Buying an existing shop

[HB2SF]

Hi Grumblers,

I know this is THE place to ask questions regarding the framing business. I'm looking at buying an existing frame shop. But the seller and I have agreed to keep things rather confidential for now. So I hope you all don't mind if I don't give to many details. I'll try to keep my questions rather general. Thank you in advance for your understanding.

For those who have bought existing frame shops: Did the seller stay on board after the sale? For how long? Were they paid a wage or fee? If so, how much?

[EllenAtHowards]

Our seller was the widow of the owner, and we knew a Helluva lot more about framing than the previous owner. So what I say has little to do with your question (not that that won't stop me...) I wanted to do everything the way I wanted it. The only mistake I made was in not coming in 'hard and fast' and making all the changes in procedures that I wanted all at once. I instead changed things a littla at a time, and got a lot of resistance from the employees at the time. But all is smooth now, so probably however you do it will be fine, and not matter in 10 years...

[Sherry Gray]

In 1995 I bought an existing frame shop that was 21 years old with an excellent reputation. Did I mention that I had never owned a business or framed a picture? I took over in September of that year, but in the months beforehand I worked there as much as I could and still keep my part-time day job. The owner stayed a month (without pay), and the framer stayed a year (I fired her for poor quality workmanship). During that year I attended Larson's framing school and read everything I could, went to the Atlanta show and when the framer and I parted ways, I was able to deliver a high quality, well framed product. I got great tips/help from a neighboring framer for which I am eternally grateful and continued to improve both the quality and the business. I also hired the previous owner back for a while, and then expanded to a full-time employee, which I trained. Currently I have an amazing full-time employee with 20 years experience. All that to say... a vital business is continually evolving.

[Framerguy]

Welcome to the Grumble, HB2SF!!

(That's ironic! I was gonna choose HB2SF as MY login name if Framerguy was already taken!) :eek: :cool:

You didn't mention how much in-shop experience you have so it is vague whether you would need the help of an experienced business/shop owner to get you through the transition period of transferring the business and getting it running to YOUR specifications.

I would imagine that, depending on the personalities of the both of you, there may be some benefits or maybe some drawbacks to keeping the previous owner onboard. If they still looked on the business as their business I would expect some friction in the changover. If they were the helpful type and wanted to share their experiences with you in an attempt to further your knowledge and give you a heads-up on problem customers, then I would expect that you would appreciate the information and the company of one who already is familiar with that specific operation.

I have been around framers with whom I wouldn't spend 2 minutes in a business atmosphere and I have known framers of whom I would hire in a heartbeat for their knowledge of framing and personality around other staff members and customers.

It seems like to keep the owner around or not is a judgement call on your part based on what your gut feelings are about that person and what you have learned about their business savvy.

Picking brains for new ideas ain't that bad a way to spend the day either. ;)

Framerguy

[Paul N]

Originally posted by HB2SF:
Hi Grumblers,

I know this is THE place to ask questions regarding the framing business. I'm looking at buying an existing frame shop. But the seller and I have agreed to keep things rather confidential for now. So I hope you all don't mind if I don't give to many details. I'll try to keep my questions rather general. Thank you in advance for your understanding.

For those who have bought existing frame shops: Did the seller stay on board after the sale? For how long? Were they paid a wage or fee? If so, how much? Welcome to the Grumble!

If you need to know about the business and learn a bit more, it is a good idea to have the owner around for a few weeks.

You can make this part of the contract. Say, 3 weeks full time presence then 3 more weeks 4 hours per day. And you can negotiate that his presence is part of the deal (I did) so you don't have to pay.

If you do pay, it should be formulated as consulting fees so they are a business expense.

[HB2SF]

Originally posted by Paul N:

If you do pay, it should be formulated as consulting fees so they are a business expense. Is there a "standard" rate for consulting fees?

[Bob Carter]

Hey Homie-This stuff is best left to "pros" that have experience in these maters. I speak from a little experience, in that like Ellen, we have actually bought and sold businesses

My recommendation: Get a third party (like an attorney) to formulate a sale package. These folks that have done this before can rely upon experience and make recommendations of how long the owner will stay on, how long they will be available for consultation (and at what rate) and how fees an dexpenses will be allocated to meet the needs of either party.

