Long established business being offered, very tempting!

[haryj]

Hi all,

I have recently came across somebody who is offering there auto engineering business up for grabs. The business itself started around 25 years ago, but in the last year 10 year's the employee there took it over from the original proprietor, who had retired and ill health (i think). The current owner say's he has put up to £200k into the business, tools, machines, equipment, building repairs and so on. Some of the machines i have seen are very expensive indeed and of high quality.

The business due it being long established and all other local businesses and individuals knowing them, have a very good clientele book and reputation. Therefore it's relatively busy all year around, which is what excites me. Me standing there having a conversation for around 30 minutes, his telephone rang over 5-6 times, now i obviously don't know if this was new customers or those chasing there work up. The work area was full of customers jobs and some very expensive jobs were also evident.

Current owner is saying he has no life at the moment, as he's in 8 am every morning, working 12 hour shifts and occasionally until 11 am at night as well. He want's more family time as he has small children and an almost 100 miles a day commute to the shop.

I haven't seen any books at this stage, however the owner has told me at least 50% of the business is cash transactions and remaining card/cheque/transfers.

The premises itself is situated in a medium sized industrial area, the entire complex being council owned and rent being around £1400pm, which isn't bad for the location.

He has very recently renewed his lease for another 5 years and has mentioned it's easily extendable.

My plans for the business starting of:

Drive more towards auto performance industry.

Advertise/Market it. They've never advertised in there lives, in fact never owned a website.

Offer more bespoke services, which wouldn't be hugely cost effective for us once we're in.

Offer collection and delivery services, they currently have no vehicle.

My current concerns:

1. The entire area where this business is located is all slowly coming under the new decent homes infrastructure. A lot of industrial sites in this town have disappeared over the last decade. I have heard rumor's from others in this area that, council owned buildings are looking to sell to developers, at some point. But why would they extended his current lease/rent term and offer longer terms as well. Confused!

2. The business only has 1 employee who is only a helper/fitter and isn't really doing the main engineering work. The owner is carrying out all major work himself. Therefore why is he not employing anyone if he is very busy with work?

2. He has demanded around £120k in goodwill everything in the shop to remain, apart from a few personal assets. Now machines/equipment do depreciate over time, am i paying for the long term establishment or the equipment or both?

3. Can the slow increase of businesses shutting down due to developers building homes, impact this business?


Your help would be much appreciated,

Thanks in advance!

 

[Clinton]

There are a million things to point out here and a huge amount to know before you even consider a deal.

We often get sob stories on these forums from experienced business folk who've been running businesses for decades and who think that just because they are highly experienced at business they are capable of assessing an investment opportunity and making an acquisition.

They are not. In fact, they are so clueless that this often ends up being the biggest mistake of their life and one which wipes out all the money they made in those previous years running successful businesses.

My advice: Stop, take a step back, don't for a minute consider you're anywhere near qualified to do this, and appoint a paid adviser for whom this is bread and butter.

I am fully booked up and can't take this on (and this is on the small side), but find somebody else or, given the type of questions you've asked and your comments above, I believe you risk making some very big mistakes.

 

[Mr D]

Hi all,

I have recently came across somebody who is offering there auto engineering business up for grabs. The business itself started around 25 years ago, but in the last year 10 year's the employee there took it over from the original proprietor, who had retired and ill health (i think). The current owner say's he has put up to £200k into the business, tools, machines, equipment, building repairs and so on. Some of the machines i have seen are very expensive indeed and of high quality.

The business due it being long established and all other local businesses and individuals knowing them, have a very good clientele book and reputation. Therefore it's relatively busy all year around, which is what excites me. Me standing there having a conversation for around 30 minutes, his telephone rang over 5-6 times, now i obviously don't know if this was new customers or those chasing there work up. The work area was full of customers jobs and some very expensive jobs were also evident.

Current owner is saying he has no life at the moment, as he's in 8 am every morning, working 12 hour shifts and occasionally until 11 am at night as well. He want's more family time as he has small children and an almost 100 miles a day commute to the shop.

I haven't seen any books at this stage, however the owner has told me at least 50% of the business is cash transactions and remaining card/cheque/transfers.

The premises itself is situated in a medium sized industrial area, the entire complex being council owned and rent being around £1400pm, which isn't bad for the location.

He has very recently renewed his lease for another 5 years and has mentioned it's easily extendable.

My plans for the business starting of:

Drive more towards auto performance industry.

Advertise/Market it. They've never advertised in there lives, in fact never owned a website.

Offer more bespoke services, which wouldn't be hugely cost effective for us once we're in.

Offer collection and delivery services, they currently have no vehicle.

My current concerns:

1. The entire area where this business is located is all slowly coming under the new decent homes infrastructure. A lot of industrial sites in this town have disappeared over the last decade. I have heard rumor's from others in this area that, council owned buildings are looking to sell to developers, at some point. But why would they extended his current lease/rent term and offer longer terms as well. Confused!

