Take Out a Loan To Buy My Dad’s Business?

Summary

Summary of "Take Out a Loan To Buy My Dad’s Business?" | The Ramsey Show Highlights

Release Date: February 15, 2025

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Introduction

In this episode of The Ramsey Show Highlights, the conversation revolves around a caller contemplating the purchase of her father’s veterinary practice. Hosted by the Ramsey Network, the episode features expert advisors who delve into the financial and emotional complexities of buying a family-owned business. The discussion provides valuable insights into managing family dynamics, avoiding debt, and exploring alternative financing options.

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Caller’s Background and Situation

The caller, a dedicated associate veterinarian, has been working in her father’s veterinary practice for over 11 years. Despite her deep involvement—managing day-to-day operations and leading the team—she does not hold an ownership stake. Recently, after successfully paying off $250,000 in student loans with her husband, she faces a significant decision: whether to take out a loan to purchase the practice from her father.

Key Details:

• Business Performance: The practice grossed $1.3 million in the previous year with profits of $80,000.
• Personal Circumstances: The caller is financially stable, being debt-free except for their mortgage, and has a young family.
• Emotional Tension: Discussions about ownership have strained her relationship with her father, leading to feelings of being unheard and undervalued.

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Advisors’ Initial Reactions

Upon receiving the caller’s query, Advisor 1 immediately advises against taking out a loan to purchase the business, emphasizing the potential financial strain and long-term debt implications. Advisor 2 echoes this sentiment, highlighting the importance of understanding why the caller might be an exception to this general advice.

Notable Quotes:

• Advisor 1 [00:17]: "No way."
• Advisor 2 [00:18]: "I hope you weren't listening to the last five minutes of the show."

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Detailed Advice from Advisors

1. Avoiding Traditional Loans

Advisor 1 strongly discourages the caller from approaching a bank for a loan to finance the purchase. The primary concern is the burden of substantial debt, especially given the caller’s recent success in becoming debt-free.

Quote:

• Advisor 1 [06:26]: "Don't get mad if he's like, what? I didn't know there's another option. That's fine. I'm not going to get mad at him about that. But I'm not going to go to a bank and mess up every Christmas for the next 15 years because I owe somebody, because I didn't have the courage to tell my dad."

2. Exploring Alternative Financing Options

Instead of traditional loans, the advisors suggest creative financing methods such as revenue sharing or gradual buy-ins. These alternatives allow the caller to purchase the business without incurring significant debt, aligning payment structures with the practice’s profitability.

Key Suggestions:

• Revenue Sharing: Agreeing to share a percentage of profits over several years.
• Gradual Buy-In: Slowly increasing ownership stake based on predetermined milestones or financial performance.
• Sweat Equity: Earning equity through active involvement and contributions to the business.

Quotes:

• Advisor 1 [03:59]: "Revenue sharing, a gradual buy-in, some sweat equity, something like that."
• Advisor 2 [04:09]: "If you have a percentage payout over time and the $80,000 a year profit goes down to 20 for a couple of years... then y'all both have skin in the game."

3. Managing Family Dynamics and Emotional Tensions

The advisors emphasize the importance of addressing the emotional aspects inherent in family business transactions. They recommend involving a third-party appraiser to objectively evaluate the business’s worth, thereby reducing personal biases and mitigating conflicts.

Strategies:

• Third-Party Appraisal: Engaging an unbiased evaluator to determine the business’s fair market value.
• Clear Communication: Expressing feelings of being unheard in a structured manner to maintain professional relationships.
• Setting Boundaries: Separating personal relationships from business decisions to preserve both.

Quotes:

• Advisor 1 [05:13]: "When family does business transactions like this with family, it gets very emotional."
• Advisor 2 [05:55]: "I'm questioning if this is the place for you long term, whether you own it or not. Because of this strained relationship."

4. Evaluating Business Fit and Long-Term Implications

Advisor 2 raises concerns about the long-term viability of maintaining both a business relationship and a personal relationship under strained conditions. The potential financial obligations of owning the business could exacerbate familial tensions.

Quote:

• Advisor 2 [05:55]: "Owing dad $400,000 or a million dollars is only going to make it worse."

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Key Insights and Lessons

1. Debt Avoidance: Taking on substantial debt, especially for a family business, can lead to long-term financial strain and personal stress.
2. Alternative Financing: Creative payment structures like revenue sharing and sweat equity can facilitate business acquisition without heavy debt burdens.
3. Third-Party Involvement: Objective appraisals and external advisors can help navigate emotional complexities in family business transactions.
4. Relationship Management: Maintaining clear boundaries and open communication is crucial to preserving both business and personal relationships.

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Notable Quotes with Timestamps

• Advisor 1 [00:17]: "No way."
• Advisor 2 [00:18]: "I hope you weren't listening to the last five minutes of the show."
• Advisor 1 [03:59]: "Revenue sharing, a gradual buy-in, some sweat equity, something like that."
• Advisor 1 [05:13]: "When family does business transactions like this with family, it gets very emotional."
• Advisor 2 [05:55]: "Owing dad $400,000 or a million dollars is only going to make it worse."
• Advisor 1 [06:26]: "Don't get mad if he's like, what? I didn't know there's another option."

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Conclusion

This episode of The Ramsey Show Highlights provides a comprehensive exploration of the challenges faced when considering purchasing a family-owned business. Through expert advice, the callers are guided to prioritize financial stability, explore innovative financing solutions, and address the emotional complexities that often accompany family business dynamics. The discussion underscores the importance of making informed, strategic decisions that honor both personal well-being and professional aspirations.

