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Is merging 2 vending companies a good idea?


MidStateVending

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I have a buddy that asked if I would consider incorporating my sole proprietorship into his LLC, for a 20% stake. I don't really understand what that means however. His company does about 5 times my volume. He has several Micro Markets, a few employees, several vehicles, and a warehouse. 

 

He was open about how this helps him: He has more Micro Markets on the horizon and he is very busy, and needs my help.

 

I enjoy working for myself and like the freedom, but his offer seems to provide more opportunities (compared to my 1 truck and 2 car garage operation). 

 

Any thoughts on how a merger like this would work? Have you heard of 2 vending companies merging? How would it benefit me? What caveats should I be aware of?

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I don't know how this can be done unless the new company is incorporated. Once incorporated, you own 20% of the company. You as a shareholder, you are entitled to 20% of the profits, and 20% of the net value should the business ever be sold. If this is the case, you technically don't have to do anything regarding the operation to receive your share of the profits, but you can be hired as an employee. If this was the case, it might not be so bad. Let's say you get paid 40k/year as general manager, plus you earn 20% of net annual profits. He earns 80% and, as President of the corporation, he has full control of the business.

If he simply wants to "add" your route to his, and it's an LLC, you'd be an "owner" and not an employee. I don't see how that could work.

The other possible thing is to form an LLP where you are LEGALLY listed as an owner. You would be entitled to 20% of the company and 20% of the profits or the net value of the SALE of the business, but you should technically only be liable to do 20% of the work, whereas he does 80%. I don't see how this can feasibly work well.

The last realistic option is to let him buy you out, then hire you as an employee. You own nothing, but you work for him and get paid as an employee.

If he wants to just add your route to his for free, while claiming you are a 20% owner, I can't see that working out for you. You could end up working your butt off and literally not get paid if you are a 20% owner of an LLC/LLP.

You are better off to sell out and get hired OR form a new corporation and become a 20% shareholder.

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PS, when I say the new business needs to be "incorporated", I mean LEGALLY incorporated. Literally, both businesses cease to exist and a new corporation is formed. So Abra Vending and Cadabra Vending vanish while Abra Cadabra Inc. becomes the new company.

A lot of us use the term "incorporated" when talking about adding something to something else... Like.. I "incorporated" a new technology to my machine. I don't want you to get confused on my terminology. I'm only using the LEGAL context for tax purposes.

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All I got is questions

 

Volume may not be a fair way to compare. If his margins are lower with high cost employees and has big loan payments. It is possible you’re your route makes more money than his.

 

Let’s say you want to do X and your buddy does not. Do you lose every dispute as he gets 5 votes to your 1?

 

Let’s say you work 60 hours a week and he works 20 does he still get 5 time as big a check as you every week?

 

If you decide to break up in 5 years how will you cut this baby in 2?

 

If you do break up is there any chance you will still be buddies? Would it mater to you?

 

 Walta

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Years ago when I was growing rapidly one of my friendly competitors wanted to merge his business with mine. I considered this only because I needed help at the time but I knew it wouldn't work well because he'd want to make decisions even though my business was larger than his. I turned him down and within a few months he was gone and his financial benefactor was trying to find all of his assets. It turned out that he was stealing all the collections and disappeared after there was no cash left to run the business with. Needless to say, my decision was the right one or he would have tried to do the same to me.

The only way something like this will work is if you sell out to him and become an employee with a contract so he can't fire you for no reason. When someone approaches a successful operator and wants to be partners you should be suspicious of why they need you and you should ask yourself whether you need them.

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Others have provided good advice already but thought I would share my thoughts. If you do consider this you just need to make sure that you cross the Ts and dot the Is VERY WELL. Make sure you understand everything fully and what is expected from each owner. Also make sure you have an exit strategy in place if this new partnership does not work. This should include not only what you bring but what you help build during this time. EVERYTHING should be in writing with no doubt as to what is what.

 

This is not that unusual for people to want to join forces because many times they are in a position for growth but don't have all the funding or resources to do so. With this the idea of teaming up with another operator makes sense.  This could be a good opportunity for you but also could end in disaster if not done correctly. Just make sure you are going into this with both eyes open and have outside help from an attorney to help guide you in the best and safest way to structure such a deal.     

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Short answer? No.

I have been in business partnerships, seen others too, unless you are with someone in whom you have absolute trust, it usually ends up going south eventually.

The way I think about this: unless the person you want to join forces with is someone you would comfortably give 200000$ to for safe keeping, (that's not many people is it?) I would not give them any control over my business.

My two cents,

Phil

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Excellent advice everyone. I got into this business for the freedom... but a partnership sounds like it could be a headache... and I am not going back to being a 9-5 "employee". 

 

Does not seem worth it to me.... even if more money was involved.

 

Thanks.

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If you wish to have the same "freedom" as you do now (which obviously depends on the demands of the customers rather than a traditional boss), then going into a partnership is not the way to go.  With that in mind, you should probably pass on the opportunity and keep your freedom!

Personally, I have considered selling my business [eventually] to my fellow vendor and working for him.  Although I really love the freedom, I may get burnt out eventually and I'll want to be able to take a vacation.. so the plan will be to put myself into a financial position where I can afford to take lots of vacations.  It's not an easy thing to do considering my relatively young age compared to other people (I am 30), but I have accomplished a lot of financial goals in my life already so I am quite confident that becoming semi-retired by the age of 50 is not unrealistic for me.  I'm just darn good with finances.

