Buying a lease hold business

[Hayze]

My husband and I are looking at giving up our jobs and buying a lease hold business, ideally a cafe or tea room. I've done lots of reading and research but i find the business for sale adverts really confusing, for example:

• Asking Price: £35,000
• Turnover: £100K - £200K
• Net Profit: Under £50K

It then states owner runs the kitchen, partner does the administration and they hire 3 staff at 30 hours. So do the owner and partner draw a salary and then make a net profit of 50k or do they take their wage out of the net profit? We just need to make sure we'd make enough to get by. It's all very confusing! Any advice would be appreciated. Thanks

 

[Mr D]

My husband and I are looking at giving up our jobs and buying a lease hold business, ideally a cafe or tea room. I've done lots of reading and research but i find the business for sale adverts really confusing, for example:

• Asking Price: £35,000
• Turnover: £100K - £200K
• Net Profit: Under £50K

It then states owner runs the kitchen, partner does the administration and they hire 3 staff at 30 hours. So do the owner and partner draw a salary and then make a net profit of 50k or do they take their wage out of the net profit? We just need to make sure we'd make enough to get by. It's all very confusing! Any advice would be appreciated. Thanks

Each business can be different. What one business does can have zero impact on what another does.
Its always a good idea to question things in a particular business - if the owners pay themselves £25k a year between them from dividend and the business makes £30k a year then ask yourself if you would be willing to work for below minimum wage (quite possible) and with a business that in reality doesn't make a profit!

Tax wise its generally accepted that limited companies can pay the directors low wages then top up with dividends, problems occur when profit drops and won't support that level of dividend payout.
30 hour weeks for staff at say £7.50 an hour is £225 a week gross so a cost of £11,724 a year so for 3 of them is £35,172 before any other bills are paid.

 

[Hahnbeck]

You're right to question this. Calculating the ACTUAL profitability and owner's drawings from a business is one of the most important first steps in evaluating the business. But you can't tell just from the ad - you have to contact the seller and ask them. The seller could be structuring this in either of the ways you described (the "net profit" figure in the ad often doesn't represent the true accounting definition of the term - sellers frequently put the "net benefit to owner" figure here instead, which is the profit plus their salary plus any other benefits they receive).

Also once you've clarified what this figure is and what it includes, you have to check the details to see if they are accurate. For example are any family members working in the business for free (or below market rate wages)? If so, this will artificially lower the expenses shown on the books and artificially boost profitability. Check everything in detail.

But the first step is contacting the seller. Often you can get enough detail about issues like this from initial emails / phone calls (at least enough to rule OUT a business), and when your initial filters are satisfied from these early discussions you can proceed further and meet with the seller to go into more detail.