All Forum Posts by: Chris Johnson

Thanks for your replies guys.

I have been thinking we are splitting the work pretty evenly from a value standpoint even though he is putting in substantially more actual hours, so I was planning a 25% split for him. I have always seen it as 50 for the money, 50 for the work.  He originally wanted 50 but realizes that unless I am down to just showing up and closing a sale every few months for a check then that's not fair. He is asking for a third and I may go that route. I have other projects going on and he is family. Jesse, I figure if I value him at 25% now, then if he kicks in half the equity that would be another 25 and then we would be equal. That is the plan anyway, but unless he picks up the tempo or gets a bigger split it will never happen anyway as he is not doing enough jobs now to set any aside for equity. Part of that is the amount of money that I am able to allocate to this partnership however as with 200k he can only really do one at a time in that market and his credit is bad so he cant leverage that cash. Does that change anyone's opinion?

Oh most wise BP members,

I will try to make this as short as possible, but still supply most of the relevant details. Please help me to come to an objective decision on how we should split the profits from our projects.

My cousin and I are flipping houses together. I have done 6 houses so far with him and all have been profitable averaging 25-30%. I have been doing this quite a few years and know the building and flipping business thoroughly. My cousin is smart, has an appraisal license, but no previous construction or flipping experience. He lives in our target market and I am 2 hours away, so I am sort of HQ and he's boots on the ground. He started out pretty much just doing what I told him, but after a few projects now he knows what he's doing and is much more autonomous.

We started with a small property and used subs, on the second I got a remodelers license and we put together a crew and did all except the trades ourselves. That was quite profitable, but a huge headache - now we use a GC/trades hybrid approach. I'll just break down each of our jobs and you guys please let me know what you would consider fair:

So far on all but one deal I have provided all the investment capital from start to finish - about half cash and half personal LOC. One that other one deal I did a personal private loan at 12% but paid the loan costs out of the project and gave a mortgage on the property to the private lender.

We split the cost of our direct mail campaign and have a staffer do the mailings and place online craigslist and other adverts. We both monitor the MLS and take calls and emails from our bird dogs, so lets say the hard part of finding the deals is even.

For leads, we both weed through and I usually decide which ones are worth pursuit, and he actually goes out to see them, takes photos, makes notes, and pulls comps for the ARV if we get that far. I make the decision to make an offer and do the negotiating and write the contracts.

I do the purchase, legal, closings, etc. as he is not a named partner of the LLC.

When we have a property it is his responsibility to get it renovated. I decide the level of rehab and budget, the design ( our rehabs are not just cosmetic ), and usually pick out the materials, colors, etc. He gets all the work done. He will meet with contractors, collect bids, and put together a scope of work. We generally discuss and agree on who we are going to use for each job. From that point he does all the ground work like utility turn on, permits, going by the job(s) a couple times a day, picking up materials, calling the termite guy, writing checks, etc. etc.  We speak once or twice a day and he fills out a report of what got done on each job, what mailers went out, who got paid, etc. along with keeping up with the expense account for each job. I spend maybe an hour of my day talking to him about the jobs, making decisions and answering any questions, and another hour researching our next acquisition or checking comps. We both appraise property the rest of the day.

When a project is complete and its time to sell he will oversee our staff running internet and web ads, we put it in the MLS after a couple weeks with a flat rate listing, and he will put out the signs, etc. and show the property to any non-represented buyers.

I want to have a totally fair partnership that can one day be 50/50, but I don't think it is at that point now and I'm having a hard time being objective with family in judging time vs value vs risk at this point, so I'm turning to you in the BP community will steer me in the right direction.

Thanks for taking the time to read and respond.

CJ

First off I would like to thank everyone for taking the time to post your comments on this topic. There is some really good feedback here from people who seem to know what they are talking about, most of which underscores my own thinking.

I have tried to look at this from a buyers prospective and I come up with many of the questions that you all have raised. Starting a biz like this can be difficult and making it mostly autonomous is even harder, but there is only so much value in that. In my other line of work I see a lot of very small oilfield service companies that may do $1MM+ revenue on little more than that in assets. It turns out a lot that the purchasing manager at a larger company is an old school friend or hunting buddy of the owner and 50% of the sales come from that one account. We pass on those as it is cheaper to just do it ourselves and you cant count on that work to stay long term. Not that there is not value in a solid book of business.

Chris C - I am not surprised that you guys have been approached to sell. As J Scott says, I believe that you have a good brand and some solid revenues there. Also I see value in your customers, many of which I understand are repeat. 10x is rich though. Have you considered going public in the future - if you want those headaches....? If you are not satisfied with the multiple that you are offered, our operation surely has far less value per revenue dollar.

Bill has a lot of good points as well to ponder. We sold a small construction biz years ago through an in house financed buyout and I always felt like we just let the business provide the cash flow to fund its own purchase. It didnt really feel much like a sale somehow.

I am not necessarily looking to sell now. I am just planning for an exit at some point and wondering how that might go. I have a tendency to see an income stream and want to monetize it. In this case maybe that just wont work. I think maybe John K notes the only viable option - keep it going, bank the income or convert it to rentals. I am already keeping a few rentals a year anyway. In 5 years or so I might have a pretty good portfolio.

Thanks again for all your comments.

Chris J

Chris M -

That is a good suggestion and I will examine that filing - thanks for the link. Having had some experience with SEC registration I am hesistant to go that route as it is very expensive and time consuming. Last time we needed 3 years of audited finanical statements and spent well over $100K just to get set up. I will likley go the biz broker if I can get this wehere I want it. I know several through my oilfield days.

If you were a prospective buyer - what things would you be looking at to make you pull the trigger?

Justin - We may have 3-4 properties at any one time, but that is not the value. He/she would be buying the cashflow generated by the established business model and all the employees, etc that are in place to make it work. The same as any business.

CJ

Jeff - I had thought of that but want to be positioned properly. Katrina changed the whole ballgame forever down here but things are steady now and doing well in the right areas. There is less competition in my niche than others as you rightly suggest. What we do is not for the TV crowd. We pull permits, have our own general contractor license, etc. That is why our margins are higher. I would be willing to stay on for a while to train a new owner, but I am not totally integral to my biz. That is what refer to as the earnout.

Chris M - We are pretty firmly in the B category. True, I am a certified appraiser and I still do make the final call on which properties we buy, but I am in NOLA now only 2 days per month and all is well. I will be working to better automate our biz and I feel good about it being able to continue in my absence. My formula is no secret.

I am currently rehabbing homes in the New Orleans market and have done so for several years. Our typical rehab is an historic home renovated from the studs out and will sell for between $200-400K. Gross sales in 2013 will be around $3MM. We are running about 34% gross margins and after interest, hard money, investor splits, and expenses we net about half of that for an EBITDA in the $500K range. Here is my question:

Can anyone here share their experience with capital structure in the sense of turning the corner toward making a saleable business out of this? We are not holding properties at this time and are not near big enough to become or sell to a REIT.

In the upstream oil business we would routinely buy mom and pop small businesses for a multiple of EBITDA based on the stability, scalability, and transferability of the revenue. That was generally in the 3-6x EBITDA range and was paid as part cash, part stock or with an earnout. Does anyone know of something similar in this business?

Any and all comments on this would be welcome. I ask because I am planning my exit strategy and also trying to figure out the best way to add equity investors to our equation.

Chris