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jjac95

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if anyone could help . i have several family members that would like to invest in my new pizzeria . but want nothing to do with everyday business truly want to be silent. i offered terms so far invest 20k-25k and receive .25 per pizza. the reason pizza is the main seller and it leaves me with meals ,alcohol,appetizers ect . the problem is a 5 year agreement and then i would option to buy them out ur they could sell. butwhat would they get in a buy out or a sell? also if it went past 5 years how would you judge if the amount they receive wouldbe the same or does it rise with increase in sales ? and last they are also aware if the business falis they would recieve back the same intial investment if i sold it for more then i paid. or if i closed and had to sell the equip they would receive the same % i did for the sale example bought 50k in equip sold for 30k they would get back 60% of inital invest.
any help or input for the same or similar situation would be grateful.
a lawyer would alsobe involved to write a contract.
 
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Whatever you do, one bit of advice I would like to give you is that when you form you corporation and list your principals make sure you’ve got at least 51% ownership. That way you make all decisions running the day to day operations of the business.

A selling formula I’ve seen a lot in the past has been 3-4 times the annual revenue of the store. In other words, you’ve got a store that’s doing $500,000 per year and making 10% profit. You take that 10% ($50,000) and multiply by 3 or 4. This is the value of the business ($150,000 or $200,000). After the predetermined 5 years you buy or sell the percentage of ownership accordingly. If someone owns 10% and you want to buy them out, you pay them $15,000 or $20,000 for their shares depending on how you want to set up the formula at the onset.

I’m sure there are hundreds of ways of determining the “value” of a business, but this method I’ve just described seems to be one of the most popular. Hope this helps. -J_r0kk
 
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Revenue multiples are a popular way to value a business, but unfortunately they’re not correct.

What if you have a store doing $200,000 per year but turns a $50,000 profit?

Then you have another store doing $600,000 per year but loses $50,000 per year.

If you bring in somebody to value a business, they will run it on a multiple of cash flow, not revenue. And usually, 3-5 times cash flow is what would make it a good investment.

As for your deal, I’ve never seen anything like that. They’re going to get 25 cents per pizza? If they put in a certain percentage of the equity they’re entitled to that same percentage of profits.
 
The previous post is correct. I gave bad advice. Cash flow analysis should be the way to value the business. -J_r0kk
 
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I would either borrow the money at a decent going percentage rate, or actually give them the appropriate ownership percentage for their investment. It of course is much easier to just borrow the money, and then you don’t have them sticking their nose so far into your business.
 
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I don’t know that I would say never get involved with friends and family in business. I borrowed a couple hundred thousand from my grandparents in my first venture and it worked out fantastic for all involved! I think the key is to put everything in writting, and really talk about what their expectations and risks are. They have to know that they could lose all the money they lend just as if they put it in the stock market. You should have to put up collateral and a sound business plan just as if you were borrowing from a bank. I don’t know where I would be today if it weren’t for that first loan, and I am very greatful for their help and trust in me.

David McGuire
 
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i have to agree with magoo. i been in business for 19yrs in landscape construction . built up a nice business and it was from help from my father cosigning a loan i was only 18yrs old. now they have even morefaith in me now being older. and know my new pizzeria is going to do really well. my family is used to taking risks in investments. thanks everybody for all your help. still would like to hear more if anybody has more info.
 
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A business is only worth what a buyer will pay for it. That will depend on thier resources, economic conditions, the condition of business assets and (to a degree) you willingness to hold paper on the sale.

If you take their money and promise them .25 per pizza, what will happen if you hit a rough or seasonal period where you are experiencing negative cash flow…They will get paid while you borrow !!!

I’d trash can that idea ASAP. Develop honest projections for establishing the business to include all operatiing costs, anticipated income, expenses and NET NET PROFIT. Since your going to have partners, be sure to anticipate that everyone is not “ALL IN” in case you need to raise additional capital and/or that they understand the possibility of needing to borrow additional capital could become necessary. Their return (or loss) on either annual operations or the actual sale of the business should be directly reflect their investment…and that’s it. The botom line is that If they put up 10% of the money to open a $500,000 business they own 10% of profit, loss and any sale price.
 
