Taking over family business

[K91]

Hi all

Slight potential change of direction from my last post, but me and my partner have been offered the opportunity to take over her parents family business which is an established bakery of 30+ years in an affluent market town, with a smaller shop in a nearby town.

The main bakery makes all the products and delivers to wholesale customers, and also has a shop attached. The smaller shop is just a shop and receives the goods daily from the main bakery.

We are having a meeting on Friday with her parents to talk about it properly as it’s only been mentioned briefly. I was just wondering if anyone has a similar experience, any key questions to ask and what to look out for good or bad.

I should mention we both have no baking experience but we would not be going in to bake we would be going in to run the business, I have management experience and my partner is very good with people.

Any advice would be appreciated.

 

[Mark T Jones]

From experience of customers, be very clear that you are taking over the business, and not just becoming shareholder puppets whilst they attempt to run it from Marbella!

Don't skimp on die diligence - in many respects it's more important when there are blood bonds.

 

[Socio South West]

There is a danger that the older generation look at the business with rose tinted specs and think its worth far more than it is: In my experience it is very hard to get them to eat humble pie and realise that what they are asking for amounts to far more than its worth.
Depending on the relationship between you, a degree of consultancy or shared running of the business for a period is desirable - You have to work out which would be better for you, but at some point you have to clearly be able to make it plain that you and your wife are the owners and make the decisions: It's often at that point that things get tricky.

I echo @Mark T Jones comment on due diligence, especially where any lease or premises matters are concerned.

Is the machinery and equipment in good condition and reasonably modern? Are there long serving staff you would take over? Providing you have experienced baking staff, it's not too much of a handicap not being bakers but having some business experience: Better that than being the best baker with absolutely no experience of running a business.

 

[Clinton]

I was just wondering if anyone has a similar experience, any key questions to ask and what to look out for good or bad.

The questions to ask would fill a whole book

Do not get involved unless you have an expert in business acquisitions advising you*.

It doesn't matter whether you're getting the business for free or paying for it in cash or paying for in out of future earnings. Whatever the offer, budget a few grand for expert advice even before you sit down to talk with them!

*No, don't look at me, I'm fully booked up, sorry.

 

[K91]

Thank you for your responses, noted regarding the due diligence and I agree that it’s more important with family involved.

In response to your questions Socio:
- They own both premises in question
- Machinery is in good order
- Lots of long-serving staff (The bakery manager is my partners god-father)

I would probably have to take a pay-cut initially whilst learning how to run the business so that is also something to factor in and I also have a small van that would be a useful addition to the fleet.

 

[Newchodge]

As well as professional advice about the acquisition both sides need their own legal advice to ensure that the final contract does what each side expects it to do and that there are no hidden 'nasties' to pop out and bite someone. Again, even more important when there are blood bonds.

 

[Clinton]

... noted regarding the due diligence...

Er, you're nowhere near "due diligence" (if you even know what it actually means).

I was pointing out, as politely as I could, that buying a business is a lot, lot more complicated than you think and it's way, way outside your expertise.

You need to learn a ton of stuff before you get to your "due diligence". And you will make major blunders if you don't have a trusted professional on your side before you even start talking with the owners.

 

[Paul Norman]

Business acquisition is a very specific skill set.

I have been involved in the acquisition (and the disposal) of around 100 businesses in my life, and the advice you need is more than just a list of questions.

I do, however, echo one piece of advice above. When buying, or taking over, a business you need to take care. If family or friends are involved, you need to increase the level of care by a factor of around 3 million.

Management experience, and being good with people, will be useful. Essential. But not sufficient. You need to be knowledgable first on acquiring a business, and then on running it.

I would suggest getting a business takeover/acquisition specialist involved very early. It might be that this is a marvellous opportunity. It might equally be the biggest error of your career todate.

 

[DavidWH]

I bought my 'business' from my uncle & cousin.

Truth is, there was no business to buy, and I hammered a bargain price for the machinery and started a fresh.

