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Thoughts on Investing in an existing business

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High Sierra

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Nov 4, 2017
5
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Lincoln, CA
I'd like some thoughts on this, please... I've never made an investment like this, so would appreciate any thoughts, tricks, traps, things to consider and/or check further, perhaps some points that should be in the contract if I move forward, etc.

A local business is for sale - it's a pool hall. I'm very familiar with this pool hall... I visit it several times a week (for the past five years) and feel it is in general a very solid business with a bright future. It's a consistent performer. The current owner has multiple investments beyond this one and is just trying to consolidate a bit and reduce his personal involvement so he can pursue other interests. The asking price is reasonable in comparison to similar businesses in the area. The current GM (he's been there for 3+ years) would like to buy the business, but does not have the cash necessary for a 33% down payment desired by the owner. I am considering loaning him $$ for the down payment.

The business is located in a strip mall type building owned by the current owner of the pool hall. The lease for the pool hall is reasonable compared to comps and already a part of the pool hall's financials - and the owner has stated that the lease will stay the same for at least 5 years.

This is the deal he's offering:

- Repay the down payment loan in 3 (maybe 4) years @ 10% interest.
- I would also receive a 40% equity stake in the business along with 40% of the net profits going forward.

To me, it seems like a decent deal. I've reviewed the financials, and they're pretty solid. The math works for paying off my loan as well as the loan from the owner for the remainder. 40% of the net profits as they currently stand would generate an income stream a little shy of, say, an elementary school teacher's salary.

The GM shared a few low-hanging fruit 'fat trimming' opportunities with me, and I fully agree that his ideas are valid and will further improve the numbers. We've also discussed various improvements, and I agree with his thinking on those as well.

The biggest problem is... the GM has no skin in the game... no collateral or anything like that to secure my loan of the down payment. I'm wondering what kinds of things can/should be put in the contract to mitigate my risk in this area. If I didn't have confidence in him and the business, I wouldn't even be considering it... but still, business is business, and I want to cover my risk on the down payment loan as much as possible.

I don't really consider this full-blown "Fast Lane"... but it sure seems like a decent step in the right direction that will generate some side income that could in turn support other Fast Lane activities.

So...

- Am I insane?
- How can I mitigate risk on the initial investment?
- Other thoughts?

- Thanks!
 
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