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My Dad is about ready for retirement and fortunately for me, is willing to sell me part of his business (in next 3 or so years).  The bulk of what I'd like to buy is around 12 franchise stores, which make between $30k-100k/each I believe (avg ~$50k).  He's virtually checked out, meaning they're going to continue making money, but he's lost the zeal to make them more profitable.

How would FW best recommend I "buy" this from him?  How does one determine the worth of the business?  It's also not quite cut/dry because he owns the land on several of them, then leases the others, and then leases land to other competing franchises.

I have good credit, good income, relevant business experience, and I've also worked for the franchises for ~8 years in my youth, so I understand the business.  I'm almost 30 with a positive debt/equity, but my credit is leveraged pretty good as it is.

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He's your dad? Shouldn't you just...inherit everything or buy everything for 1 dollar.

How much would it cost to buy a franchise yourself + setup costs and time to make each of them profitable?

Somewhere around 5x earnings seems reasonable. Even that would be 3-6 million. How are you gonna pony up that kind of cash?

Why not work out a deal with your Dad where you take over running everything, and then you do a profit split. Also add into the deal that you take over everything when he and his spouse(if he has one) passes away.

DaGimp said:   He's your dad? Shouldn't you just...inherit everything or buy everything for 1 dollar.
  
Not if the business is the dad's retirement savings.  Or if there are multiple people that he will be leaving his assets to.

Have your Dad put you in charge of operations of the business right now while he's still around so he can show you everything you don't remember "from your youth" and about the details of *actually* running a business. Then you can prove to him you are actually up for the job and able to carry on his legacy and he'll still be getting ownership $$$ in the mean time.

After a couple of years, you can talk about ownership and whether he wants you to buy it then so he can fully retire or if he just wants to transfer it to you or other siblings after he does. There should be no hurry to change ownership, unless you're want it all for yourself and are worried he's going to give chunks of it (or all of it) to someone else.

In the mean time though, your goal should be to run the business as best as you can. He will be much more happy about leaving the business to you, or working out a partnership arrangement if you can run the business for 2 years and increase revenues. If it turns out you don't really know how to run a business with 12 franchises, this protects you also from a terrible investment and waste of time.

daw4888 said:   Why not work out a deal with your Dad where you take over running everything, and then you do a profit split. Also add into the deal that you take over everything when he and his spouse(if he has one) passes away.

This is the way businesses used to be passed on. I'd say that you should agree on a value and then agree to pay him a percentage of profits until that value is reached. As for the value of the business, you've got a lot of things to take into account: net assets, cash flow, revenue, etc., there are plenty of books that discuss how to value businesses (think value investing).

Franchise startup costs are $200-300k. The business is definitely part of his retirement. He's basically retired now and works mayyyyyyybe 2-3 days a week answering emails.

I thought I remembered reading usually 3x earnings or "owner benefit" but that multiplier changes.

As for paying for it, I'd get a "loan" via a bank or through owner-financing (my Dad).

I want to own it. Profit split and waiting for family to pass just leaves the window for other family members to try and take things over or it leaves many years for somebody to try and change the deal/arrangement. Also, what happens if I increase profits big-time. All the sudden people are having second thoughts, etc.

Cash flow is just part of the picture. What does the balance sheet look like (value of all assets [including land, equipment, inventory, etc.] and liabilities [including mortgages, accounts payable, etc.])?

ecoatrain said:   My Dad is about ready for retirement and fortunately for me, is willing to sell me part of his business (in next 3 or so years).  The bulk of what I'd like to buy is around 12 franchise stores, which make between $30k-100k/each I believe (avg ~$50k).  He's virtually checked out, meaning they're going to continue making money, but he's lost the zeal to make them more profitable.

How would FW best recommend I "buy" this from him?  How does one determine the worth of the business?  It's also not quite cut/dry because he owns the land on several of them, then leases the others, and then leases land to other competing franchises.

I have good credit, good income, relevant business experience, and I've also worked for the franchises for ~8 years in my youth, so I understand the business.  I'm almost 30 with a positive debt/equity, but my credit is leveraged pretty good as it is.