2. The business only has 1 employee who is only a helper/fitter and isn't really doing the main engineering work. The owner is carrying out all major work himself. Therefore why is he not employing anyone if he is very busy with work?

2. He has demanded around £120k in goodwill everything in the shop to remain, apart from a few personal assets. Now machines/equipment do depreciate over time, am i paying for the long term establishment or the equipment or both?

3. Can the slow increase of businesses shutting down due to developers building homes, impact this business?


Your help would be much appreciated,

Thanks in advance!

Long established business? Like a number of the ones that have gone under in the past few years?

The 'no life' bit - you'd be purchasing a job? If the current owner who presumably does know how to run the business is working long hours would you be doing the same?
Its not uncommon for business owners to earn less than minimum wage when all hours are factored into the pay they get. And we aren't usually as limited in hours we work either.

Baffled why you would offer bespoke services that wouldn't be cost effective, is there a reason you would want to do that rather than more cost effective things?

Collection and deliver services - you & your staff running that? Or paying someone else to do it for you? Can get some custom or may simply cost you.

1. Could be no developer is interested yet in that property.

2 (first one) Yes ask yourself why someone is employed to do some stuff and owner is doing the rest. Could be not cost effective, could be no time to train, could be unable to do work.

2 (second one) What is demanded and what is realistic can be different. There does appear to be a tendency for sellers to overestimate (or be talked into it by others) about the value of their business. What a buyer will pay …. not the same sum?

3 - if losing custom then yes. If losing competitors then yes. The impact is different despite the answers being the same.

 

[The Byre]

Let's go through the obvious red flags in your post, one-by-one -

1. The owner has one employee who is just an unqualified fitter and the owner is working all the hours he can.

2. Half the turnover is cash.

3. He values the goodwill at £120,000.

4. The business sits on a rented site and the neighbourhood is being gentrified.

That means the following -

1. It is not a real business, but a job with tools. It's a business when you can take a holiday or just not bother with the damn thing for a few weeks and it continues to function perfectly.

2. Yer, right! How often have I heard that fairy story? If it ain't in the books, it didn't happen!

3. You can't place a goodwill value on a job! People hire him - they may not hire his successor. The 'goodwill' value of a job is precisely zero!

4. There is no real equity in this operation, other than some used machines and tools and the long-term prospect is that this workshop is going to have to move somewhere else!

To sum-up (assuming what you have written above is true and there is no further bad news lurking under the rocks in his yard) like so many of these one-man-band operations, he has confused income with profit and is living a hand-to-mouth existence and has done absolutely zilch to develop real value in what he mistakenly thinks of as a business.

My wild guess is that if you were to follow @Clinton's excellent advice and hire someone to take a look at this 'opportunity' they would write a nice report, stating that the whole shebang is worth whatever the tools could fetch at auction. They might be persuaded to add a little bit on top, but that would be akin to putting lipstick on a pig.

 

[Clinton]

Let's go through the obvious red flags in your post, one-by-one -

Actually, it starts even before that with his use of "auto engineering business up for grabs". Up for grabs? Wow! Like in a really cheap price? A once in a lifetime bargain?

That kind of language is typical of enthusiastic buyers who've already decided it's a great opportunity.

 

[haryj]

Thank you for coming back to me so soon.

The reason why i have shown such significant interest in this business is because my uncle who owns a car garage has been using them since they've opened, as he now knows both previous (founder) and current owner of the business. He has mentioned every time he has gone to them, past and present, they've been busy all the time and he hasn't really ever heard them complain about things financially.

I wouldn't really say i've put it across as a once in a lifetime opportunity, it's more about the level this business has reached and/or achieved over the years, (not just talking financially), which has caught my attention.

I am particularly not keen on the basis that, there is no permanent skilled staff here, owner working long hours and why he hasn't been interested in moving forward, as mentioned above it seems more of a job than a business.

There are other businesses like this, in fact plenty near where i live, who offer far more.. this why i have mentioned i am looking to offer more bespoke services within it.

i understand first impressions sometimes do excite people, i obviously would seek professional help on this, not something i would just jump straight into.

 

[The Byre]

With neither staff nor equity other than some used tools, I fail to see what there is of value.

Sorry to be a wet blanket here, but the two things I look for are either a set of people that generate profits and just need leadership and investment, or solid equity, such as property or valuable IP. Those are the things an investor is looking for.

 

[Robert Meredith]

I would echo what the others have said. What are you actually buying? What about just setting up yourself from scratch?!

 

[Mark T Jones]

The answers will lie in detailed inspection of the numbers. Everything else is just talk

You need to look not just at individual numbers but at 5 year trends

Your plans, at this point are irrelevant - they are for you in the future and have no impact on the value of the business.

 

[Clinton]

i obviously would seek professional help on this, ...

Save yourself the money you'd spend on fees and walk away now.

Even without looking at the numbers or trends or anything else I can tell you this is a bum deal. Businesses highly reliant on the owner are difficult to sell. If he's working the hours you state, that makes this a hair breadth's away from impossible to sell. Add the large cash component (for which there won't be proper books) and it's crazy to even consider buying it.

