Business law question

[captruss24]

I'm pretty sure I know the answer to this question but here's a scenario: I have a relative who owns and operates a small business (sole prop). He has one primary, national customer under a 15 yr old "gentlemen's agreement"....he inherited the business and no formal contract was ever drawn up by the previous owner and the customer. He is going to close shop this year, and I want to make sure his customer has no legal recourse since he is not under a formal contract to provide service/product. I'm sure the customer will probably threaten to sue him since they are a $93M publicly traded company and rely on his service.

 

[RacerDeac]

Sounds like the business has some value...why doesn't he sell it rather than close shop?

 

[Baconwfu]

Sounds like the business has some value...why doesn't he sell it rather than close shop?

that was going to be my question....if it's to a point where the customer is going to threaten suit he can either increase the price of his services or sell the business.

 

[captruss24]

Good questions! The product does not have a patent b/c its 'common general knowledge'. On top of that there is no contract with the primary customer, so they are not obligated to do business with a change of ownership. Its a service based company that manufactures and sells a mass marketed product. He can provide better service, cheaper, and quicker than the 'bigger guys'. Very low overhead, JIT inventory system, pretty high profit margins, no company debt, but the service piece = traveling the country every 2-3 weeks working long hours. You can't put a price on how that wears down on you over time.

We have explored the idea of selling the business, but are having a hard time assessing an intrinsic value (less inv, equipment, trucks) based on the two points above. Also we have no clue where to go about finding a potential buyer.

 

[RJKarl]

Would one of his employees like to take over and pay a percentage to your family member? This would create continuity and cash flow.

 

[captruss24]

Would one of his employees like to take over and pay a percentage to your family member? This would create continuity and cash flow.

Its a one man show. His manufacturing crew consists of himself and part time laborers, and he does 95% of the service calls himself (and with a buddy). From time to time he outsources service work to industry-certified specialists.

 

[ABCDeac]

No legal claim here if/when he folds up shop. If public company wanted contractual assurances, they could have and should have negotiated to receive them.

 

[Baconwfu]

Good questions! The product does not have a patent b/c its 'common general knowledge'. On top of that there is no contract with the primary customer, so they are not obligated to do business with a change of ownership. Its a service based company that manufactures and sells a mass marketed product. He can provide better service, cheaper, and quicker than the 'bigger guys'. Very low overhead, JIT inventory system, pretty high profit margins, no company debt, but the service piece = traveling the country every 2-3 weeks working long hours. You can't put a price on how that wears down on you over time.

We have explored the idea of selling the business, but are having a hard time assessing an intrinsic value (less inv, equipment, trucks) based on the two points above. Also we have no clue where to go about finding a potential buyer.

does it make money? If it does then you should be able to sell it for some multiple of those earnings. The less risky those earnings are the higher the multiple.
Or if for some reason he doesn't want to sell, just hire someone to do what he did....or at least someone to do the grunt work. That might mean a little less income but also less work.

 

[TheTwinAndreBen]

Jesus.

1. Hire a lawyer
2. Form an LLC
3. Open bank accounts, conduct business through LLC
4. Draft assignable contract
5. Hire a competent dude to run the thing so relative can stay home more.
6. Wait 3-6 months, sell company for revenue multiple.

 

[TheTwinAndreBen]

No legal claim here if/when he folds up shop. If public company wanted contractual assurances, they could have and should have negotiated to receive them.

You cant say that without knowing more. If they've already paid him for 6 months work, he may have a problem.

But yeah, as our MP likes to say, "If it ain't in writing, it ain't sh!t."

 

[buckets]

How contingent is the business on the one family member? Would the one major customer be willing to sign a new contract if sold?

What sort of size/cash flow are we talking about?

I work with guys that buy this sort of stuff all the time, send me a PM if you don't want to post details or have any questions.

 

[deacdiggler]

Why not sell to the big customer and train his successor?