When buying any business, whether it is Boots, EMI, or the local Post Office outlet, you must do the usual due diligence of looking at all the various aspects of the business, such as existing contracts, leasing arrangements and the landlord's demands on a new tenant, TUPE (staff) considerations, taxes, utilities, debts against the business and any other gotchas that might come steaming up from between the floorboards.
You also must look at future developments. A tape recorder factory today is not an enticing prospect! Neither is a bookshop. It is my contention, that a small Post Office is also in the list of doomed animals. That does not mean that such a business is without value, it just means that the future is very uncertain, as all sorts of functions get taken away and put on-line, one by one.
But the purchaser of any business has two more considerations and the are ones that most forget -
1. Is this business an asset, or a liability?
Boots & EMI - When Roberts and Pessina bought Boots for £11bn, it was an asset. It is today an extremely profitable company. When Guy Hands bought EMI, it was in the midst of the end of the CD as a product and it became a massive liability.
The difference was not just in the structure of the two companies, but in the purchasers. Roberts and Pessina are specialists in buying retail companies of all sorts and making them profitable. Hands did not know the first thing about the music business. What is an asset in one pair of hands, can be a massive liability in another!
So you must ask yourself - "Do I know how to run a Post Office? Am I Roberts and Passina, or am I another Guy Hands?"
One of the largest aspects of the asset/liability question is property and real-estate in particular. I like businesses that put me on the right side of the real-estate desk. i.e.the business has to own the shop, if it is to be worth money and remain liquid and creditworthy, even during the hard times.
And banks want collateral, such as deeds to a property.
2. Does the business run itself?
The owner of that building has a business. Every year, that building pays him/her £20,000 for the shop, come rain or sunshine. The owner has to do nothing, other than occasionally look to see if the post-master has transferred the money. That may not be exciting, whizz-bang, groovy and windswept, but it is the very epitome of a business!
Post Offices, on the other hand, do not run themselves. Taking any net profits out of the business as a profit in the books may be a 'tax-efficient' way of extracting payment, but the reality usually is, that is wages. If a couple works in a business and takes £50k p.a. out as profits, that is £50k that must be regarded in your private, mental P&L account as wages and not profit.
Wages get tarted up as all sorts of things, like expenses, profit share, loans and even a few things, such as phantom payroll that are less than totally legal, but are still remuneration and when forking out trouser money for a business, must be regarded as such and taken off the headline-grabbing profit numbers!
So to cut a long-winded explanation short, full gross payment for hours worked by the postmaster and his wife/husband/beagle/aardvark must not be regarded as profit and must be subtracted from the gross profit. If the books show £60k gross profit and they are both working in the shop full-time, but not getting paid, then the real gross profit is more like £10k.
If we use the somewhat Mickey-Mouse calculation of a business being worth four-times gross profit, then (in that example) the owners may think it is worth £240k (4 x gross) but the reality is, that it is worth just £40k as a business.
You may of course, regard the whole thing just as a place of work and how to price up the value of being employed is a totally different kettle of fish!
