I will pay a lot of interest but as I said it will be all worth it, not having to fight my dad the whole time. But how does this work, here's a few questions:

1; Does the business itself stand as surety for the money borrowed, although it has no assets like buildings etc?
2; I know if a business buys property, the loan term is 10 years. What terms will such a loan have?
3; Will loan repayments be tax deductible, or not?
4; Where will be the best to start, banks, or any other financial institutions?

Any additional info will be a great help please. I know some will think I'm doing a bad thing to literally kick my dad out of his business, but he really makes us all miserable, he stir so much nonsense for me, and I can really not take this any more. Our business is not in the best of shape right now, but when my dad and mom is out, I can almost pay an installment with his salary alone, so thats why I know I will be able to do it.

Thanks a lot.

 

[minty203]

Firstly understand the approaches to valuing a business. There are three main ways to value a business.

1. Net asset value
Assume you will sell all the assets at a public auction. The yield from this sale, after subtracting the liabilities of the business will be the value.

2. Historic performance valuation
This is based on past profits/losses.

3.Future performance valuation
The value of future incomes will be discounted to determine a net present value.

Consult your accountant to do these calculations for you. They will most likely determine the value using all these methods and then give you a range of a value. This you use when you negotiate a price.

Once the total value of the business is determined, multiply this by 70% to give you the value of your father's shareholding.

Your accountant will be able to best advise you on the way forward. Because after the value is determined, he will then look at yours, your fathers and the company's whole tax situation and be able to advise you on the financing of the shares purchase. The options from here on are too varied and wide for anybody to give you advice on the tax implications of this transaction.

And this predicament you in isnt something to feel bad about. It is a usual issue with family-owned businesses. Parents and children feel different about the best way forward. Children are usually more optimistic about trying different things, expansion, whereas the parents are more laid back because the business has been good to them over the years. The income they earning is enough to support their lifestyle, and they have the attitude of "moenie krap, waar dit nie jeuk nie".

But this is a big decision, and dont let it get ugly.

Godspeed.

 

[HavocXphere]

Try to keep it in the family...no point in handing a bank a k.a.k. load of interest. You seriously need to structure this somehow to work around that. Roll in the lawyers to make an agreement bulletproof if you must but don't do the bank thing.

Not familiar with your family circumstances, but in mine the attitude is pretty much to look out for the family as a whole. Sure I could screw over my parents, but ultimately if they have a shortfall I'll cover it & if they have an excess I'll inherit it eventually so no real point in drawing a thick line in the sand. Its one of those things that differs from family to family though.

That being said: It seems to me that the grief comes mainly from strategic decisions. Someone has to take the lead there & decide...2 leaders is a bad plan.

There are also various tricks you can pull with the shares. e.g. You can convert it to preference shares with 0% dividends but participating rights. Meaning effectively it stays the same but you stripped the voting rights from the shares. Also has liquidation order implications, but I'll leave that for now.

Perhaps a middle route is appropriate. i.e. Aim for 51% rather than 100%?

1; Does the business itself stand as surety for the money borrowed, although it has no assets like buildings etc?
2; I know if a business buys property, the loan term is 10 years. What terms will such a loan have?
3; Will loan repayments be tax deductible, or not?
4; Where will be the best to start, banks, or any other financial institutions?.

1. Surety isn't automatic. Without assets, the bank might not accept it anyway. Also, 70% of the biz is your dads so effectively he is risking his wealth. The surety angle is a bit back to front in this scenario. Plus the bank angle is a bad one anyway imo.
2. Similar to a mortgage. The issue is more getting the loan rather than terms. Without significant assets loan approval is going to be difficult.
3. Capital definitely not. Interest...its going to be borderline. The problem is your not buying a business asset used to produce income, your buying an actual biz. I rate what for someone else to pitch in with an opinion.
4. See above. I wouldn't.

3.Future performance valuation
The value of future incomes will be discounted to determine a net present value.

No free cash flows, not income. Using income will generally screw over the calc. In this case the two just happen to be similar though because there are probably no significant non-cash income/exp.

 

[HavocXphere]

Also, you'll likely need a formal valuation anyway for tax purposes - you can use the same for both tax & negotiating a deal. Ask for a Discounted Free Cash Flow valuation. And consider asking someone else to have a look at it...even accountants can mess up a DFCF something wicked.

NB valuation are horribly subjective. i.e. You can make them say whatever you want - 'tis true. So you really wan't to be the one paying the accountant that is doing the DCFC.

Just watch the valuation & buying piece by piece thing...if you get a valuation now then its only valid right now. So if you don't pin down the price via contract then technically you need to keep revaluing it for SARS etc.