There are ways to make a deal like this workable, but that's for very savvy buyers, not for a first time player.

 

[Lisa Thomas]

I can recommend an agent that can value the business for you (if the purchaser will play ball). Dm me for the details.

 

[Clinton]

Which agent / broker is that, Lisa?

 

[Socio South West]

Some great advice here from nearly every poster with a lot of valid points particularly about the lifestyle and the cash situation.

A businesses value is only going to be based around what is on the books... The cash tale may be true, but you can't take any account of it in working out a value.

Likewise, secondhand machinery is only worth auction value effectively. For something like a car ramp I guess you can add the cost of relocation of it.

You have to get his books/accounts and go from there - if you are planning marketing/advertising not done at the moment, that comes off the profit.... If you want to employ rather than work yourself into the ground like he is at the moment.... that comes off the profit.... and so on.... How you plan to run the business may make it look very different on paper at the end of the day.

I would contend that local relocation isn't all bad if the residential thing came to pass: The residue of the current 5 years will give you enough time to consider this and plan accordingly.

 

[haryj]

Thank you everyone for your informative responses, much appreciated indeed.

As many have mentioned regarding the books, cash yes! don't we all love it, but if it ain't got proof to back it up, it's virtually non-existent.

Personally there is a lot to consider here and as some have mentioned moving equipment isn't going to be cheap, we're talking industrial grade mill's, weighing 1.5 tonnes at a minimum and there's around another 5 machines that are similar weight to this. Cost here alone would be frightening.

Setting up one business like this myself would be very costly, i don't want to start of with all my machinery/equipment being on leases, on average £30k a piece that's a huge chunk out the kitty already.

 

[Mark T Jones]

Thank you everyone for your informative responses, much appreciated indeed.

As many have mentioned regarding the books, cash yes! don't we all love it, but if it ain't got proof to back it up, it's virtually non-existent.

Personally there is a lot to consider here and as some have mentioned moving equipment isn't going to be cheap, we're talking industrial grade mill's, weighing 1.5 tonnes at a minimum and there's around another 5 machines that are similar weight to this. Cost here alone would be frightening.

Setting up one business like this myself would be very costly, i don't want to start of with all my machinery/equipment being on leases, on average £30k a piece that's a huge chunk out the kitty already.

I think the point is to understand - and be extremely clear on - what you are paying for

Based on common consensus, the real value of this business is the auction value of its assets. Everything else is an illusion.

Obviously you need to be absolutely certain that there is no finance or charges against the equipment.

As an aside, 50% cash is exceptionally high in this sector.

 

[Clinton]

@Lisa Thomas , which agent is that, Lisa? My experience has been that all agents at the bottom end of the market provide free valuations, and there are hundreds of such agents, but they tend to not have the vaguest idea what they're talking about. Over the years clients have forwarded to me, and I have collected, numerous examples of ridiculous valuations done by these agents. It's mind boggling how these agents get away with that nonsense.

As many have mentioned regarding the books, cash yes! don't we all love it, but if it ain't got proof to back it up, it's virtually non-existent.

It's not just non-existent, it's worse than that. For the buyer it's a huge risk taking on a business that was on the fiddle!

 

[The Byre]

an agent that can value the business for you

There is no such thing as a single value for a business.

The value of a business is composed of future market developments, the equity embedded in the business, the relationship of the future owners with that business, the skill set and demeanour of the staff, as well as profit and market share, etc.

A business is just not a static object, like a house or a car. It is an ever-changing, dynamic entity that is on a journey across a sea of shifting sands.

(Though having said that, this one might be fairly easy, as it is just a bloke in a shed with some tools!)

 

[billybob99]

I can value this business for you. I have the number in my head.

I have valued many big companies, from Facebook to Twitter to even Uber, in my head.

DM me if you want to hear it.

 

[Chris Ashdown]

Slightly different
Long established companies in a town area may not need advertising as every knows who and what they do, so thats a good thing

No other mechanic means all the work falls on the owner apart from striping down and cleaning up type work

Is there no money for a mechanic to assist

Is there no money for a receptionist which would improve his time on the job as always breaking off to answer the phone

Why do you think a web site would improve things when already working all hours possible but seemingly not able to afford professional staff

No way of checking the books as already mentioned cash sales no doubt not in the book or maybe never existed who knows

Work out the hours worked and how much he takes out of the business and compare to minimum wage

How much would you have to spend starting up yourself

 

[Lisa Thomas]

Which agent / broker is that, Lisa?

LSH

 

[Noah]

It's not just non-existent, it's worse than that. For the buyer it's a huge risk taking on a business that was on the fiddle!

I was considering buying recently, and informally ran over the business model with the current proprietor. She was blatant about all the little off-the-books schemes she was running, motivated I think by a combination of showing off her cleverness and wanting to boost the business; she achieved the opposite of both.