  
No way to answer that without stating what his attentions are:
1) Sell it to his son at fair market price?
2) Sell it to his son at a bit of a discount because it's his son?
3) Sell it to his son as cheap as possible and still have it be considered an 'arms length transaction'? 

Those are 3 different goals with 3 wildly different answers.


FYI, most family deals are "seller financing" where he just continues to draw some form of an income while not having to do anything anymore.

ecoatrain said:   Franchise startup costs are $200-300k. The business is definitely part of his retirement. He's basically retired now and works mayyyyyyybe 2-3 days a week answering emails.

I thought I remembered reading usually 3x earnings or "owner benefit" but that multiplier changes.

As for paying for it, I'd get a "loan" via a bank or through owner-financing (my Dad).

I want to own it. Profit split and waiting for family to pass just leaves the window for other family members to try and take things over or it leaves many years for somebody to try and change the deal/arrangement. Also, what happens if I increase profits big-time. All the sudden people are having second thoughts, etc.

  
You are correct in that regard, you want all this in as much legal writing as possible.  Family fighting over $ is the worst sh1t show ever.

Make sure you are on the same page with what you are trying to accomplish and then talk to an attorney and an accountant to figure out the best way to structure the transaction.

@dshibb, I'd probably guess #4, sell for above market value because he's put sweat equity into it and probably overvalues it. I will then be able to probably talk him into #1 or #2. Then again, one of his competitors might actually over-pay because he doesn't want competition.

I'm guessing he'd like the idea of me owning it, because he can still go to every location and be "boss" and yell at people...even if on paper he's not.

@rsrvoir - I do need to crunch these #'s for sure. It's always been a grey area how much the business makes, as with most families.


Question about seller financing. Let's say I buy the business for $2 mil (random number). And it's a 20 year seller-financed loan at maybe 4%. That means I'll be paying him around $14k/month for 20 years. If he wants to retire and is say 60 year old. He'd probably much rather a lump-sum so he can do whatever with it. Who wants to get payments when they're 80? Especially since he's probably making $50k/month doing almost nothing.

I wonder if a bank would do a partial loan, then owner finance the rest? Maybe 1mil cash payout, then 1mil owner finance?

ecoatrain said:   @dshibb, I'd probably guess #4, sell for above market value because he's put sweat equity into it and probably overvalues it. I will then be able to probably talk him into #1 or #2. Then again, one of his competitors might actually over-pay because he doesn't want competition.

I'm guessing he'd like the idea of me owning it, because he can still go to every location and be "boss" and yell at people...even if on paper he's not.


 

  
Why the hell are you interested in entering negotiations with your wealthy father who expects you to accomodate him instead of the other way around? Look you can buy any franchise you want. The reason why you buy your dad's is because he offers you at least an ever so slight discount on the purchase price; otherwise there is no reason from your perspective to buy his other than doing him a favor. If you add to that the fact that he expects you to overpay him because you're his son and you should do that for your father, I would say "f*** that noise". You're starting off negotiations with one of the parties having completely the wrong attitude, and thinking that you'll convert him over to your attitude. 

I'm normally the person on these forums that is more open to agreeing with someone's private deal. This one doesn't smell right. A father that isn't starting off conversations with at least the expectation of selling at fair market value to his son, is a father that will ultimately use the relationship in the negotiation table and try to guilt trip you into maybe not even getting fair market value. If you try to shoot for a father son discount(which even a 5% discount is what you should get to agree to take his instead of someone else's) he'll probably just end up holding it against you in the relationship. Then if somehow you succeed in even getting fair market value and you make it wildly successful and make a lot of money...he'll probably just resent you for it.

If a father isn't coming to the table with at least FMV on his mind, than I say run away

It does not seem that you have had a conversation with him to see what he wants. Does he want to sell? Maybe he already has a number in mind and it may be much lower than you think. If he knows you want to buy, and you have a good relationship, he will most likely work with you to make sure you are both happy. Do you have any other siblings who may want to take part of this as well?

He does want to sell in a couple years and his competitor (owns like 75% of the other franchises in the state) has already talked to him about buying.  He just now found out that I had an interest in it and would rather keep in the family.  I'm already successful in my current ventures, so he originally thought I had no interest in it.  I plan on talking to him more about it, I don't think he's picked a number yet, but again I haven't even seen income/bal sheets so I have no idea how profitable it is, etc.

