Business Buyout With Little Capital

[SkylarPat92]

Hi,

I get on very well with someone in the same industry as me, but in a neighbouring town, so we aren't direct competition.

They are about to move to Australia, and have approached me about buying their business.

I have looked over their finances and they are very profitable, even more so than my current business. It would be an ideal expansion to my company.

Problem is, i don't have much money to pay for it.
I am approx £60k short from the asking price.
Is there any companies that specialise in loans for things like this - business acquisitions?

My personal credit rating is extremely poor after raising funds to buy my ex business partner out, so can't look at any finance in my name.

Maybe its just not feasible, but its a great oppprtunity, so felt there was mileage in looking at options, if there are any.

Thanks

 

[Paul Kelly ICHYB]

Whatever you do, make sure you get legal advice and a good accountant to look over the books before you purchase.

Have you discussed a staged or delayed payments?

You might offer x% up front and then y% after 6/12 months, based on the business not having unforseen issues or meeting agreed expectations.

 

[Socio South West]

Assuming all is above board with the books etc as @Paul Kelly ICHYB advises, look at the problem from the Seller's side.

You say 'about to move to Australia' - What happens if you do not buy it? Selling a business at a valuation based price can take quite a while, and with a lot else to organise before they move it becomes more and more of a nuisance. The need to sell becomes more desperate, and accordingly the price easier.

Your position in terms of striking a deal is fairly strong, and you can work out either the most you can afford for an immediate complete deal. or offer them a Buy in deal over a period of time to suit your cashflow.

You might do well to get a third party to look at the situation and negotiate on your behalf to see what can be achieved here.

Whatever you do, protect yourself against the Seller deciding they don't like Australia in a few months time and returning home and set up in the same business again just down the road from you.

 

[Mark T Jones]

I'd agree with the above.

However well you feel you know them - legal; & professional advice are an absolute must.

Vendor finance should make sense here.

 

[SkylarPat92]

Thanks guys for the input.

I think there will be no problem selling this business for asking price as soon as it goes to public. I am just getting first refusal. So i don't believe there is much room for negotiations.

I will ask the question about "paying up" but i don't think that will be an option.

I take on board the part about returning from Australia and opening a competitor, but she is retiring, and has family out there so i don't believe there is any interest in returning and working again. However, i shall request a non-compete clause put into any contract.

WIll look into Vendor Finance, not a concept i have heard before.

Thanks all

 

[Paul Kelly ICHYB]

i don't believe there is much room for negotiations.

It costs nothing to ask.

I will ask the question about "paying up" but i don't think that will be an option.

You don't ask, you will never know.

 

[pentel]

I think there will be no problem selling this business for asking price as soon as it goes to public. I am just getting first refusal. So i don't believe there is much room for negotiations.

I wouldn't be so sure of this. Over 90% of small businesses fail to find a buyer, especially as this seems to be an owner dependent business.

 

[DontAsk]

Would you buy a house on "first refusal"? No, if you have any sense, you would at least get it professionally valued by at least 3 estate agents.

Tell her to let you know if she gets any offers to buy the business and you will consider whether you can make a better offer. Frame it as you wanting to establish what the market price for the business really is.

Is there a "bricks and mortar" premises involved? Is it essential to doing business in the other town? If not, and she gets no offers, then let her close the business and move to Australlia, advertise in her area and pick up her customers.

 

[WaveJumper]

All of the above and don't rule out staged payment plan as it might be more tax efficient for seller

 

[Mark T Jones]

You are the buyer. They are the vendor.

The role of the vendor is to big up the opportunity. The role of the buyer is to question, challenge and seek hard evidence of EVERYTHING.

Long experience tells me that vendors who want to avoid standard due diligence have reasons for doing so.

The most innocent reason us that they are in a hurry - which means they should be amenable to other propositions.

The 'mid ground' reason is that they aren't sure that it will meet their e petition.

The bad reason is that they know its a can of worms.

Act like a buyer, not a vendor

 

[Chris Ashdown]

I seriously doubt they will find many buyers unless it has a turnover of over 1-2 million and great profit,, She sounds like yourself a business controlled by the owner and without the owner little value,
Make a offer subject to due diligence for just under what you can afford and sit tight and don't forget the costs involved in physically moving the business and any leases etc. Any old stock may be next to worthless

 

[WaveJumper]

As an aside Clinton must be keeping busy these days

 

[Mark T Jones]

As an aside Clinton must be keeping busy these days

He went off in the mass flounce

 

[Socio South West]

I think there will be no problem selling this business for asking price as soon as it goes to public. I am just getting first refusal. So i don't believe there is much room for negotiations.

Remember the timescale - You are the easy option for a quick sale as you know the business.
Unless the business has been offered to other similar businesses, you are in the driving seat, and the nearer the departure to Australia gets, the stronger your position will get

With your given capital problems, you need to play for time to strengthen your position further. As others have said - a small business is not easy to sell, and I would not let that impinge on your thoughts and planning.

 

[fisicx]

Consider also that to do all the due diligence and arrange the actual sale and handover is going to take months. Even for a small business it's not speedy as the fine details take forever to negotiate.

