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Thread: Silent partner deal with 95% startup

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    Default Silent partner deal with 95% startup

    There is a restaurant for sale me and my wife are looking to purchase or become partners. The asking Price is 475k. We are meeting Monday to talk about possible partnership deals and i have no idea what a fair deal would be. Me and my wife will be running it with salary and they will be silent partners. Here's what I am thinking right now.

    They receive full asking price of 475k. We put up 30k for 1st month operating cost as a "buy in". Me and my wife receive a salary of 750$ a week with possible bonus and health insurance. This is on the low end for a manager/GM in our area. So now every month they take 85% of net profit as a payment for the 475k and 15% goes to an emergency fund for things like freezer breakdown or an emergency. After the 475k is paid back we are 50/50 partners. The one catch is we would want a buy out clause that allows us to buy them out at why time after the principle is paid at a PRE determined price. They dont really want to stay In the buisness but trust us to run the place and make them money as opposed to just sellimg it so think a buy out is inevitable. Am I way off on the terms, does it seem reasonable?

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    Post Impressionist Array vangogh's Avatar
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    Welcome to the forum Machmood. Your question is one we get a lot. One thing I always say with this question is ultimately the right deal is the one all parties think is fair to them. There's no perfect way to do this and there are usually lots of different factors at play. I can offer some thoughts though.

    One thing that struck me while reading your post is I'm wondering what exactly the current owners will be doing to justify their 50% once you've paid for the restaurant? You'll be paying them back with pretty much everything the business makes, outside of your salaries and the emergency fund. Maybe I read things wrong, but it sounds like their only financial contribution as silent partner is the purchase price for the restaurant. Are they going to to be contributing more money or money after the money is paid back. If not why would they still be 50/50 partners? Why not just work out the deal to pay them the price of the restaurant, even if that means paying a little more because they'd be waiting.

    It seems like they're really putting in is patience to wait until you can pay them back, but I have a hard time seeing that being worth 50% of the restaurant. Like I said maybe I'm reading this wrong, but that thought keeps coming back to me.

    I guess I can see why you'd make that offer, since they are waiting on the sale and it doesn't sound like they're asking for interest on what is essentially a loan. If the sale itself hinges on this kind of 50/50 partnership then it doesn't sound too far off, though I would definitely make sure to get that buy out clause and also for an amount not out of line with what extra you would have had to pay in interest on a loan for the same amount.
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    I hear what you are saying, and my thought exactly is our buy out will be the interest that would have accumuated. My thought process is the 50/50 entices the owners to do the deal with us. I know they had an offer of 100k down and turned it down. If they are going to hold such a big note they wnt to be sure the person won't ruin the buisness and not pay it back. Then owners really like us and trust us, but money talks and their looking at 100k down payment so it's tough. With the deal Im proposing im essentially offering a deal 0 down financing. And I split 50/50 profits at the end until I Can pay off the interest(my buy out). The other thing is there is a liquor license. I can use that as collaterall down the road when I buy them out as at that time I would be the sole owner

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    im shocked that someone would put up $475,000 and just let you run it for them

    to me any deal is a good one for you since you have 0 risk

    i feel your deal is good for you

    if i were mr. 1/2 a million id just hire you as an employee w/ some bonus's....i think your in a lucky situation

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    My only thought is you never really want to be 50/50 partners, because then you can't do anything without all partners agreeing. Someone has to have that extra .1% to take control when needed. So for their 85% payback, what % of equity do they control? What do you control? Who makes what decisions and do you have that in writing? What if things fail? The odds of a new business succeeding is low, and if 475K just gets you the place, who's putting up the operating capital to keep vendors and employees happy?

    I also happen to think it's a pretty sweet deal for you, given that you're putting little at risk except your time.
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    You know I hadn't even thought about the lack of risk. I can see that worth their end of the partnership once you've paid them back. It is a pretty good deal to be able to enter into this business without the risk. I'd still figure on some way to include the buy out clause. If they are willing to finance the purchase they do deserve something, however you're going to want to take things over at some point. If you haven't already worked out a deal maybe there could be some kind of sliding partnership split. In the beginning when you haven't paid much, they own a much larger share, but by the time you've paid them back your's is the share that's much larger and you can have something set where you buy out whatever remaining % of the business they own at your discretion.
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    This is one of those deals which soars or sinks on the restaurant's cash flow potential. With a strong bottom line, Machmood gets to the 475K hurdle point in a reasonable amount of time. Good for him, and good for the sellers (since the faster they get their 475, the greater their ROI). If the cash flow stream is more like an anemic drip, then eventually both parties grow weary of the fact that no meaningful progress is being made toward the hurdle.

    It's noteworthy that the sellers have declined a 100K-now-375K-later offer, although this might be attributed to their perception that the offeror had no credibility, either in terms of financial wherewithal or in their restaurant-running chops. In any event, the sellers are seeing their proposal to Machmood as a way to get not only their 475K asking price, but then afterwards enjoying half the pie from then on. But this arrangement is superior to a flat-out sale for 475K only if they believe that Machmood can get them their 475K in fairly short order. So they must feel that Machmood brings significant potential to the deal.

    Machmood, with respect to your buyout provision: A very good idea on your part, although it might be tough to get them to go along with a pre-determined price. That would put the ball solely in your court: if down the road you see the business as being worth substantially more than the agreed price, you'll exercise that option to your benefit, and to their detriment. On the other hand, if the value at such time is significantly south of the pre-determined price, you'll just choose to disregard the option. So be prepared for them to either insist that the buyout price is to be determined by an appraisal of the company at the future time, or else they'll want some form of counter-buyout provision in place.

    Also, be very careful you understand how interest (if any) on their 475K is to work. The last thing you want is having the lion's share of the net profit being applied to some "seller's accrued interest" element, with little progress being made at chipping down the 475K principle.

    Machmood, if you're still dialed in, how did yesterday's meeting go?

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    Here's the situation. The restaurant has been in buisness for 15years. 2 years ago a contractor bought it and completely renovated it. He has a very succesfull contracting company and the restaurant is just to much work for him to handle. He still owes 175k on the restaurant in the form of a note to the previous seller. It turns out they are friends and don't have any payback structure. Pretty much right now he isn't making monthly payments. Right now the current owner is talking with the previous owner to see what type of deal he can accept with regards to the 175k owed to him. Just waiting to hear back. On a side note it looks like I may be able to get an sba loan for the full asking price so that is good news

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    Forget about a partnership. Just let them hold the note. Give them the $30K as a down payment and let them finance the rest through the business. While I would not pay full asking price - let's use it as an example. You put $30K down and finance (amortize) the rest ($445) at 5% for 25 years - this will set you with a low monthly payment (around $2,600 per month). Do this for 5 years - then have the note balloon at the 5 year mark. If the current owners believes in the business - then, they should have no problem and it will work out much like you described above. Then, at the 5 year balloon mark, you can either go down to the bank and get a loan for the remained - some $394K (showing the bank that you have 5 years of operating history and solid revenue) or can let the current owner continue how you have it at $2,600 per month.
    Just my thoughts - which gives you the business outright without all the hassles of partnerships and 50/50 splits and all that other garbage.
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    ^^ Im Trying everything in my power to own it outright. the one option is an SBA loan form the entire amount, or an SBA loan for a 200k down payment then have 2 monthly payments, one for my SBA loan and one for the note. Obviosly im looking for outside investors as well. Problem is location is perfect, concept, and cash flow are all great, as always it comes down to money

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