Business Acquisition Finance Suggestions

[Addison T. Jaynes]

Hi!

My wife and I are currently in the process of acquiring a popular takeaway and are pursuing finance options. My wife is a UK citizen and I am an American on a PBS visa, hoping to get ILR sometime sooner than later (hopefully this doesn't matter for financing, but thought I'd mention it).

A quick check on Experian shows my wife to have a good credit score of 951/999. I have an US credit score of 770/830; I'm not honestly sure how that translates to the UK system.

The asking price for the business is 29K (which I'm trying to get nearer 25K). I'm willing to put 8K of our own funds into the business, leaving somewhere between 17K-21K to be acquired. We don't have much in regards to personal assets, just some jewelry/vehicle.

A bit about the business:

- 2015 Turnover: 165K (lower 2016 TD)
- 2015 Net Profit & Owner's Take: ~ 35K
- Nature of Business: Frozen Yogurt
- Rent is high, but it is in a extremely good location.

The business is asset-rich for the asking price. Just the machines alone are worth ~24K, not taking into account anything else such as computers, CCTV, furniture/fixtures, freezers/fridges, etc.

I have significant experience owning and operating food business in various countries; however, I'm just now learning about how everything works in the UK business system, so please bear with me.

First off, is my assumption that the fact that having the loan under 25K should be beneficial? (It's my understanding that UK banks tend to place less worry in loans 25K or less, security-wise? Or, is it better to be over the 25K threshold for EFG eligibility?)

I'm curious to hearing opinions on the matter. Seller financing seems to be out of the question, so we are just exploring all of our options.

Thanks for the discussion in advance!

 

[Clinton]

Your first move should be to get your hands on a copy of Ted Leverette's book How To Buy The Right Business The Right Way. I recommend this not just because he's a good friend (who gives me lots of links from his site/s) but because he loves talking about OPM (Other People's Money) and how to use it to acquire a business. Another good friend of mine, Richard Parker, has written extensively on how to buy and finance the purchase of a business. I recommend his books on my site.

It's also worth signing up for Ted's webinars. Here's my blog post about his last one which I believe you can download for free.

 

[Brennerz]

This is not from experience, but some things I would question before financing the acquisition, you have probably already covered everything.

The equipment - Can the seller show how old it is - invoices etc. How costly would it be should anything fail? If you had a loan to buy the business, would you have to borrow more to repair/replace etc or are you likely to earn that much you could save enough in the business to pay for these things?

A loan - under 25k is typically non secured and relatively easy to get providing you have an income. You may find it easier to get a personal loan rather than a business loan - but keep in mind you may get in to some trouble should the bank find you have used a personal loan for business (I'm not an expert on that).

What hours need to be worked to run this? Are you able to keep your jobs in the day time? or work different shifts e.g. 1 of you works your job in the day then runs your business at night, another works their job at night and runs the business in the day? Or would it just be open at night?

You may not need to operate like that but a £25k loan somewhere between £450 - £550 per month over 5 years. Having jobs would certainly make that more manageable or paid off super fast if the business is profitable.

The person selling the business have they shown you the takings? The lease, is it long? Would you be taking on any debts?

The net profit isn't huge, realistically how much could this be increased considering how long it would take to pay off the loan etc?

Being a city, could you offer delivery, perhaps with deliveroo or advertise on just eat? etc

To make it any more profitable, would you need further finance to invest?

 

[Addison T. Jaynes]

Thanks for the feedback. My wife is a NHS employee and will keep her job for a few years; her salary is enough for our own family budget. She would help out occasionally, but I would run the business primarily; I'm happy to put in long hours for the first few years, as required.

The only money we would need to take out is to pay back loans. We would try to finance over 5 years, but would entertain full payback over 12 months.

I'd prefer to avoid the personal loan situation and get financing solely based on a high business credit score, business assets, and business performance.

I've developed a vibrant business and marketing plan; I'd fully expect to be averaging 45k cash flow after 18 months.

Thanks for the thoughts!

 

[Ian J]

I'd prefer to avoid the personal loan situation and get financing solely based on a high business credit score, business assets, and business performance.

In the current economic climate I would think it highly unlikely that you would be able to obtain a business loan of the amount you require as the banks tend to be interested in security rather than business plans.

One possibility might be asset finance against the machinery. It isn't my area of expertise but @Mark T Jones might be of help to you. Again crowd funding isn't an area that I'm that well versed in but it could be another possibility for you to consider

 

[Addison T. Jaynes]

Thanks for the considerations. As I stated, I am new to the UK business finance territory and am just learning of all the options.

How about EFG considerations? I was advised that although it is often misunderstood, EFG may be used for business acquisitions. Furthermore, the amount of requested finance is significantly lower than the total asset value of the business. Surely, there should be some options here since the maximum amount I'm seeking is only 21K?

 

[Ian J]

Furthermore, the amount of requested finance is significantly lower than the total asset value of the business.

I think that you find that a financier will value assets differently from their balance sheet value and as an example you say that the assets include computers and CCTV which any financier will value at zero

 

[Addison T. Jaynes]

Yes, that's understandable. I guess that's why I'm interested in an EFG loan; my understanding is that they are very similar to the US SBA loans and the government guaranting 75% of the loan pushes low/no security loan acceptance up? Or, perhaps I'm misreading the situation here...

 

[Clinton]

...my understanding is that they are very similar to the US SBA loans ...

No, they're not. And most banks that claim to make EFG loans usually don't (they make fewer than one, yes one, small business EFG loan per county per quarter!) That's because the 75% guarantee is an illusion; in reality the banks aren't "guaranteed" a penny ...hence their lack of enthusiasm. The only thing EFG is good for is for banks to play pass the parcel. After RBS got caught doing this - illegally shoving bad debt down the EFG channel - EFG lost further credibility and is now a laughing stock and banks try their damndest to not issue any EFG loans.

