Small shops: Are they really little more than a hobby?

  1. Small shops
    Francois Badenhorst

    Francois Badenhorst Business Editor, UKBF & AWEB Staff Member

    Posts: 91 Likes: 18
    2 |

    For UKBF member Dartfordian, the bitter disappointment of his recent redundancy has also presented an opportunity. Through his managerial job in the City - and his wife’s income - his family managed to attain a very comfortable middle-class existence.

    But now unbound from that career, he feels the time is right to pursue an old ambition: “We would like to sell up and move to the coast or a nice little village. The idea is to get a shop with accommodation that will keep us busy and provide a similar income, as well as a home.”

    The initial capital for the move can be covered by selling his home, he tells the community. And after a few initial exploratory searches, he has found a few small stores he’d be interested in taking over.

    But in the process of doing the financial due diligence of buying a business, he’s come up against a road block. “They all have similar turnovers and gross profit margins. They're all advertised as having ‘adjusted’ net profits of about £60-£70k, which is all well and good but the actual net profit figures are much less - between £15k and a minus figure!”

    None of the owners, despite these modest profits, seem to struggling, however. “They’re almost all of retirement age. One fellow with a net profit under £10k said I could earn £80k without changing things too much.”

    So what’s cooking here, he asks. Is he getting the wool pulled over his eyes?

    Hahnbeck explains: “The differences between the accounting net profit and the ‘adjusted’ net profit are critical. It doesn’t necessarily mean they are trying to rip you off - it is legitimate for the seller to make adjustments to the accounts that show the total benefit they derive from the business, not just the net profit”

    It’s crucial for the buyer, he warns, to be clear on “what you believe is a fair adjustment to make, and what isn’t”. “I would recommend asking your accountant for help with this if you are unsure (use an accountant that has a lot of experience in buying and selling businesses, as not all of them do).”

    Usually, the adjustment made to the profit refers to the owner’s salary. “They would add this on (sometimes with their employer’s NI on top) to the net profit of the business because this makes up part of the total benefit they derive from the business.”

    As always, though, a few caveats remain: namely, how many hours a week does the current owner put into the business at present. £80k adjusted profit is healthy, sure - but what if that only comes after working 16 hour days? That might be an unappetising proposition to someone looking for a quiet, bucolic existence.

    “Similarly,” writes Hahnbeck, “if any of their family members are working for free or for below-market wages, you have to make your own adjustment to the profit to account for this too, since you will have to pay people at a market rate to do all of the things they currently do for free. Other adjustments may include depreciation, interest on loans, and one-off expenses that are not likely to be repeated. All of this is negotiable.”

    Mr. D is even more cautious when it comes to buying a business: “Do not trust what you are told by the seller or agent, check everything. Where records are public check those too.” Clinton’s advice also rings true: ingratiate yourself with local business owners, find out what the area you’re moving into is really like.

    “Running a business properly is bloody hard work,” says the Byre. “Do not imagine for one second that you can live some dreamy life of pottering about, selling sweeties and tins in today's world. Aldi and Lidl are everywhere and the sheds like Tesco have been moving into the small shop sector, with convenience stores and home deliveries.

    “Also, running a business is a complex affair and is not for the novice. All these pokey little shops, hotels, restaurants and pubs are up for sale because novices keep trying and then failing to make a fist of things and are forced to give up.”

  2. Awinner2

    Awinner2 UKBF Regular Free Member

    Posts: 154 Likes: 25
    Unfortunately in my small market town, shops open and close regularly. When I look at the ones opening I wonder how much research they ever do into footfall, breakeven figures, local Business Rates, achievable margins. There are some old established shops that appear to be doing ok, but the newcomers last 6-12 months and then the shutters come down. Sad but the reality of modern shops in High Streets.
    Posted: Aug 30, 2017 By: Awinner2 Member since: Aug 4, 2017
  3. Talay

    Talay UKBF Big Shot Free Member

    Posts: 3,703 Likes: 779
    Are most hobby businesses ? Yes and no. Most are paid for jobs, which is to say that the "business" owner has bought a business which is really a job.

    That is fine and there is nothing wrong with that but the business wouldn't work if you substituted the owner's labour for hired help.

    Why is it a decent option ? well, for most people who could earn moderate or low salaries in a company then the income you can generate from even a small business can be much more. Conversely, if you can earn £100k plus from a salaried job, it isn't that easy to earn that much from your own business.

    What are the critical things ?
    • Rent - as cheap as possible with the best terms possible and certainly breaks on your side
    • Rateable Value - if under £12k then you pay no rates. This is crucial for a new or small business
    • Availability of staff - there are jobs unfilled everywhere and this is pushing up salaries
    • Don't forget the Minimum Wage - this is going to £9 or more by 2020
    • Make sure you can get at least 4 to 6 weeks a year off. You cannot work every day
    • Don't forget professional fees. They make life easier, not more expensive
    • Make 100% sure you have a USP or simply don't bother
    Posted: Sep 1, 2017 By: Talay Member since: Mar 12, 2012