 

[blue-eye-boy]

Hi, thanks for the replies. I nearly missed them, as it took some time to get replies, but I appreciate all the input.

I am really in a very difficult situation. Me and my wife spoke this week, and we realize that even for me to pay my dad a installment each month for say 5 years, when that 5 years is over, he would have nothing left. Because just this week he decided he hates financial planners, just because ours ( me and my dad uses one guy) said he can't withdraw money from an investment the business made 3 years ago, because my dad already took a chunk 2 years ago. So he said no one will tell him again to invest money. So what will happen? He will get his payment each month, live it out, and ask me for more when it is finished.

I sometimes wonder if anyone else can hate their dad as much as I hate mine. He makes me feel so dead an hopeless. One day I will bury a big heap of sorrows and problems when we passes on, believe me.

But as said, thanks guys for all the input. Much appreciate it.

 

[Greg C]

You must sepearte surety and security they are vastly different whilst sometimes confusing.Surety is YOU in your personal capacity that if the company cannot pay will be held liable for the money owed and the bank will come for it in your personal capacity ie house car etc.Security is a tangible asset that is liquid enough to be used against a loan that in case of default will be used for collateral.

Try to keep it in the family...no point in handing a bank a k.a.k. load of interest. You seriously need to structure this somehow to work around that. Roll in the lawyers to make an agreement bulletproof if you must but don't do the bank thing.

Not familiar with your family circumstances, but in mine the attitude is pretty much to look out for the family as a whole. Sure I could screw over my parents, but ultimately if they have a shortfall I'll cover it & if they have an excess I'll inherit it eventually so no real point in drawing a thick line in the sand. Its one of those things that differs from family to family though.

That being said: It seems to me that the grief comes mainly from strategic decisions. Someone has to take the lead there & decide...2 leaders is a bad plan.

There are also various tricks you can pull with the shares. e.g. You can convert it to preference shares with 0% dividends but participating rights. Meaning effectively it stays the same but you stripped the voting rights from the shares. Also has liquidation order implications, but I'll leave that for now.

Perhaps a middle route is appropriate. i.e. Aim for 51% rather than 100%?


1. Surety isn't automatic. Without assets, the bank might not accept it anyway. Also, 70% of the biz is your dads so effectively he is risking his wealth. The surety angle is a bit back to front in this scenario. Plus the bank angle is a bad one anyway imo.
2. Similar to a mortgage. The issue is more getting the loan rather than terms. Without significant assets loan approval is going to be difficult.
3. Capital definitely not. Interest...its going to be borderline. The problem is your not buying a business asset used to produce income, your buying an actual biz. I rate what for someone else to pitch in with an opinion.
4. See above. I wouldn't.


No free cash flows, not income. Using income will generally screw over the calc. In this case the two just happen to be similar though because there are probably no significant non-cash income/exp.

 

[Greg C]

Dont hate the financial planner for in a sense he is just the middle man in helping you invest and advise.Whilst I dont know the advise he gave you,no you cant withdraw as there are penalties and rules to the amount you can withdraw,if everyone could just willy nilly withdraw from long term investments it would collapse. Get an independent valuation.And dont be scared of a bank attempting to help you structure the deal financially. Other side of the story when you say end of 5 years your dad has nothing... If he lives off the installments is just bad business in my opinion. Buy the portion out completely and pay back to a 3rd party,have him invest for his future and live off the cash flow from the intial capital outlay.

Hi, thanks for the replies. I nearly missed them, as it took some time to get replies, but I appreciate all the input.

I am really in a very difficult situation. Me and my wife spoke this week, and we realize that even for me to pay my dad a installment each month for say 5 years, when that 5 years is over, he would have nothing left. Because just this week he decided he hates financial planners, just because ours ( me and my dad uses one guy) said he can't withdraw money from an investment the business made 3 years ago, because my dad already took a chunk 2 years ago. So he said no one will tell him again to invest money. So what will happen? He will get his payment each month, live it out, and ask me for more when it is finished.

I sometimes wonder if anyone else can hate their dad as much as I hate mine. He makes me feel so dead an hopeless. One day I will bury a big heap of sorrows and problems when we passes on, believe me.

But as said, thanks guys for all the input. Much appreciate it.

 

[Shiraz]

[Bold]I sometimes wonder if anyone else can hate their dad as much as I hate mine. He makes me feel so dead an hopeless. One day I will bury a big heap of sorrows and problems when we passes on, believe me. [/bold]

But as said, thanks guys for all the input. Much appreciate it.

Hi

If you really that unhappy and since he is the majority shareholder, why not ask him to buy out your 30% and you go your own way?