They'll no doubt upsell the good will, and whilst there is some value in that, it's not tangible - You could pay £1000's for the goodwill, for it to vanish overnight when they've sold up.

 

[Chris Ashdown]

Many new owners think they can increase profits with changes, only to find they have killed the reason people brought there goods or service

 

[pentel]

You could be buying a job.......

 

[IanSuth]

Also remember baking is very energy intense - redo the figures using latest guess on energy prices for this year (and other inputs like flour if that is on the up) and make sure the bottomline still works.

 

[K91]

Er, you're nowhere near "due diligence" (if you even know what it actually means).

I was pointing out, as politely as I could, that buying a business is a lot, lot more complicated than you think and it's way, way outside your expertise.

You need to learn a ton of stuff before you get to your "due diligence". And you will make major blunders if you don't have a trusted professional on your side before you even start talking with the owners.

Overreacted a bit there haven’t you Clinton pal! Thanks for your concern though, I’ll make sure to look up the meaning of due diligence.

 

[K91]

Thanks for all the informed responses, some great insight and information there that’s going to be useful in deciding how to move forward.

 

[Socio South West]

In response to your questions Socio:
- They own both premises in question

Be very wary that the Outlaws (her parents) aren't lining up a nice inflated rental for you to fund their retirement even if the business is offered on attractive terms.

Try and get negotiations on a even playing field and at rates that make the business sustainable for you and your wife. You may need to spend hours on spreadsheets to get it right, but if it doesn't stack up for you, don't be afraid to decline... regardless of who is on the other side.

 

[Talay]

Look at the contracts in place, the rents, who owns the buildings, ask why over XX years they never got further than a second shop, is one part of the business supporting the other, what about seasonality, the weather, demographic changes, dietary changes, so much more than even comes to light in 2 minutes.

My guess is that it isn't a business but rather a job and when the outlaws leave, the whole thing will end up being worth nothing and could even have a negative valuation owing to lease commitments etc.

My guidebook rule of thumb is to ask whether I could buy it, put in a manager or two managers on £50/100k a year combined and still get some return. If not, then it is a job, not a business.

 

[K91]

Look at the contracts in place, the rents, who owns the buildings, ask why over XX years they never got further than a second shop, is one part of the business supporting the other, what about seasonality, the weather, demographic changes, dietary changes, so much more than even comes to light in 2 minutes.

My guess is that it isn't a business but rather a job and when the outlaws leave, the whole thing will end up being worth nothing and could even have a negative valuation owing to lease commitments etc.

My guidebook rule of thumb is to ask whether I could buy it, put in a manager or two managers on £50/100k a year combined and still get some return. If not, then it is a job, not a business.

They had 5 shops at one point but have scaled back in the last few years. The mother-in-law has not worked in the business for the last 15 years and the father-in-law goes in for a couple of hours each day, they have long standing managers in place, so I believe there is a business there.

 

[Talay]

They had 5 shops at one point but have scaled back in the last few years. The mother-in-law has not worked in the business for the last 15 years and the father-in-law goes in for a couple of hours each day, they have long standing managers in place, so I believe there is a business there.

Scaled back means it didn't work out. No-one does it when shops are putting £000s a week into your pocket. It is actually very hard to get past about 3 or 4 shops as you begin to hit the ceilings on what you can manage yourself and yet you don't often have enough income to put in place a real management team to free your time up. That is why you see so many 2 and 3 shop businesses but so many fewer 10+ outlet businesses which themselves haven't moved onto 50+ etc.

Look out for a lack of investment over time too. The current owners might have decided 10+ years ago simply to run the business into the ground for profit and not to reinvest anything. Sometimes you cannot turn these around as the investment required now is too high.

 

[ChrisGoodfellow]

Thanks for the helpful advice, everyone. Taking over a family business has come up a number of times on the forum, so we've collated the basics into an article:

https://www.ukbusinessforums.co.uk/articles/taking-over-the-family-firm-what-you-need-to-know.1046/

Let me know if you have any feedback or there's anything you think we should add