SBA it ain't!

I gave you a suggestion earlier that you ignored (perhaps because you believe you've solved your problem i.e. you think you've found an easy way to get finance). EFG is not as easy as you seem to think.

 

[Addison T. Jaynes]

Clinton,

I appreciate your comments. I'll consider looking into those books if I have time. I've years of experience in acquiring businesses globally, so I'm trying to use my time wisely to learn how UK banks operate. Crowdfunding is certainly not an option this time and seller financing is out of the option. I've used both of those methods efficiently in the past; the only crowdsourcing that might work in this scenario is P2P acquisition lending, which I'm engaging now.

It is indeed a shame that the EFG program has turned into such... I've read about the gross mismanagement of the programme; it also seems many banks don't understand how the programme works.

 

[Mark T Jones]

Thank you for the shout out @Ian J - yes, I could look at funding machinery - in this case it would be against its 'forced sale value' be prepared to be surprised how relatively low that is!

However, I suggest your first port of call should be Start Up Loans which, like EFG is operated under the British Business Bank - I believe the current rate is 6% - which is very good for a start up!

As Clinton says, EFG is a bit of a mess, with Government and Banks over-promising and blaming eachother for under delivery; that said, it won't hurt to enquire.

 

[Addison T. Jaynes]

Thank you for the shout out @Ian J - yes, I could look at funding machinery - in this case it would be against its 'forced sale value' be prepared to be surprised how relatively low that is!

However, I suggest your first port of call should be Start Up Loans which, like EFG is operated under the British Business Bank - I believe the current rate is 6% - which is very good for a start up!

As Clinton says, EFG is a bit of a mess, with Government and Banks over-promising and blaming eachother for under delivery; that said, it won't hurt to enquire.

Thanks for the comments. I do understand that and will have to explore it fully. I am very familiar with the StartupLoan programme - amazing scheme! The downside here, is unless I'm misreading their fine print, this business wouldn't qualify as its been in business 4 years. Am I correct in my understanding that you can only use it for businesses that are 2 years old or younger? If so, could an alternative be to create a seperate LTD and then "buy the assets" from the current company?

Thanks.

 

[Mark T Jones]

Thanks for the comments. I do understand that and will have to explore it fully. I am very familiar with the StartupLoan programme - amazing scheme! The downside here, is unless I'm misreading their fine print, this business wouldn't qualify as its been in business 4 years. Am I correct in my understanding that you can only use it for businesses that are 2 years old or younger? If so, could an alternative be to create a seperate LTD and then "buy the assets" from the current company?

Thanks.

It's been a while since I was involved with SUL, the rules may have changed, but back then it was permissible to borrow to buy an existing business, as long as you didn't already part own it.

Suggest you call & ask.

 

[Addison T. Jaynes]

It's been a while since I was involved with SUL, the rules may have changed, but back then it was permissible to borrow to buy an existing business, as long as you didn't already part own it.

Suggest you call & ask.

Thanks for the suggestion - I rang and they said that it's not out of the question and they would consider it!

We will go for it.

Also, the original situation has changed a bit - the total amount needed is only £25K. After our contribution, we will need &17.5K.

It's all becoming more possible!

 

[Mark T Jones]

Thanks for the suggestion - I rang and they said that it's not out of the question and they would consider it!

We will go for it.

Also, the original situation has changed a bit - the total amount needed is only £25K. After our contribution, we will need &17.5K.

It's all becoming more possible!

Fingers crossed! Lots of bureaucracy - it's a Government scheme after all, but they are there to lend.

 

[Addison T. Jaynes]

Fingers crossed! Lots of bureaucracy - it's a Government scheme after all, but they are there to lend.

They make it sound so simple, although I'm sure it will be far from that. The business meets all criteria...it will be interesting to see how it proceeds.

There is little online about their loan acceptance rate or difficulty. Any idea how difficult it is to actually move forward with the programme?

 

[Mark T Jones]

They make it sound so simple, although I'm sure it will be far from that. The business meets all criteria...it will be interesting to see how it proceeds.

There is little online about their loan acceptance rate or difficulty. Any idea how difficult it is to actually move forward with the programme?

Acceptance rate are fairly irrelevant TBH - many applicants are really not evolved in their business thinking, just following a fantasy.

They will expects a thought through business plan, particularly with regard to marketing / market research.

It seems you know what you are doing, so should be relatively straight forward

 

[Addison T. Jaynes]

Hi All,

I thought I would just drop in to provide an update on the financing situation. We ended up with a wide variety of offers, but @Mark T Jones, your suggestion was perfect! The final result was with the StartUpLoan programme.

The process was rather straightforward, but extremely detailed. It is also interesting to note that they dont like to lend more than ~6K (at least our provider). Asking for 20K, it was clear to us that they wanted to find any way to reduce the amount provided, but it seems that as long as you can provide enough rationale within documentation to mitigate their risk, all is good.

 

[Mark T Jones]

Hi All,

I thought I would just drop in to provide an update on the financing situation. We ended up with a wide variety of offers, but @Mark T Jones, your suggestion was perfect! The final result was with the StartUpLoan programme.

The process was rather straightforward, but extremely detailed. It is also interesting to note that they dont like to lend more than ~6K (at least our provider). Asking for 20K, it was clear to us that they wanted to find any way to reduce the amount provided, but it seems that as long as you can provide enough rationale within documentation to mitigate their risk, all is good.

Glad it worked out to you. Your provider will have a 'house limit' which they can underwrite themselves - presumably that's where the £6K barrier came in. It's a bit tougher if they have to go up the line for a decision, but you convinced them so well done & good luck with the venture.