We often see individuals that sour deals because they don't know how to structure what can be a very complicated matter (just as soon as a problem arises). I am certain that many have done this seamelessly, but I certainly would not trust this to those not best suited to do the deal

If this deal is for any money more than $50K, those fees are a small sum, indeed.

Under $50K and it may not be any more serious than buying a used car from the newspaper

On a personal note, if the operator was spectacular, I would want him to stay forever. If it's an asset-based sale, his phone number might be enough

[Paul N]

Like Bob Carter said, you do need to have an attorney do this kind of contract.

I did go through exactly the same procedure you're asking about, and I did have an attorney (and a business broker) take care of the paperwork, it was worth it.

This is a smart move because what if the seller agrees to stay and the doesn't show up?? The lawyer will pen down what happens in such cases.

I didn't pay for the previous owner to stay, it was part of the sale. He stayed 3 weeks full time and 4 weeks part time.

[Bob Carter]

Paul is great proof of this concept

One more thing I failed to mention was a third party can be a much stronger advocate than when it is you face-to-face with the seller.

Imagine that the seller wants a gazillion dollars an hour for his consulting, yet, you feel it's only worth a half-gazillion. Having a third party involved takes the ego and emotion out of the equation and he might even speak with authority when he suggests that the market value is 1/3 gazillion and by offering half-gazillion you are truly being magnanimous. Trust me, it just sounds more "authentic" when offered from a "disinterested" party.

You would hate to spoil a harminous relationship over a lousy half gazillion dollars

And, if you do not hit a few roadblocks over money, then you have either way overpaid or the owner is way overmotivated (leading me back to way overpaid)

[McPhoto]

Ditto as to what Bob & Paul said - consult with / hire an attorney. They can cover all the little things that can happen w/ this type of transaction - the stuff you would never even dream of.
When we bought our business from the previous owner, our attorney checked the sales agreement to make sure that there weren't any loopholes and that we were covered - actually our bank required this to be done before they would give us the loan.
Luckily for us the previous owner was a very old & trusted friend and wanted to make sure that the business continued in the same manner that he (and his father before him) had wanted. He stayed w/ us for a couple years after the "transition period" just to help out where he could - - - It also gave him an excuse to do something in his retirement and not "bug" his wife.
BTW - Welcome to TG !

[HB2SF]

Bob, Paul, Mike

I have both my attorney and financial consultant on board for this transaction. The seller has listed a time frame and consulting fees. My questions are to find out if they are in line, to much, not enough....inquiring minds.

As I expected from this forum, very good advice based on experience. Thanks all so far, I'm open for more.

[gemsmom]

I sold two shops. One was sold to the manager, so she took over after the sale. The second I sold to a non-framer. I stayed on for one month at no salary (included in the sale). I trained the new owner, and worked full time the first two weeks, 4 days at shorter hours (10-4) for one week, three days at shorter hours (10-3) the last week. After one month, I stayed on for an agreed upon hourly rate until he no longer needed me, about another 4 months.

There was also a no-compete clause in the agreement. I can't work within a 25 mile radius of my old shop for three years after the sale.

[Paul N]

Pamela is right: A non-compete is essential. You don't want the previous owner to turn around, grab all his customers and start a new business next to you!

My contract did include one, by the way.

[Val]

Welcome to the G!

I bought an existing business January 1st of this year. It happened really fast, we first talked of it the end of November, he wanted his name off the title by Dec. 31st. He didn't stick around to help out, I'm a many-years experienced framer, but I needed a lot of help reading his mind! He wasn't good about returning my calls when I had questions ..."Ruth Who and where's her ph#?",... "Where's the frame for this one, and who's is it?"..."How on earth have you operated the chopper without that part?..."Does the V-nailer always trip the breaker after two corners?"..."What's the matter with the mat cutter??"..."Who belongs to that couch and why didn't you tell me you still owe her $250 after I gave it to the used furniture place?"..."Does the sink always drip like that?"..."Does this painting belong to the shop or is it consignment, and if so, who's is it and how do I reach them?"..."How did the $25/month electric bill you told me about turn into $125/mo overnight??".... ad infinitum.

