I get asked a lot about how to take over an existing business. What this translates to is rather simple: I want something for nothing. I have no problem with wanting something for nothing. It just takes some patience. And you may have to fail a few times before you pull it off.

In general there are two ways to take over an existing business. You can either work you way into a good business, or paper out a bad business. Since papering out a bad business falls under the other category of the typical leveraged buyout, or more accurately an LBO of a distressed company, I will address the first way.

An occasional buyer will have the unmitigated audacity to inquire of the seller whether or not he/she could just hand the company over to the buyer. Perhaps not up front, but over time as the buyer enters the company and goes to work, gradually replacing the seller’s day to day functions. Why would a seller agree to this? There are a number of reasons. First the seller needs an exit plan. Second, he cannot find a well capitalized buyer. Third he cannot find a buyer whom he likes. Fourth, he wants to have a succession plan that provide stability to his employees. Fifth he can still get paid out for his valuation plan while easing out of operations. Any combination of the reasons can be compelling enough to sway the seller into this program.

While I won’t kid you that I have done these types of deals before, I have been around long enough to have seen how they work. The first and nearly only hurdle in these situations is to develop a close relationship, with the seller. This takes an investment in time spent with the seller learning the details of the business. It also takes a willing seller to be open minded enough to entertain the idea of training a prospective buyer as his successor. Once a comfort level is reached between the parties, and this may take months, or even years, only then can we talk numbers and deal structure.

Deal structure can be as simple or as complicated as we care to make it. I opt for simple. Since the buyer usually has no money in these cases, there is very little if any cash at closing. There is often a plan to pay the buyer as the new manager and effect a gradual change in ownership in exchange for stock. The stock may be escrowed and “vested” as money changes hands. For example there could be an agreement to acquire 60% of the stock (controlling interest is always desirable) over six years at 10% per year. The price will have been negotiated based on the valuation and so a money figure would be attached to the 60%. This gives the buyer enough time to either earn or raise the necessary capital each year and acquire the desire stock over a set amount of time.

The deal can be risky for both parties inasmuch as any partnership risks a falling out and disagreements along the way. The documents will usually call for some sort of breakup arrangement which entails a complete buyout so that no partnership relationship remains. Not always easy but it is always worth it to plan for the worst.

I do not vigorously recommend taking over an existing business from a buyer’s perspective. These types of deals are useful if the buyer has no cash but the seller usually remains in the driver’s seat for a number of years. Most of the time you as the buyer will want your controlling interest or preferably 100% of all common stock vested at closing. Which means its already paid for and nobody can take if from you even if you default in payments. However, this type of deal is for unusual circumstances and can be beneficial to both parties if they can co-exist over multiple years.