@dshibb: I might have phrased it poorly. His idea of fair market is probably higher than what actual fair market is. It'd just be some discussion to get to fair market.

The main reason is, I can't just go out and buy a business for fair market with my current standing. I'd probably need more cash down than I currently have. I'd have to sell stock, rental properties, etc to get enough to put down, which I don't want to do because they're currently good investments.

Also, the business would be profitable 'as-is' and be able to make enough to clear the loan payments. I also know of many other improvements that would make it much more profitable that he currently doesn't care to put the effort into. So I see the potential profits.

sfvera said:   It does not seem that you have had a conversation with him to see what he wants. Does he want to sell? Maybe he already has a number in mind and it may be much lower than you think. If he knows you want to buy, and you have a good relationship, he will most likely work with you to make sure you are both happy. Do you have any other siblings who may want to take part of this as well?
  

See the problem is that a father who values his business more than it's worth for his own son, is not particularly concerned about both parties being happy with the transaction. Instead he's valuing his own financial well being substantially above his both his relationship with his son and his son's well being. Most parents take the position that they value their well being and their sons well being equally and will approach such a discussion around what a 'fair deal looks like' because they're family. Instead this looks like a father that would prefer to use the relationship to get a better deal for himself.

That is not good for family harmony even if you can talk him down because if you talk down an unrelated 3rd party it doesn't matter because it doesn't matter what he thinks of you. When it's your dad it does matter so having to talk down your dad is good way to already create animosity.

dshibb said:   
ecoatrain said:   @dshibb, I'd probably guess #4, sell for above market value because he's put sweat equity into it and probably overvalues it. I will then be able to probably talk him into #1 or #2. Then again, one of his competitors might actually over-pay because he doesn't want competition.

I'm guessing he'd like the idea of me owning it, because he can still go to every location and be "boss" and yell at people...even if on paper he's not.



 

  
Why the hell are you interested in entering negotiations with your wealthy father who expects you to accomodate him instead of the other way around? Look you can buy any franchise you want. The reason why you buy your dad's is because he offers you at least an ever so slight discount on the purchase price; otherwise there is no reason from your perspective to buy his other than doing him a favor. If you add to that the fact that he expects you to overpay him because you're his son and you should do that for your father, I would say "f*** that noise". You're starting off negotiations with one of the parties having completely the wrong attitude, and thinking that you'll convert him over to your attitude. 

I'm normally the person on these forums that is more open to agreeing with someone's private deal. This one doesn't smell right. A father that isn't starting off conversations with at least the expectation of selling at fair market value to his son, is a father that will ultimately use the relationship in the negotiation table and try to guilt trip you into maybe not even getting fair market value. If you try to shoot for a father son discount(which even a 5% discount is what you should get to agree to take his instead of someone else's) he'll probably just end up holding it against you in the relationship. Then if somehow you succeed in even getting fair market value and you make it wildly successful and make a lot of money...he'll probably just resent you for it.

If a father isn't coming to the table with at least FMV on his mind, than I say run away

  ^^ That. Also, what's all the BS about "he'll still be able to go to all the businesses and yell at people, even though he's not the boss"? Really? is that something you REALLY want? 

ecoatrain said:   I might have phrased it poorly. His idea of fair market is probably higher than what actual fair market is. It'd just be some discussion to get to fair market.

The main reason is, I can't just go out and buy a business for fair market with my current standing. I'd probably need more cash down than I currently have. I'd have to sell stock, rental properties, etc to get enough to put down, which I don't want to do because they're currently good investments.

Also, the business would be profitable 'as-is' and be able to make enough to clear the loan payments. I also know of many other improvements that would make it much more profitable that he currently doesn't care to put the effort into. So I see the potential profits.

  

Okay so his intentions is to sell it to you for fair market value, it's just that he doesn't have a good idea what that is?