It's been a nightmare, but I've figured most everything out. All of the equipment that came with the shop was defective and needs/needed to be replaced/repaired. I expected to jump right in and start framing. Not.

I really wish I had been smarter (hindsight again, bit me on the butt) and gotten an attorne or a third party involved, but Nooo, trusting soul that I am, too anxious for "an offer I couldn't refuse". He pops in now and then,always in a hurry, when the payment is due, and I keep a file for him with questions and mail and questions and sometimes I get answers, usually not.

Aside from the legal documentation, as everyone has already mentioned, my suggestion would be to INSPECT EVERYTHING THOROUGHLY before you sign anything. Use the equipment, look through the books, files, building maintenance, little things that turn into big things. He took everything with him, all fles, paperwork, the computer that I thought came with the biz, "It crashed", etc. No records. What I learned about his monthly sales I got through the taxation department, public information. All file cabinets were empty when I stepped on board.

From day one, production was held up because the chopper needed parts, the v-nailer didn't work, the mat cutter was ####, plumbing was leaky and eventually flooded my back room, ruining the entire matbd inventory, credit card machine was leased, not purchased, telephone bill had so many extras I didn't need and it took months to figure that all out. He was way behind in orders, and that was embarrassing, considering I didn't know who most of them even belonged to. His customers knew nothing of the sale of the business. Sounds like minor things, but they aren't.

If the owner isn't going to stay around, make sure (I'm not sure how to do this) that they will return your calls immediately with answers.

I'm not sorry I bought the shop. I love it now! I've surmounted a ton of bumps, but it's clearing now and I love it, and the people that work with me (he worked alone). To do over again? I'd not be so darned naive. I trust everyone to be honest and do what they say they will, and they just don't always. It's the real world out here!

[HB2SF]

Val,
Thank you for such a thought provoking post.

I spoke with my attorney last night on the phone and am meeting with him today. Even though I trust the seller completely, like your post, my attorney is raising questions about issues I probably would have assumed to be OK.

I've been framing for over four years out of our home as a side business to a full time job (unrelated profession). My girl friend suggested I take a weeks vacation and actually work in the shop before signing the deal and giving my notice. From your post, I'm seeing that is a good way to find out that everything I assume is working does in fact work. After all I'll be giving up a job with insurance, a regular paycheck and other benefits. I'll also be leaving behind the office politics, BS and egos of a corporation.

The seller has agreed to stay on for two months. As part of the selling price the seller is asking a "consulting fee". I would like to find out what Grumblers feel that fee should be.

Thanks again,

[Richard Darling]

I would think the fee would relate to the size and complexity of the business, and to the type of consultation you need. If you have experience in framing, then you may not need their expertise in that area, only issues specific to how they ran the business (certain customers, special offers, computers and systems operation, pricing, etc.)

[Dave]

All good suggestions here.

Talk with your attorney/consultant about structuring the deal as a low value asset purchase with the bulk of the purchase price based on a consulting fee...up to about two thirds the purchase price. There are definate tax advantages for the both of you.

Good luck.

Dave Makielski

[Paul N]

HB2SF

I am curious about one thing: How did you figure out the place you're buying is making money and how much money??

You need to look at the bank deposits, sales tax payments, tax records, etc and calculate an approximate figure. Your accountant's expertise is required here).

Also, there is what they call "due-diligence". It really means you show up at the store daily and observe, for a defined amount of time, if there are really customers coming in, the average ticket order, etc. This also a part of the sale. Due-diligence in my case was 4 weeks.

If your due-diligence shows that the business is viable, then it is a done deal. If you don't care about the previous income of the store, then of course it is a totally different story.

Also, make sure the landlord doesn't triple your rent the day after you buy the place! (The sale contract can include a clause for acquiring a a favorable lease).

[HB2SF]

Originally posted by Paul N:
HB2SF

I am curious about one thing: How did you figure out the place you're buying is making money and how much money??

I have aquired tax returns from 2005 & 2004,and other financial statements for review by both my attorney and tax consultant.

My attorney and I have discussed "due-diligance". I have visited the shop several times, I've seen stacks of completed orders, orders in progress and the seller has shown me invoices for completed orders.

Thanks for the tip on the rent, very good point that I will definately ask about.