 

[DJ...]

Retirement is a very difficult decision for someone to make, so bear that in mind when dealing with your dad. You'll need to sell it to him a little better than I think you've so far done. And nobody likes to be forced into retirement, which might explain his resistance to the idea.

Wrt your questions:

Your business income can be used to secure a loan. Speak to your bank about it.

The term of the loan is between you, the company, and your dad. I'm not aware of any laws dictating the term of a private loan. Unless you're referring to the raising of the capital in which case it's up to the bank, you, your dad, and the business. Mostly the bank.

The loan repayments aren't tax deductible, nor is the interest component to the best of my knowledge.

Speak to your bank. They structure deals of this nature for a living. No other institution will give you the combined advice and access to finance better than the bank...

 

[Paul Hjul]

I don't see why you need to buy out your fathers share in toto. Certainly the current situation of 70/30 with you as the minority member is untenable but I see no reason why you father shouldn't retain a member interest of 20% with simply the operating agreement between the members providing that his members interest is as a retired member. I also suspect that your father is, as most elderly men, petrified of absolute retirement. Almost every old man I've encounted in life does one of three things on retirement: (1) Die within months of retiring; (2) Actually become incredibly busy with all sorts of odd things often because they don't know what to do with themselves; (3) Become bored, grumpy old men who need something to give them purpose. So it is more important for him to have something deal with the retirement issue seperately to the business buyout issue.

 

[blue-eye-boy]

I think the best I can do for now is to let him buy me out, then he can carry on with his miserable life.

I'm already busy checking out other options as well, there is currently one which is very much appealing to me and my wife.

And yes, I think his big problem is he doesn't know what he will do with himself, but the thing is, I must know which way forward from here, and he doesn't help much. His whole life he lived for the moment, never thought of saving for retirement, and I'm not going to deal with that stupidness no when I must start saving. He's messing with my retirement also now.

But yes, as said, thanks for all your input, we really appreciate it. I will be asking some other questions sometime, regarding starting my own shop.

Thanks

 

[w1z4rd]

I would suck it up and keep it in the family. Rather take the money you were going to spend on buying the other % on diversifying by buying other businesses.

You are probably going to inherit it. Why waste 5 million?

 

[Greg C]

With the greatest respect and I mean that whole heartedly,I dont know your personal situation and I am not going to pretend to but with hat being said I dont think your attitude towards your father is terribly fair. Hes also worked his ass off for where he is and what hes got etc Retirement is hard for him and try to be accepting of that. Wish you well

I think the best I can do for now is to let him buy me out, then he can carry on with his miserable life.

I'm already busy checking out other options as well, there is currently one which is very much appealing to me and my wife.

And yes, I think his big problem is he doesn't know what he will do with himself, but the thing is, I must know which way forward from here, and he doesn't help much. His whole life he lived for the moment, never thought of saving for retirement, and I'm not going to deal with that stupidness no when I must start saving. He's messing with my retirement also now.

But yes, as said, thanks for all your input, we really appreciate it. I will be asking some other questions sometime, regarding starting my own shop.

Thanks

 

[blue-eye-boy]

I would suck it up and keep it in the family. Rather take the money you were going to spend on buying the other % on diversifying by buying other businesses.

You are probably going to inherit it. Why waste 5 million?

To be honest, 5 mil will be the cost of my peace, and many others in our business. I am going to inherit it all, if I stay in the business, but I've had it. I can not take any more.

With the greatest respect and I mean that whole heartedly,I dont know your personal situation and I am not going to pretend to but with hat being said I dont think your attitude towards your father is terribly fair. Hes also worked his ass off for where he is and what hes got etc Retirement is hard for him and try to be accepting of that. Wish you well

I understand why you say this, and many people can at first not think why me and my wife feel this way. My wife's sister started working for us this year February. At first she also said she can't think why we feel towards my dad as we do. You must all hear her now. Now she knows best. I must sort out employee complains on a daily basis, problems he create. We looses great workers, then I sit with the problem. he had my wife, and her sister in tears just the other day, just because he wanted to be spiteful towards an employee, because she booked off sick when she didn't feel well. With this incident specifically he created so much chaos, and he just kept at his point.

I mean, how can I manage a business, when he, who has majority shares, does things like this? I fsk up the whole place, then he go home, watching his freaking chicken cages. And also, he did not work his ass off for where the business are today. He managed the place for his brother, and out of desperation with my dad, his brother decided to sell the place to him. Thats when I came in to the picture. So this is going back many years now.

I know, many people think I'm bad news, but all I want to do is to save him from himself, and let him retire in peace, and so that things between us can recover, I know it will.