Buying into a Business

tatties

Hi all,

Looking for some advice here as this is all quite new to me.

I've been a senior employee at a small law firm for 10years and the senior partner is retiring. Ive been given an opportunity to buy in as a partner of for 30% equity.

Ive only haf initial discussions but have been told my share will give me an income of £100k per annum (gross profit share before tax).

As part of my buy in, i will owe circa £280k which is to be paid over a period of time still to be agreed, although he did mention about 5 years hopefully.

My question is, if i was to pay 280k over 5 years, based on a profit share of £100k, how much would that leave me in net income per annum?

Thanks!

tacpot12

Who is going to loan you the £280k to buy out the partner?

Are you a fee earner and can you command the same fees as the outgoing partner? If not, you might find that the partnership profit reduces, although it should really increase with inflation.

You might be better off having a meeting with the partnership's accountant to fully understand the transactions you are proposing, and the implications on your personal tax situation. They might give you the advice for free as they will want to get onto good terms with an incoming partner.

If the partnership can lend you the money interest-free (which I doubt, but the accountant will confirm), then you will take home about £34k net of tax, ni and loan repayments.

nicechap

There is a simplistic answer.

280/5 = 56

100 - 56 = 44.

Taxes will need to be factored in, as will opportunity costs - will you be borrowing the £280K? Will income be steady at £100 pa or vary from year to year.

But you really, really need to take independent advice, from a clued up accountant who can look at the firm's books for at least the last 5 years and has an understanding of the business environment its operating in to see whether its future income and costs are realistic. Then you will know whether the £100k income is realistic and what the £280k equity is for.

£280k for a 30% share values the business at just shy of £1m. Is it worth £1m?

As a lawyer you will no doubt be aware of the benefits and risks of becoming a partner as opposed to being a director of a ltd company or a director who is paid in shares.

trailingspouse

Were you looking to buy into a business? And if you had been, would this be the one you would invest in?

At first sight the figures look great - you pay back £280k, but earn £500k. BUT - will there be interest added to the £280k? And as you say yourself the £100k pa is before tax. And also - it's a profit share. It's only a profit share if there's a profit - it could be a break-even share, or even a loss share... And you would still owe the £280k.



You know the business - is it profitable? Have you seen the last three years' audited accounts, and do you understand them? Do you want to run the business (which is what 'being a partner' means) - or would you prefer to just be an employee (which has more security and less stress, but ultimately less opportunity for making big money - or big losses)?



You need to speak to an accountant, who will talk you through all the tax implications (which will be specific to your situation). Crunch all the numbers, and ask all the 'what if' questions. Including 'If I was going to invest £280k in something, is this what I would do?' and 'What if I get fed up of this job and want to move elsewhere/my partner needs to move with their job?' because that won't be so easy if you're a partner.


Having said all that - it's a great opportunity. Just make sure you're going into it with your eyes open.

TELLIT01

You definitely need to take professional financial advice, and I don't think that should come from the accountant working for the company. At the very least there is the risk of conflict of interest, and that is best avoided.

getmore4less

Depends is that £280k the full cost of the 30% share or that is what is left after you put in real cash?

if it is for 30% and the business is generating £300k(ish) profit that is a good ROI.

Will you be giving up you regular salary for that share of the profits?

tatties

Hi all,

Thanks for the replies very helpful.

Just to clarify a few queries:

Yes this is a business i see myself running as a partner, its on my doorstep and i get on with all our employees and clients.

Ive seen the last five year accounts, pre tax profits are all £300-£350k per annum consistently.

I'm not putting any cash in only paying the £280k which will come off my share of the profits.

I wont be salaried anymore, just get a profit share.

The partner mentioned that they business may get a loan from the bank to pay the 280k and i will repay it from my profit share, so yes there will be interest but yet to be determined.

All profits get split by percentage equity owned, not individual fee earners, all other employees are salaried. So i should get circa £100k if it all stays the same.

My worry initially was that out of the £100k i would be income taxed so say £60k left over, of which i would need to pay £56k? Or am i totally wrong??

getmore4less

£280k for 30% share seems on the low side for a business that creates £300k+

What assets does the business own?
What assets does the business use that belong to other partners.

What salary are you giving up, what income did you generate, will you be replaced?

tatties

No real assets, office has been rented for the last 10 years

tatties

Just to add the business was valued by an independant accountant who used a simple valuation method which was the average pre tax profit multiplied by 3.

tatties

tacpot12 wrote: »

Who is going to loan you the £280k to buy out the partner?

Are you a fee earner and can you command the same fees as the outgoing partner? If not, you might find that the partnership profit reduces, although it should really increase with inflation.

You might be better off having a meeting with the partnership's accountant to fully understand the transactions you are proposing, and the implications on your personal tax situation. They might give you the advice for free as they will want to get onto good terms with an incoming partner.

If the partnership can lend you the money interest-free (which I doubt, but the accountant will confirm), then you will take home about £34k net of tax, ni and loan repayments.

Tacpot, just out of interest, what calculation did you make to get the 34k?