[HB2SF]

Originally posted by Dave:
All good suggestions here.

Talk with your attorney/consultant about structuring the deal as a low value asset purchase with the bulk of the purchase price based on a consulting fee...up to about two thirds the purchase price. There are definate tax advantages for the both of you.

Good luck.

Dave Makielski If I'm relying on the assets to aquire financing, wouldn't I want the value to be high?

[Dave]

The bank usually isn't too interested in asset value. They are more interested in profitability. They never want to take your assets to pay off the liability...they only want to know how you will pay them back. In a fire/bank sale, you'd only get 10-20% of depreciated asset value.

If the business is profitable the seller might be confortable taking payments over a period of time, typically 2-5 years, for a portion of the purchase price...seller financing...it's a great thing. If they are willing to do this, they normally will have a distinct tax advantage taking the payments as income. If they are not, then scrutinize the business very carefully as one possible reason they won't take this type of arrangement is that they may doubt that you will be successful. Of course, they may just want to cash out too. In that case you are in an excellent bargaining position.

Dave Makielski

[Dave]

As far as valuing the business...it is more of an art than a science. Like anything, it's worth what someone is willing to pay and what the owner is willing to accept.

Typically, a value will be reached by using several different methods.

Asset value: the total depreciated value of the assets of the business + any real estate duly appraised (again usually an average of three appraisals).

Profitability: A weighted average of the profitability over a period of time...usually 5 years. Into this figure is added owner compensation factoring in time spent actually working in the business and "perks"...those intangible and often legally questionable things that many closely held businesses don't always report 100%.

example: year 2000 $ 25,000 X 10% = $ 2,500
2001 37,000 X 20% = 7,400
2002 15,500 X 30% = 4,500
2003 70,000 X 40% = 28,000
2004 23,000 X 50% = 11,500

Total of these figures equals $ 53,900. This figure then has a multiplier applied to value the business...it's been several years since I had any business valuations done, but I believe the multiplier in this example would be 5. Therefore this example would value this business by profitability at $ 269,500.

Averaging the two (or more methods) of valuations gives you a starting point. You then would need to subtract any liabilities, factor in any trends in the specific industry, determine if the leases have value, examine any other ongoing contracts that have value or obligate the business, dtermine if any real estate involved is appreciating or going down the tubes, consider what employees would stay or leave, trademarks, servicemarks and patents, and a multitude of other factors.

Nowadays, "Goodwill" is normally not assigned any value.

Please don't take any of these methods as gospel...I may be way off as to modern methods of valuations and my formulas off. I only offer this information to stimulate more conversation with your professional consultants.

It still boils down to what someone is or is not willing to pay for the business.

Dave Makielski

[Val]

[QUOTE]Originally posted by HB2SF:
#1 My girl friend suggested I take a weeks vacation and actually work in the shop before signing the deal and giving my notice.
#2 The seller has agreed to stay on for two months.

#1 I think that's an excellant idea. A week wouldve' given me the opportunity to actually see how he did what he did, and to go through records, etc., that would've been part of the agreement. When he told me $XX-sales per month avarage, it turned out to be the sales of his best month of the previous year.... Christmas...go figure! The rest of the year wasn't even close! Is now, and way more! But...

#2 I think, especially since you already have framing experience, 2 months would be a pretty long time to have him in "your" shop, and I'd be way ready to be on my own and have him out of my hair. But to be available to answer further questions?...absolutely! Maybe it should read "At least two months" (or is that too wishy-washy? Too much wiggle room?), giving the opportunity for him to go when you're ready for him to go and not lock you into paying his consulting fee for a flat 2 months even if he isn't actually there the entire time. Maybe the payment of a consulting fee could be for the time he's actually in the shop?? A per-hour sorta thing? What do you Biz Guys think? Would that hold water?

Write all of your questions down, whether they sound "silly" or not, starting right now! Write, write, write. And then TAKE NOTES when he answers them!! This is important! (I know this! That's why all the !!!!'s!) These are just my been-there-didn't-do-that-wish-I-had suggestions. I'll probably think of more when I get to the shop.

My hair's starting to grow back now, thanks. Funny, it's turned all white! graemlins/icon45.gif