That's probably fine then. The first discussion you want to have with is not price. It's what kind of deal does he want to do with his son? Does he want to do a fair market value deal? Or does he want to offer you a small discount since he doesn't have to use a business broker(attorney, but no business broker) and because you can buy any franchise, but you would prefer if you bought his instead of someone else's(I'm sure he's of the same mindset).

Have that discussion first and agree on a percentage discount(0% discount/aka exactly FMV, 2%, 5%, 10%, 15%?, what?) and you also need to talk about structure of deal whether that is owner financing, bank, he still collects a salary so you can deduct his 'financing', etc. Then once that discussion is over than all you need to do is just have a good valuation done and you'll have your number. Once you get his intentions price discovery becomes the easier part.

It may sound bad the way I put it, but yes I'd love for him to stay involved. If he goes into a location and sees an employee cutting corners, that could cost big money. I'd love for him to tell the employee their mistake or tell me to fire them. He's not angry or anything. Just expects employees to do their job.

@dshibb, I think that's the best thing we can do.  An independent evaluation for FMV, then he'd probably knock some % off of that.

Can I buy it with no money down using owner finance?  If it was $2mil, then $1mil bank loan and $1mil owner finance?  So it'd be essentially 50% paid off in the banks eyes, so money down wouldn't be necessary I'd hope.

I see a lot of warning signs here:

1. Dad wants above market value because of the "sweat equity" he has put into the business? If I can open the exact same franchise next door (in theory, ignoring the likely geographical franchise restrictions) for $200k-500k, why would anybody pay your dad more? The only exception to this that I could see is if your dad was a thrifty guy and you thought you would somehow see the money back in his estate when he passes. That's a big gamble though, especially considering that you could easily lose 50% in estate tax depending on the size of your father's estate.

2. Are you the only heir to this mini-empire or do you have siblings/other family who also want some of your dad's business holdings? This is where things could get tricky, say you have two siblings and each get 3/9 businesses, what's going to happen if/when some of those locations fail and you/they start thinking they got screwed? That'll make thanksgiving awkward....

3. Seller financing is (by far) your best bet. I would suggest agreeing on a total price with the option to prepay out of your profits, but also since it's dear old dad, see if he would allow you to skip payments as long as you remained ahead of your repayment terms. For example, let's say you buy the business for a million and repay $100k/year for the next ten years. Say 2014 is a great year and you repay $200k. Because you're 100k ahead, you could (in theory) not pay him in 2015. The benefit to this flexibility is it gives you access to ready cash if you have an expansion opportunity, if you have a lean year or some huge capital expenditure comes along.

4. You mentioned that your dad would want to be seen as "the boss" whether he is or not. This is not going to end well for you. What happens the first time that dad comes into the restaurant and fires your best employee because he was having a bad day and he didn't "respect the old man"? How often is he going to come into the restaurant and start changing things because "junior just doesn't know the business like I do". If you take over the business, you need to have a very clear understanding about who is in charge.

mwa423 said:   
2. Are you the only heir to this mini-empire or do you have siblings/other family who also want some of your dad's business holdings? This is where things could get tricky, say you have two siblings and each get 3/9 businesses, what's going to happen if/when some of those locations fail and you/they start thinking they got screwed? That'll make thanksgiving awkward....
 

  
Just ask Tom and Ken Dart.

http://www.businessweek.com/stories/1995-07-09/the-darts-fear-lo...

People. OP doesn't care what we think as far as whether or not it sounds like a train wreck, etc. He's going to buy. He just wants guidance on how to structure the deal and value the biz. For that, dshibb has offered excellent advice. Best of luck to OP!

The above market value comment I made was just my guess. I can't base it on anything.

There are MANY heirs. I'm the only one capable of owning/operating. I'd have to buy to justify the ownership. Nothing is given, except perhaps a given discount on FMV.

I like the pre-payment terms. I think he'd absolutely be flexible on repayment, especially if I could get the bank to give him an initial lump-sum. So if worst came to be, I'd be current on bank payments and he'd let me slip on payments to him if it was justified. Using your numbers, I can see after 7 or 8 years, getting married, then he just says we're even and I don't owe him anything else for my wedding present or something.