Just getting your accountant to review the books could take until the new year.

 

[pentel]

I am approx £60k short from the asking price.
Is there any companies that specialise in loans for things like this - business acquisitions?

How much is the asking price?

Being £60k short on a £70k deal is very different to being £60k short on a £500k deal.

 

[Mark T Jones]

In answer to the specific question,

There are lenders who will lend for business purchase, though bad personal credit will be a hurdle - it will depend on the nature/extent of the 'bad'

Beyond that, they will look at a mix of the due diligence mentioned above and/or solid performance of your existing business

 

[Washington]

Hi,

I get on very well with someone in the same industry as me, but in a neighbouring town, so we aren't direct competition.

They are about to move to Australia, and have approached me about buying their business.

I have looked over their finances and they are very profitable, even more so than my current business. It would be an ideal expansion to my company.

Problem is, i don't have much money to pay for it.
I am approx £60k short from the asking price.
Is there any companies that specialise in loans for things like this - business acquisitions?

My personal credit rating is extremely poor after raising funds to buy my ex business partner out, so can't look at any finance in my name.

Maybe its just not feasible, but its a great oppprtunity, so felt there was mileage in looking at options, if there are any.

Thanks

The owner of the business you are looking at has given you first refusal and I am sure their motives here are good, however, this also comes with time and cost savings for the seller that puts you in a good place to negotiate a purchase

You probably need to know what is the key motivator for the person selling. Do they just want to maximise the price to bank cash for security, or do they need the cash to buy a property abroad ? If they are selling to go and live with family, were they attached to the business in such a way that they had affection for it (and any remaining staff if there are any) and they want to see it prosper and flourish, or are they just cashing in and getting out of Dodge ?

Perhaps you could offer to buy the business for the asking price (if you feel this is fair) or offer a better price than the asking price if the seller was willing to wait for the balance of the money over a slightly longer period that you and the enlarged business could afford. If the seller does not really need the cash and is looking for steady income, you could offer to pay them out of future generated profits over a year or two. It should not hurt your business too much if your new combined business is generating additional profits over the long term. What does it matter is if you slightly overpay (within reason of course). Think to yourself, if this business is a perfect fit, how long would it take you to find a similar business close to home and what is the opportunity cost whilst you find it.

If you were buying over an agreed period of time at an agreed amount, the seller could keep some shares in the business which you could purchase over the agreed time at the agreed price ? I am guessing by the numbers you say you are short, you could pay this in a relatively short time of 1-2 years ??

Before finalising an offer, find out what the sellers financial motivation is and build your offer around this.

Nothing should be off the table, and as someone has said above... just have the conversation, you have nothing to lose and everything to gain

 

[Washington]

I have just looked at your other threads, you seem to have had a very turbulent year !

Were you able to resolve your business divorce amicably or are there still legals ?

 

[fisicx]

Perhaps you could offer to buy the business for the asking price (if you feel this is fair) or offer a better price than the asking price if the seller was willing to wait for the balance of the money over a slightly longer period that you and the enlarged business could afford.

No. Don't ever do that. The seller always overvalues their business. It's probably only worth a fraction of what they are asking.

 

[Washington]

No. Don't ever do that. The seller always overvalues their business. It's probably only worth a fraction of what they are asking.

We don't know that...

I think I covered it with 'if you think that is fair'

 

[fisicx]

We don't know that...

Yes we do. Everyone overvalues their business.

 

[Washington]

Yes we do. Everyone overvalues their business.

Whatever !

 

[pentel]

You probably need to know what is the key motivator for the person selling.

This is of little or no relevance.

The business is worth what the buyer is willing to pay.

 

[Washington]

This is of little or no relevance.

The business is worth what the buyer is willing to pay.

Yes, but knowing what the sellers motivation is can influence what the buyer is willing to pay or how the buyer structures the deal. Knowledge is power !

 

[pentel]

Yes, but knowing what the sellers motivation is can influence what the buyer is willing to pay or how the buyer structures the deal.

In a downward direction only....

If the sellers motivation is to leave the country urgently for a new life they are a distressed seller, so a great situation to reduce the price.

If the seller is motivated to sell his corner shop in an area where the population is reducing to enable him to buy a £2million property from the proceeds this is not relevant to the price a buyer would pay.

 

[PugwashEQ]

Yes we do. Everyone overvalues their business.

Actually that's not our experience with clients

Around 20% of the time clients materially undervalue their business.

Around 40% of the time there is no connection between reality and value (often they want say, £10m, because that's £5m for each shareholder- usually when the business is worth £3m...)

The balance is made up of business owners who are fairly realistic.

The bit that isn't being discussed is transaction structure.

OP- as someone else said, how much of the transaction does £60k represent? 2% or 20%? you could offer to pay it on a deferred basis, or on an earnout.

As loads of people have said- please take proper advice- as a minimum use a proper M&A lawyer to agree the purchase documents. (unless the transaction is for Tradea and Assets rather than shares- in which case you should be having a very different type of conversation).