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so lets say i have a sister who wants to put money towards my pizza place and wants to put up 20k. it cost me 100k to open my net might be example- 400k sales net profit 40k she would get 8k for the year. after 5 yrs 40k. now the option up she wants out or i want to buy her 20% i give her 3-4% of my cash flow. and she would have 40k plus the 3-4%. is this right. the idea for the .25 per pie was if i sell 300 pies a week she gets $75 week or 300.00 month. or 3600 a yr . which from what i read most guys do that on weekends. also i should have been more clear i have the money to open on my own but thought i would let my family make some money it sure beats a 2% at the bank . or really be risky and put it in stocks they would rather invest in me. maybe were crazy dont forget it does keep me from putting extra 20k out of my pocket to use for something else.better equip,marketing,ect.we have done thisbefore she loaned me money for a truck for my other business and recieved x $ for every lawn cut we did and we were doing 88 accts a week times $35 per cut she got her money back plus more interest then the bank and i didnt need to take out a loan.and this is very seasonal.maybe were nuts!
 
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jjac95:
so lets say i have a sister who wants to put money towards my pizza place and wants to put up 20k. it cost me 100k to open my net might be example- 400k sales net profit 40k she would get 8k for the year. after 5 yrs 40k. now the option up she wants out or i want to buy her 20% i give her 3-4% of my cash flow. and she would have 40k plus the 3-4%. is this right.
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Not quite right. When valuing a business by cash flow multiple you don’t give them a percent of cashflow. You multiply the cashflow by some factor to arrive at the total value of the business. You’d have to giver her 20% of that to buy her shares.

So say the business is cashflowing $50,000. An appraiser might agree that the business is worth a multiple of 4 (what multiple you get depends a lot of if the business is growing.) That means your business would be worth $200,000. That means her shares would be worth about $40,000 if you want to buy her out. Don’t cofuse her share of the profits with buying the business. She’s entitled to 10% of the profits for the entire time she owns shares, and it has nothing to do with buying her out.

I think you have them putting in equity, but you’re kind of treating it like a loan. They’re two different things.
i have the money to open on my own but thought i would let my family make some money it sure beats a 2% at the bank . or really be risky and put it in stocks they would rather invest in me.
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You would never find one person on Earth that believes an upstart restaurant is less risky than the stock market. To be brutally honest, there is a significant chance of your business failing and them never seeing their money again. The odds of that happening with say, an S&P 500 Index fund are very close to zero. And there’s a reason they’d get 2% at the bank… their deposit is insured by the FDIC. Risk/Reward… it’s the fundamental law of finance.
maybe were crazy dont forget it does keep me from putting extra 20k out of my pocket to use for something else.better equip,marketing,ect.we have done thisbefore she loaned me money for a truck for my other business and recieved x $ for every lawn cut we did and we were doing 88 accts a week times $35 per cut she got her money back plus more interest then the bank and i didnt need to take out a loan.and this is very seasonal.maybe were nuts!
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Reading this section, I’m pretty sure you’re thinking of this much more as a loan, and there’s a big difference between a loan and equity. This is not an equity position that your sister would be taking. In that case, you don’t worry about buying out her shares. Once the loan is paid off, you don’t owe her anything else. I like the idea of a family loan much more than selling her shares. With a loan you can be done with it at some point. With equity, you may be paying her out of the business for the rest of your life.

P.S. I’m the guest that answered above. Finally got un-lazy and registered!
 
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a lot of people calculate the value of a store by taking an average of how much the store makes a week let’s say 10k Multiplied by 25k so that would be 250k that’s about the value of the store. so if a family member wants to invest have them give you a % of the store’s value.
 
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