 

If I chose to do what I stated previously though, I would completely sell out.  I wouldn't become a "partner" and merge with another business. No way!  If you want my business, you buy it from me.  If you want me to run that same route or possibly do other tasks, you hire me and pay me an hourly wage!  If I do sell out completely, I'll have a completely different kind of freedom -- the freedom to leave work every day without having more "work" to do when I get home!  You all know what I'm talking about! Lol.

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  • 5 weeks later...

I would agree to the merger with both parties being 50% partners. You would have to come up with cash to buy the existing 30%. Either pay him outright or offer to make monthly payments till he is paid back. Eventually, when he gets bored you can buy out the other 50%. That's how you roll! :)

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I would agree to the merger with both parties being 50% partners. You would have to come up with cash to buy the existing 30%. Either pay him outright or offer to make monthly payments till he is paid back. Eventually, when he gets bored you can buy out the other 50%. That's how you roll! :)

 

I'd have to say that is the best idea yet... although there would still be many details to work out. I would certainly need a loan from a bank as this guy is about 5x times the size of my biz... plus he is picking up 2 more micromarkets in the next month. I'd love to see 1/2 that revenue. I know he'd do it too because he is 65, and working 7 days a week. He is getting too big, too fast, and needs help.

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If he's at that age then you'll be facing a buyout rather soon in this venture.  You'll need to plan accordingly.  It kind of sounds like maybe he's looking for an exit strategy and perhaps that is the way you two should be planning this instead of just merging.  If, in your discussions, he's not suggesting that you'll end up with this business when he retires then you need to consider that he might sell his portion or bequeath it to someone other than you and you don't know how this could end up.  If you write the contract correctly (use an attorney) then you can protect your interests.

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Being in the business for such a short time...I may be coming into this situation in the future. All your ideas are great and useful on whatever he considers.

As for me I would weigh my options and what absolutely makes sense for me, as far how the merger/partnership benefits ME because if he proposed the idea to MIdstate, the 65 yr old. already knows how this merger/partnership will benefit himself. I'll say, "Be business smart about it and consider your pros and cons and moving forward it will benefit you Immediately and the future. Other than that I would keep and enjoy my freedom with my 1 truck and 2 car garage. Soon you will eventually be 5x's what you are today and will be asking a smaller vendor the same thing. Good luck and wish you the best.

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  • 2 weeks later...

All of the advice I have read on here seems pretty sound as for the pros and cons on the administrative side of the business. This is perhaps the most important part of running the business outside of the execution of the actual service. Myself, I have bought out several smaller vendors, 14 to be exact, and we are now the largest independent vendors in the Quad Cities area. The reason I was able to go in and convince them to sell is because they had all been running their companies for longer than 5 to 10 years, and with a stagnate economy, they found their profit margins were down and they were losing out to the larger franchises who were now going after the smaller markets to make up for the revenue decline in their own accounts.

  As small operators, their waste was higher, along with their infrastructure costs. By combining the 14 other businesses into mine, there is now one warehouse as opposed to 15. Locations are drawn up into simple and easy to maneuver routes as opposed to the costly zig-sagging across town. Our orders are bigger, increasing our buying power, along with increasing our rebates. Supplies are distributed more evenly, thereby cutting down on dated product loss.  Buying these companies was the best move I could make. I paid a fair price to the small vendors and remain friends with all of them. One of which I hired. I hired a couple daughters of the other lady. Both of those experiences were not the best decisions for the company. The daughters stole from me. The first one I caught within a month. The second one I didn't catch for three years.  The gentleman I hired on, it was a good deal for him because he only serviced his old accounts and made 500 a week doing it. I bet, with cost of repairs and waste, his small business never had a 500 dollar week in profits. Mainly because he had made some bad deals with the equipment company. So for him, the deal turned out not to be to bad. Got paid for his business, lost the headache, and made 500 a week. However, for myself, while it was good to have an honest and dependable employee, he was set in his own ways and it was difficult to get him to appreciate that I had a different style of how I thought it should be done. For instance, I thought he should load up for the day and go do a route. He would load up for an account, go do the account, then come back and load up for the next account.... loop that.

 

  Only you know how well you are doing, and only he knows how well he is doing. The most troubling thing mentioned is your friends age. That he is 65, while I encourage everyone to live their life, we realistically know that this age is the twilight of our adventures in the working world.  This makes me suspicious that he is hoping to acquire your business to boost the presentation of his own.

Like the previous commentor said, if you like your freedom and your direction then you should keep your business. no way is he going to give you 50 percent, and a partner is a hard sell when it comes to style. 6 years ago I had one van and was working out of the same two car garage that you are working out of now, I now have 10 vans, a warehouse, nearly 1,000 machines, 320 accounts and 8 employees.... We are still growing, enough that we are able to be more choosy with which accounts we accept as opposed to just taking anything that comes our way,

 

  Good luck on whatever you decide, but also remember, the bigger the business you grow the bigger the headaches you have!

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  • 2 weeks later...

Thank you for your perspective Vander. Everything you say truly makes sense. I feel I have the capability to become large, however I have seen other large owners, and they work 7 days a week. Also, when a driver gets sick, it only gets worse for them. Warehouse rent is high, higher tax bracket for yourself and your company, multiple vehicles = bigger expenses. And if they incur debt, they eventually collapse.

 

I really want to believe that someone could be a millionaire in this business, but that might be my fault for not being able to look at the bigger picture. 

 

In all, it is refreshing to see a big operator as yourself doing well, so maybe there is hope... other than being afraid of getting to big.

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