I own 49% of a small business. I'd like to buy out my father (21%) and brother (30%) and continue to operate. My father has said he prefers not to hold a note and I assume brother is the same.

I have a couple uncles that probably wouldn't notice if their statements dropped $3MM and I plan to go to them first for a loan.

1) what kind of terms are fair for the both of us?
2) who can write that kind of deal up?
3) the buyout price is another unknown. Using a multiple of our average yearly distribution is my starting place. Any ideas?

Tia!

Family loans being the way to go depends on the family involved, the track record of the borrower, etc. I have seen it work several times back when I was practicing. Knowing those involved, I would sometimes discourage it however. Many prefer to deal with people they know rather than those they do not.

You would need to get with an attorney as to drawing up the paperwork.

Ornithopter said:

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I think you guys should get someone to help guide you towards a valuation together. Otherwise there is a big chance you guys stop talking to each other.

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Agree as to the valuation. Even then, you never know. Had a guy that got his business appraised by a guy for some estate planning purposes. The appraiser had a list of qualifications, former clients, etc. that was quite impressive. Value came in very low, so low I offered (mostly jokingly) to give him twice that amount for the company, would even do a stock deal rather than asset purchase. Had a meeting, he redid the appraisal, came in at around $5 million or $6 million, I forget. A few months later, a group approached the client to buy the business and they wound up having an appraisal done and, using pretty much the same information, it came in at $19.75 million, lol.

But getting an appraisal is at least a starting point. Some my not like what it shows, but at least you have a start for moving forward.

You mention valuation using a multiple of the average annual distribution. But what about the assets owned by the company? I would assume you would buy the assets for a fair price and account for the current valuation of the business activities. As you would if all partners were selling to a third party.

Buy out your brother, but why buy out something you likely will inherit any way?

1. Are they interested in selling/you acquiring their equity interest? If they are, that's a positive first step.

2. What does your brother and/or dad do for the business currently? Are they employed by it? Or simply profit distributions? Who are the ones grinding/operating the business so that it is profitable and grows?

3. What type of business is it?
And is there enough operating capital available to continue to operate and grow? Or is another capital call needed/foreseen by the current equity partners ((you three)?

Ornithopter said:

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I think you guys should get someone to help guide you towards a valuation together. Otherwise there is a big chance you guys stop talking to each other.

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The only right answer is decide the max you are willing to pay based on your understanding of the business and make an offer in that neighborhood. Don't let a third party ever determine what you're willing to pay for a business you know a lot about. It's only worth what it's worth to you. If they don't agree to your valuation then let them justify why.

Wouldn't touch a family loan. Not a true Dave Ramsey follower, but he is correct that Thanksgiving will taste different when you owe money to the uncle across the table.

And +1 on don't borrow money from family. It's likely more financially expensive at a bank but won't jeopardize family relationships.

How eager are your cousins to be lenders for your business?