Buying 50% of business "goodwill" (What can we do about cash in bank stock value etc.)

[Jemm]

Hi,

Obviously will be speaking to the accountants properly on this but I'd like an idea of the ways in which to approach this scenario, whilst preparing. Essentially, I wish to buy into the company I work for which is currently owned by one director. The problem is there is a large amount of unnecessary cash in the bank, which is not required for the cashflow of the business. I think the most tax efficient way for the current director to remove most of this would be to pay into pension? (They will be retiring in the next few years and I intend to purchase the remaining shares at that point)

Maybe a little more complicated is the current stock value, I'd really like to avoid paying for that, is there a way that this can be "allocated" to the current owner as part of sale? Could they show this as a Directors loan to the business? Essentially, I am only interested in the goodwill of the company going forward, the current assets and cash is for their use. I am the only employee of the business other than the Director (in their 80's) and we are both keen for this to happen. Appreciate any advice!

 

[pentel]

Buying 50% of the company will need a very good shareholder agreement so that there is something in place should there be issues in the future.

If you were buying all of the shares in the company would you need any stock to continue running the company? or any cash in the company to pay suppliers, expenses etc?

It is very easy to underestimate cashflow requirements.

 

[UK Contractor Accountant]

thought you needed to have stock to run the business?

if not needed and has been sitting on shelf for donkeys of years then it should have been written down as slow moving/obsolete stock on the balance sheet anyway.

 

[DontAsk]

Can you switch things around? Buy the whole business now and employ the director until he retires.

 

[Paul Kelly ICHYB]

Just agree a value to buy 50% of the business/shares - forget about stock value etc.

If the value of the stock is wrong, this needs to be considered in the valuation.

Re the money in the bank, that is something the current director needs to sort out, but remember that there might be a cost to the business.

You then agree on the value based on the money being out.

 

[Jemm]

Thank you for the response. My issue is my own cash available, hence why I wanted to minimise the investment. I guess I may have to accept the stock situation (we sell high value items) but hopefully the cash can be significantly reduced. I know the business inside out and we only need around 25% of the current cash balance for operating with a comfortable surplus, the rest has just built up through lack of managing this aspect efficiently.

 

[numbersrule]

You have said you are only interested in the Goodwill so you and the current owner need to agree a value for the Goodwill.
Whilst agreeing this you also need to agree what proportion of the Goodwill is already yours as a result of the hard work you have already put into the business ( you haven't said how long you've been employed by the company ).
Regarding the cash required to manage cash flow, which you have said would be 25% of the current cash, remember that 25% of the current cash has a value. However you may not have personal funds to 'buy' that, so you may need to agree staged payments to the current owner before and after his retirement so that the necessary cash balance is maintained and the company which you then own is able to fund the share buy back for the current owner.

 

[numbersrule]

As you have said you sell high value items, I am intrigued why you see no value in the current stock?

 

[pentel]

More details on the type of business and some numbers would be helpful as this could affect the path forward.

 

[Jemm]

Thanks for your help. I can fund the purchase of the 25% cash plus goodwill, it was the other 75% i was wondering on the best way for the current owner to take that out before we agree on the rest.

It isn't that I don't value the stock, it is required for an efficient service, it would just be easier for me financially if we allocated that value somehow to the existing director. For example, if we were starting this business today from scratch It would essentially be like the current director providing the funds in the form of a loan for the stock to get us going which we pay back to them over the next 12 months or so. I just thought maybe its possible to show this as a loan to the business even without the transactions? Or if we add the value to the price of me buying in, maybe I buy less of a share upfront and gradually take on more shares over the 12 months. Sorry this would be my first time buying an existing business and whilst we have agreed on the sale of the goodwill, it just the technical side of the transaction and how I fund the asset side purchase.

 

[Lisa Thomas]

I think you are over complicating things.

Decide whether you want to buy a) the business or b) the shares.

Then decide how much you want to pay for that choice and see if an agreement can be reached on how that will be funded.

 

[SillyBill]

Remember you are also "buying" 50% of the creditor book. So I wouldn't obsess over stock. I prefer to look at the net asset value for that reason and stock is just one input into that equation. Want a load of cash for the stock? Okay I will give you that but in return you pay all the bills that are currently sat due for payment over the next 2 months? Deal?

 

[Paul Kelly ICHYB]

Forget about goodwill - it is a mythical thing that people use to extract additional value out of a business.

Get the owner to get the spare cash out of the business and then value/buy what is left.