He doesn't need to be perceived as the boss exactly, he'd still be backseat. I just know that he's owned these places for 20+ years, and would like to be able to walk into the stores and tell them to straighten the sign, clean up the cigarette butts in parking lot, or cut the grass. Versus selling to a competitor, he has no influence. I'd still run the show, but he'd like being able to give me a piece of his mind whenever he feels like it.

He'd hate to sell to a competitor and see them not keeping store fronts looking good, or having a customer go there and have a terrible experience and associate it with him.

How secure is the franchise?
Is it like Subway is rumored to be, where the parent corp can just seize all your franchises for any reason they choose and you've given up your right to sue them?

You need an independant appraiser.  They exist.

mwa423 said:   I see a lot of warning signs here:
 

  
The only warning sign that matters is that he hasnt even talked to dad about this beyond expressing an interest.  He clearly needs to toss out the concept of "buying from dad" and just treat it as any biz purchase because it doesnt seem to heading down the path of a typical family transfer.

The biggest of the warning signs mentioned in my book is the possibility of other siblings or heirs who think they all probably deserve a piece of this guy's business, and OP here is wanting to take the initiative to get it all in his name before his Dad gets coerced by the other family members to get everything put in their name. OP - whatever family members you are worried about getting their fair share now, are still going to be there in the future scrutinizing any deal you make now, trying to prove you forced him to sell you the business under duress.

OP states the Dad makes $50,000 per month by practically doing nothing - then why one Earth would he EVER sell to you before death? His retirement isn't going to get better than that.

Why not just start with one store and add to it as you can afford it, slowly phasing him out as he eventually sells you the 12 stores? And if you do it over time you'll have a chance to see if you really want to be a franchise owner/manager.

I'll second everyone's comments that there are only really two reasons to do this deal. Either he's selling to you at a discount to FMV or replacement cost, or that you're getting credit terms without which you couldn't do the deal. Or both.

Spread the payments over a bunch of CashBack cards.

If I was having this conversation with my dad it would go something like this:

1) Conversation about his long term goals in regards to these businesses. Would he prefer to be bought out on them to get more money for retirement? Is he okay with illiquid private businesses in the estate if he were to pass away and all of the hassles that come out of that situation with multiple heirs? Is there any ancillary joy's he gets out of owning them that he like long term? Is there any hassles they bring to him that he'll appreciate not having to deal with anymore? Is he at all worried about what your siblings will think about the issue and how would he approach that issue? Just ask as many questions you can about the topic so that you can see where his mind is on all these details. You're primarily fishing for red flags(family, financial, or goals). You're also trying to get him to a place where he's really thinking about it and so that he feels like he's making the decision instead of you thrusting it upon him. Lastly, you're building reference information so that you can adjust the structure of your offer to fit with his goals and any issues that might be at play here. #1 alone might take a couple of conversations just to give him time to mull certain things over.

2) Once I felt like I gotten a very good picture about how he sees the whole topic of selling vs. not selling and what he wants and doesn't want, I would move forward with talking about structure next. I would ask him about his desire for lump sums vs. payments over time. I would vocalize obviously my own preferences for a distributing the purchase over time, but that I'm flexible. You also want to ask about things like time frames. When does he want the transaction completely over? Also a good occasion(as an earlier poster pointed out) to get his thoughts on overpaying certain years and then underpaying a subsequent year(as long as you're still on schedule). You also want to probably bring up maybe transition related questions like: "Would your prefer a period where I get more acquainted with the operations while you're still owning them or would you prefer a hard date where I have little involvement 1 day and then I just pick up everything the next day?" Also asking him about any roles or authority he would still like to do(as you mentioned he might enjoy whipping employees into shape whenever he stops by). Get his thoughts on all of these structure details.

3) Then proceed with the topic of his intentions about pricing. "I realize we haven't discussed price yet and we haven't yet sought out an independent appraisal to determine a fair market value of the property yet, but I would like to get a feel for what you're intentions are on that subject. Also obviously we're just spit balling here so your under no obligation to accept anything in the future based on what we discuss, but... since this is an intra family deal you don't have to pay for a business broker. And obviously I would prefer to buy your businesses instead of someone else's and I think you would probably prefer me buy them then some third party. So without yet knowing what the fair market value is... is it you're intentions that you sell these for exactly fair market value and you keep the commission you would have payed a business broker, or is it your intention to split those savings or since this is a family deal maybe a little bit of a discount because you know they're staying in the family, etc. Generally speaking what kind of value do you place on this being a intra family deal vs. one that you would do with just some random 3rd party if you had to express that in percentage terms? Get his thoughts on that.

