Throwaway account. Long time reader, but I never posted.
I was looking for similar experience in this forum but didn’t find anything comparable.
Feel free to oriente me or move this topic in another category if necessary.
I (35, M, swiss) am working for a small non quoted consulting company (about 20 employees). We sell consult hours and niche software solutions and earn money from subscriptions (we have a half-moat).
Salary today as an employee : 120k + 10k bonus per year.
3rd Pillar: 50k
After 5 years working in the company, I could invest about 400k and acquire 10% of the company (the 90% are shared equally between 4 other partners or “associates”) and becoming a partner/associate. I would benefit from the company’s earnings each year: on average an extra 30k bonus (as salary) and 25k as dividend, yearly, while keeping about the same caped base salary (same for all partners).
Almost all earnings would be split yearly between all partners, a part as salary bonuses, a part as dividends.
The company has a half but solid moat and is 100% owned by the founding partners who are also employed (they are about 45 years old). It’s mandatory to work in the company to stay as a partner. One partner is leaving and can only sell to the other partners or to a new one (that could be me).
The company is private. Owned by 5 partners (each 20%) who developed and are still developing the company. They also all work for the company. There is no external financing. One partner is retiring and selling 20%. The other 4 partners will buy 10% from this, and I could buy the rest 10%. I would be able to buy another 10% if I decided to.
Earnings are constantly, steadily growing. I would be able to sell to (and only to) other partners if I decide to leave. It’s a bit like a lawyer or consulting office, where the profit is split equally between the owners who also are employed in the company.
Incentives: all the partners are working to maximize the company earnings.
Clever people: all the partners are high skilled, experienced in this company and dedicated to the company. If one partner is missing, the company would survive.
There is no external control. No other external investor or financing (bank).
Dilution is not really a risk, as the other partners would also be concerned.
I believe in the company’s future, who as still potential in the branche.
Low liquidity could be a risk.
If two or more partners (one would be ok) are leaving, it could be difficult to replace them (very high skilled). But I don’t know why they would leave.
I would put all my eggs in the same basket.
I will have to take a loan to finance 1/4 of my investment. I have today about 300k in cash and easily salable ETF/stocks. For the missing 100k, I would have probably have to take a loan. I’ve been saving money and building my nest starting from zero the last 10 years. Taking this opportunity would mean putting all my eggs in the same bag … I’m am still not very sure if it’s a clever idea.
How would you estimate the risks and returns of this investment?
How would you balance between maximum cash/minimum loan or minimum cash/maximum loan?
My concern is also, how should I calculate the return on investment?
The shares I would buy could also increase in value and I could profit from it if a decided to sell if/when I leave.
Would you do it? I project to fire or minimum “barista Fire” in about 10 to 15 years. Taking this risk would highly increase my returns, but is more risky (high risk, high return).
I get it is a bit risky but the company is nationally well known and renown in this niche domaine.
How are the shares of the company valuated ?
Is there any formula or an accountant evaluating the shares ?
How long did the leaving partners stay in the cmpany ?
Was the shares reevaluated since he joined ?
What is the seller profit on this 800k ?
Something to mention here before it gets lost is you can’t compare entrepreneurship and its ups and downs to a purely financial investment in the stock market. It’s impossible. Because the partnership / associate-ship status changes pretty much everything about your position in the capital hierarhy as you go from employee to employer.
Which people who haven’t done it can’t comprehend even if they say they’ve read things - Not The Same.
If you tick that way you wouldn’t go around asking on forums, let’s put it like this.
I’m not a “born to be entrepreneur”, true. I value financial freedom and independence: if I invest here, I would increase my financial freedom (highest earnings middle/long term) but would decrease my freedom to move from the company or move my assets/investment.
I’m not really on forums to only ask “should I do it or not” (that was my question number 4) but to clear some uncertainties, regarding my questions (all other questions).
Defintely a very big bet, and 7 years to have back the investment it is really a lot if you want to put more or less all your money in this.
The big part of the evaluation is the actualization of the future earning, it is important to understand which kind of grow they are estimating
If they are estimating 20% grow every year for the next 7 you are for sure overpaying it.
As soon you have the evaluation I suggest to ask for a neutral opinion, also if they are doing the evaluation from an external company.
Important to keep in mind that that “valuation” only holds true as long as business is doing well and (new) partners happily line up to take your shares.
If growth stagnates, you want out for whatever reason and the opposite holds, it’s really only worth what the other partners are willing to pay for it. If anything.
Another thing: ensure there’s a drag along / tag along clause in the shareholder agreement. This avoids the situation where a majority wants to sell (e.g. to a PE firm) but one partner, or potentially his wife/kids if (s)he dies unexpectedly dies, refuses to sell for the agreed price.
But this would be your business. If you don’t really see it as such and don’t want the long term commitment that this will mean, I would avoid it. As you can get up to 20%, the quesiton is whether the 20% represents enough considering the potential of the company.
Yeah it’s one of those decisions where you have to see if you get along well enough with the existing partners to make it worthwile, as you’ll spend a lot more time with them for an undefined time
How old are the four other partners? How close to retirement are they? How are they planning to help you get up to speed to executive management level? What are their strategic plans for the firm? Which new insights can you bring, and how does that complement theirs?
Sounds like a no brainer to me. If you do the cost/benefit analysis, it is probably your one single chance to go chubby/fat fire in a decade or two. IT sector is growing steadily by 20/30% every year, and do you think it will slowdown? Nope, unless your are doing some obscure technologies.
Make sure to:
hire a lawyer that knows about this particular type of shareholder agreement (drag/tag along, preemptive rights, etc.) = ask the associates in your current job if they have a reco, if you’re still in good terms with them
optimise the debt, I would look to borrow the full 400k if I could and the terms are acceptable.
make sure to go along well with the other partners, what you are doing is truly like a wedding…