Two Or More Individuals Join Together To Acquire A Business:
The two most common reasons for two or more individuals to join together to acquire a business is the need for their combined expertise and/or a need for more capital then either one of the individuals can generate on their own. A common partnership situation is a Chef and Maître d' forming a partnership to acquire or start a restaurant. In this case defining each partner’s area of responsibility is relatively easy, the Chef manages the kitchen and the Maître d' manages everything else. Not all partnerships are quite as easy to define.
I always recommend that prior to acquiring or starting the business that the partners make a list of all the job functions within that company and decide who will be responsible for which job function. E.g., finance (accounting), facilities, procurement, contracts (legal), warehousing, shipping, sales, personnel, advertising, fleet, etc. By creating the list and then designating responsibility for each item the partners will ensure that all job functions will be covered upon acquisition. Please remember that there is a difference between who actually does the job and who is responsible for it. An employee of the company, that you are considering acquiring may currently and very adequately perform the warehousing and shipping functions and there is absolutely nothing wrong with that. You are not looking for one of the partners to necessarily replace that specific employee. The questions are; which partner does that employee report to, which partner will ensure that that specific job function is running efficiently and which partner is responsible for making sure that that job function is performed when that employee calls in sick or takes a vacation.
Although not a rule, the type of partnerships that seem to work and have longevity are those where each partners expertise is in a different discipline. For instance the Chef and Maître d', the engineer and administrator and the salesman and administrator are good examples of complimentary disciplines. Each partner will be able to look after different tasks and take on different responsibilities within the business and they will or should not be getting in each other’s way. Partnerships that seem to have longevity problems are those where the disciplines of the two partners are the same, both are salesmen or engineers or administrators.
Employee Buyouts:
Employee buyouts are a partnership created by a group of current employees, two or more, (and in some cases outsiders may be involved) who purchase a business from their current employer. The need for the employees to operate as a group is usually created by the need for more capital than any one individual can obtain combined with a need to maintain a key group of expertise. I will not be covering the topic of employee buyouts in this manual primarily because they have a totally different set of criteria for consummating the purchase and as well the potential buyers have a great deal of knowledge of the current status and overall operation of the business in question.
For interest sake only, the primary pitfall in employee buyouts is in defining the structure of the employee group, namely the relationship between the employee shareholders and their relationship to management who may or may not be shareholders as well. In some cases an employee shareholder will have a problem understanding that he is an employee when he reports to work every morning and a shareholder when he attends shareholder meetings. He is never act as an employee and a shareholder at the same time.
A Current Business Owner Looks For A Partner:
There are numerous reasons why the current owner of a business may look for a partner.
- A common requirement for a partnership occurs when someone who owns a business requires additional capital. The current owner seeks out a partner, someone to put in that additional capital and in return share in the profits of the business. When facing this type of opportunity the potential partner (buyer) should discover why there is a need for additional capital.
If the story line is that the business needs more capital because of growth ask the current owner why he cannot obtain or is not willing to utilize bank loans or other third party financing methods to meet his capital requirements. There are many valid reasons why a business may not be able to obtain loans from a bank or financial institution or why loans are not a valid method to increase the cash available to do or increase a company’s business. Financial institutions have lending guidelines that determine how much, if any, money they will lend to a business for different items.
For instance, a business will usually not be able to borrow more than 50% of the cost of their inventory or more than 75% of the value of their current receivables, usually receivables that are less than 90 days old. Certain types of inventory, perishables for instance, will not be accepted as collateral at any percentage. Other types of businesses (those with a statistically high failure rate) may find it difficult to obtain loans or third party financing.
Satisfy yourself that the reasons and explanations that the current owner provides you for needing additional capital are valid. Make sure that you are not funding losses, unless of course you feel that it is still a golden opportunity. Make sure that the capital that you are putting into the business is going into the business and not into the pocket of the current owner. A lot of business owners will advance their businesses funds. These advances should appear on the financial statements as “shareholders loans”, but they do not always appear in that manner. When negotiating the deal be sure that when you put your money into the company that the current owner does not plan on paying himself back any of his shareholder loans from the proceeds.