4) Go get 1 or 2 independent appraisals of the businesses done and then go get an attorney and a *creative* accountant(or successioin planner). The appraiser helps you get price discovery. The accountant helps you to best position the transfer primarily from a tax perspective(where things like paying a salary as a substitute for payments(under maybe a deferred comp structure), increasing or decreasing the stated interest rate on 'owner financing' and subsequently increasing or decreasing purchase price in conjunction to maximize tax efficiency of transfer, and then once that's all agreed upon get the attorney to draft up the contracts so that everything you guys want is on paper and enforceable.

cbdo2007 said:   OP states the Dad makes $50,000 per month by practically doing nothing - then why one Earth would he EVER sell to you before death? His retirement isn't going to get better than that.
  Because OP is merely guessing about the finances, he hasnt actually talked to dad about any of this...

Does the Franchisor have to approve of any transfer of the franchises?  That alone could dictate how you have to do this, if alone you do not have the financial resources to qualify as a franchisee.

Glitch99 said:   
cbdo2007 said:   OP states the Dad makes $50,000 per month by practically doing nothing - then why one Earth would he EVER sell to you before death? His retirement isn't going to get better than that.
  Because OP is merely guessing about the finances, he hasnt actually talked to dad about any of this...

  

That and do you have any idea how much of a hassle it is to try to deal with small illiqiud franchises upon death? Try dividing those things up once. Have 8 owners each and they're guaranteed to do terribly. Have each one take a different franchise and here starts the b!tchfest about how the one Billy got is more profitable than the one I got. Try to sell them? Yay, like vultures on a dead deer they'll come swooping in and try to use the heir's impetus to sell to let them scoop up the assets on the cheap.

Then don't forget the hassles private businesses place on a 75 year old man in the beginning stages of dementia or suffering from severe arthritis. Cuz lord knows they would just love to get up every morning and go check on a bunch of adolscent teenagers when it's painful for them to walk and they're having trouble remembering details about the business.

Let's face it, one way or another there is an exit strategy. It's just when and how.

Assumptions based on OP

Father owns a number of frachises.  Will assume he has had most of these for quite some time.  Each one makes an average of $50K for a total of $600K per year

I really hope I never get to the point that if I am making $600K a year for some time I feel the need to charge my kid to take over my business.  Furthermore I really hope I never feel the need to over charge him and charge interest (really?  Interest to your own kid?)

I also hope that if I was making $600K per year my whole retirement plan is not based on having to rip my kid off for a couple mil.  Shouldn't he have way more than enough for retirement if he had been running these for at least 10 years?


I'll never understand how people treat their own children.


Oh and for the record my wife's family owns various businesses around the state of CA.  They would never ever charge their children one penny to take over one of those businesses.  In fact the only reason they still run them to this day is to make more money so that they can give thier kids more money someday.  


Good luck OP.   I really hope that in the end your father gives these to you and lets you give him some of the profits.




 

mikef07 said:   
I really hope I never get to the point that if I am making $600K a year for some time I feel the need to charge my kid to take over my business.  Furthermore I really hope I never feel the need to over charge him and charge interest (really?  Interest to your own kid?)

 

 Just an FYI interest or implied interest is really occurring either way. 

If you don't have stated interest than you have imputed interest set by the IRS. Google imputed interest and you'll see for yourself.

Also there is really no difference between a low price and high interest rate and a high price and low interest rate over the right time frame. Basically under the right time frame $1.5 million at 8% interest can be the same as $1 million at 0% interest. In these deals interest rate is usually nothing more than a function of tax planning(deduction and reported income vs. no deduction and capital gains).

dshibb said:   
mikef07 said:   
I really hope I never get to the point that if I am making $600K a year for some time I feel the need to charge my kid to take over my business.  Furthermore I really hope I never feel the need to over charge him and charge interest (really?  Interest to your own kid?)