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Additional Information

For more insights and daily advice on life and money, tune into The Ramsey Show Highlights, brought to you by the Ramsey Network. Join experts like Dave Ramsey, Ken Coleman, Rachel Cruze, and others seven days a week for actionable guidance in under ten minutes.

Transcript

[Host]

Brought to you by chm, a biblically based alternative to health insurance. Learn [e-mail] budget My question is, should.

[Caller]

I take out a loan to purchase a family veterinary practice?

[Advisor 1]

No way.

[Advisor 2]

I hope you weren't listening to the last five minutes of the show.

[Advisor 1]

Oh, geez.

[Caller]

I was listening. Yes.

[Advisor 2]

Okay, tell us why you're the exception.

[Advisor 1]

Incredible.

[Advisor 2]

No, Tell us more about this business.

[Caller]

Yes. So this is a father daughter business. My father owns the business. I have been working in the business for almost 11 years now as an associate veterinarian. I'm not a partner, I'm not an owner. And I work full time as a veterinarian. I've got two little girls, beautiful little girls, one and four and a half. And my amazing husband works as a school teacher. And my, I guess my. Currently the practice is grossing. Last year in 24, we grossed 1.3 million and our profits are 80,000 a year. My biggest question, and my brother actually said that I should call and ask about this because my gut reaction is absolutely no, I do not want to purchase this practice with a loan. But the reason the question is coming up is because my husband and I in June finally paid off $250,000 in student loans.

[Advisor 2]

Yeah, you did.

[Advisor 1]

Congrats.

[Advisor 2]

Way to go.

[Caller]

Thank you. Thank you. And we are debt free, except our mortgage for the first time in our lives.

[Advisor 1]

Awesome.

[Caller]

And it's, it's amazing.

[Advisor 2]

And you're like, why would I want to go back into hundreds of thousands of dollars of debt?

[Caller]

Absolutely. Yeah.

[Advisor 1]

So is your dad trying to get you? Is he trying to get you to buy this or is he offered it to sell to you? How's that? How did it come up?

[Caller]

Yeah, so we've been talking about it for years now. I'm pretty vested emotionally in the business. I'm 120% kind of person. And so I, I run the day to day and I manage our team. And so we have talked in the past and I've been very undecided if I wanted to move forward with purchasing the practice or at least becoming an owner. And my. And I finally agreed that, yes, if we can do this, if we can figure out a way. Last year, year, about a year and a half ago, I said, we can figure out a way without me having to take out a loan to do this. I'm on board. And it came up again recently and he said that he didn't actually believe me when I had told him that I didn't want to take out a loan when it came up again. And so that really made. Made me feel very unheard. And my we. Our relationship is very strange because of this business. And I have worked really hard to try to be mentally healthy for my patients and my family and my team sometimes working against him.

[Advisor 1]

Okay, so let me. Let me hop in here. So a couple of things here. Number one, please don't go to a bank and take out a loan and buy this from your dad like that. Okay? There is some ways that, like, for instance, y'all shake hands and he agrees to take 25% of the profits over the next five years. That kind of thing's okay.

[Advisor 2]

So revenue sharing, a gradual buy in, some sweat equity, something like that, like you're talking about is we're not going to do debt, but I'll give you this much revenue over this many years in order to essentially pay this off.

[Advisor 1]

And what I like about the percentage is if suddenly there's a Covid hits, then you don't like. If you take out a loan from the bank and Covid hits, you're still paying the bank what you all agreed on. If you have a percentage payout over time and the. That $80,000 a year profit goes down to 20 for a couple of years because of, I don't know, there's a dog flu that hits or, I don't know, then y'all both have skin in the game. And if he looks at his daughter who's been with him for 11 years and says, no, then I don't want to do business with him. Okay, okay, here's the other side of it. You're going to have to take language like, I don't feel heard and I have makes me sad. This is a business transaction, and you are going to have to get business partners to help you. Because when family does business transactions like this with family, it gets very emotional. So what does that mean? You're going to have to get a third party appraiser to come in and say, we're going through your books. This is what this thing, not how.

[Advisor 2]

He feels about the business. It's what is it actually worth?

[Caller]

Okay?

[Advisor 1]

Because dad might say it's worth $10 million. I want $10 million and I deserve 10 million. I put 40 years of my life in this thing. I want $10 million. And now he's put his daughter in a really precarious situation, both financially, but also you going to look at your dad and say, dad, it's only worth $3 million. It's only worth $2 million, dad. Right? So now We've got a problem. We're gonna get a third party appraiser. And if he says, well, I'm not doing that. Then again, if you're running this practice, essentially, if you're already a veterinarian and you're leading the team and you're running payroll and you're hiring and firing people anyway, then you can go start your own company.

[Advisor 2]

Yeah. I'm questioning if this is the place for you long term, whether you own it or not. Because of this strained relationship. It hasn't been going well so far. Owing dad $400,000 or a million dollars is only going to make it worse.

[Advisor 1]

And by the way, in his generation, you just went and took out a loan, which is why his generation's in the mess that they're in. So don't get mad if he's like, what? I didn't know there's another option. That's fine. I'm not going to get mad at him about that. But I'm not going to go to a bank and mess up every Christmas for the next 15 years because I owe somebody, because I didn't have the courage to tell my dad.

[Host]

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