 

 Just an FYI interest or implied interest is really occurring either way. 

If you don't have stated interest than you have imputed interest set by the IRS. Google imputed interest and you'll see for yourself.

Also there is really no difference between a low price and high interest rate and a high price and low interest rate over the right time frame. Basically under the right time frame $1.5 million at 8% interest can be the same as $1 million at 0% interest. In these deals interest rate is usually nothing more than a function of tax planning(deduction and reported income vs. no deduction and capital gains).

  Thanks, but I know nothing about this because I simply have never been part of nor would I ever be part of charging my kid for something or being charged for something by my dad.

I have a hard enough time trying to pay for dinner when my dad is with us (he gets so pissed when we pay) let alone something like this.

BTW thanks for the advice you gave him.  Appreciate you taking the time to write all that out even though I have nothing to do with it.

mikef07 said:   
I really hope I never get to the point that if I am making $600K a year for some time I feel the need to charge my kid to take over my business.  Furthermore I really hope I never feel the need to over charge him and charge interest (really?  Interest to your own kid?)

I also hope that if I was making $600K per year my whole retirement plan is not based on having to rip my kid off for a couple mil.  Shouldn't he have way more than enough for retirement if he had been running these for at least 10 years?


I'll never understand how people treat their own children.

 

  
To be fair to dad, OP is just guessing about all this.

And to be fair to OP/OP's family, we're talking about taking dad's primary asset that supposedly generates $600k/year (worth millions) and giving it to just one of his multiple heirs. A formal sale is virtually required in order to not screw OP's siblings.

But I agree with the general sentiment.

There are different ways to calculate the value of the business. A quick and dirty way to calculate the value is the average net income of the business in the last 3 years + depreciation + owner's salary + interest divided by 20% (this formula is commonly used at the SBA). The value does not include inventory or RE value.

Since you are buying it from your dad, see if he is willing to finance you directly (less costs and headache with the banks). If not, banks typically will finance the purchase with 30% down payment on the business for 10 years. On RE, you can buy it with 10-15% down payment (depending on types of property).

No matter what, I would recommend a business appraiser for the transaction if you go the personal route financing. Typically, a business appraisal cost $2,000 to $5,000. I hope this helps...

Skipping 49 Messages...
ecoatrain said:   So an update, I met with him in person and he says he wants to sell, but after looking at things, he's not ready. Too many wheels turning, but it got him working on how to structure it to sell. From what I gather, there is a separate s-corp(?) the holds the real estate for 6/12 locations and it also has some other unrelated real estate. I think he said the income 'flows-through' because it's an S-corp.

He wants to sell slightly below FMV to me, but we need to agree on what FMV is. He thinks of all the business as a whole and what it makes him, so he values it at $N. Him and I (after he gets structured), need to spend a great deal of time, defining that the franchise portion is worth X, franchise real estate is worth Y, other real estate Z, and X+Y+Z=N. The problem now is he just blurs it all together to N...but he's sensible/reasonable so once it's clearly laid out. He just doesn't bother with stuff anymore because his accountants do everything. He plays tennis, mows the lawn, and grandkids now.

If the real estate is set off in it's own corporation, it shoud be very easy to isolate the business operations performance. Separate entities have separate books, even if it all ends up being reported on one tax return.

I can't figure out what family comment I made, that made people think it was a bunch of hands in the pot.

You answer your own question in the very next sentence:

His brothers and some other extended family is employed, and they may have a pipe-dream of 'running' the business, but they have no skills or legitimate interest in it, so it'd just be me laughing and telling them no.


So the current status is, holding pattern, while he figures out how to structure things. He's going to talk to his accountants too and start figuring out how to split/value the business.
This is the time to start getting involved, before getting all the responsibility dumped on your lap as owner. Either taking the responsibility of running a single unit as the manager (which you admit you have never done), or creating a new executive position for you to essentially intern.
He relies on the income now, so he needs to either make sure the selling price plus 401k/etc is enough for him to retire on, or he might need to hang on a little longer.
I'm sorry, but something is wrong with this picture as you've presented it, if he still has to rely on the supposed $600k/year income. 



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