Looking to potential buy first retail business

[maples]

Hi everyone,

I am looking at potentially purchasing a retail business. I have never worked in retail but have a great interest in the field and as such feel it may be a decent opportunity. It would be the only one of the kind in the City as others have gone / on line etc but I feel a retail presence does give certain advantages. Perhaps I am misguided here, but that's probably a different discussion. Now assuming I decide I wish to go into this field, the only shop of the kind in the area is for sale. usual reason, "retirement". Not convinced as the owner is probably early 50's. Possible but...

I admit I know little about small family business valuation etc, but this is my thinking. Am I at least of the right track or am I miles off? Any advice appreciated.

So business is for sale for 300K. This is freehold. I have 0 interest in the freehold and would only be interested to buy the business and either a short term tenancy or buy and move to another location. I will get the fuller finances on Monday, but this is what I've seen on the prospectus:

Revenue of 200K and Gross profit of 90K. Which to me is a but useless? I think they have the owner running the shop with 1 or 2 staff, could be part time? I downloaded the latest accounts from companies house and they show the following:

150K fixed assets
80K current assets
50K creditors
net current assets of 30K
So total net assets of 180K.

Based on this, I am making the assumption that the current assets is basically stock and some cash at hand and the fixed assets must be the property? I can't see what else they have worth 150K? Also, the fixed assets have been almost the same for 5+ years?

If I am on the right track, I think this means that the business has some stock of 80K value, but owes 30K for it? So a value of 50K stock? Then looking at the profit, I assume that 2 employees are minimum wage. I think this is about 18K, but I think have to add NI maybe, so maybe 40K for the two staff? That would mean the owner is getting 50K, or about 45K plus Ni etc?

45K, not a bad wage, let's say mid manager, but you need to buy the role?

If I am correct and they are quoting 300K, and the property is worth 150K, assuming it it the fixed asset cost, that means that they want 150K+stock for business? That sounds madness? Surely nobody would buy a job for 150K?

Would it really be worth something like stock + profit and then good will adjustment?

I.e. 50K for stock, then assume a manager costs 35K, so net profit would be 10K once owner gone? Thus 10K profit x maybe 3 to 5 so 30K to 50K at best?

Sorry for the long post, but want to make sure I am not missing something obvious or being unreasonable in my expectation?

Thanks
Steve

 

[WaveJumper]

Welcome to the UKBF and I am sorry to pour cold water on your idea (ill leave others to comment on the numbers) but with no experience in retail what an earth makes you think this is a good idea in this current economic climate. You have not mentioned the product, but there's probably a very good reason the others have all gone on line.

 

[MBE2017]

A lot of questions to cover.

Hi everyone,

Now assuming I decide I wish to go into this field, the only shop of the kind in the area is for sale. usual reason, "retirement". Not convinced as the owner is probably early 50's.

So business is for sale for 300K. This is freehold. I have 0 interest in the freehold and would only be interested to buy the business and either a short term tenancy or buy and move to another location. I will get the fuller finances on Monday, but this is what I've seen on the prospectus:

Revenue of 200K and Gross profit of 90K. Which to me is a but useless? I think they have the owner running the shop with 1 or 2 staff, could be part time? I downloaded the latest accounts from companies house and they show the following:

150K fixed assets
80K current assets
50K creditors
net current assets of 30K
So total net assets of 180K.
45K, not a bad wage, let's say mid manager, but you need to buy the role?

If I am correct and they are quoting 300K, and the property is worth 150K, assuming it it the fixed asset cost, that means that they want 150K+stock for business? That sounds madness? Surely nobody would buy a job for 150K?

Would it really be worth something like stock + profit and then good will adjustment?

Firstly, the price being asked is just that, an opening offer. Only YOU can decide what it is worth to yourself.

If you are serious, get full accounts for the last 2-5 years and look at how sales have been, have profit levels been maintained, obviously allowing for Covid skewing most businesses figures at.

You are not interested in the freehold, yet this is almost certainly where the true value lies. If you can move the business somewhere else, do you even need to buy it? As for the stock is it current in good condition? Or dead old stock?

Find out more about the owner, drop in, chat, listen, look at everything you can without giving away what you are doing, you might learn a lot. If he needs to sell, he is probably open to lower offers, but remember with the main asset losing value atm, take this into consideration along with how many people are likely to be spending in a recession?

Would someone buy a job for £300k? Well, you are considering it. Hard to say much more with little info, this might be a specialist store or just something easily replicated.

 

[maples]

Welcome to the UKBF and I am sorry to pour cold water on your idea (ill leave others to comment on the numbers) but with no experience in retail what an earth makes you think this is a good idea in this current economic climate. You have not mentioned the product, but there's probably a very good reason the others have all gone on line.

Sorry, should have said. my partner has the experience.

 

[maples]

A lot of questions to cover.


Firstly, the price being asked is just that, an opening offer. Only YOU can decide what it is worth to yourself.

If you are serious, get full accounts for the last 2-5 years and look at how sales have been, have profit levels been maintained, obviously allowing for Covid skewing most businesses figures at.

You are not interested in the freehold, yet this is almost certainly where the true value lies. If you can move the business somewhere else, do you even need to buy it? As for the stock is it current in good condition? Or dead old stock?

Find out more about the owner, drop in, chat, listen, look at everything you can without giving away what you are doing, you might learn a lot. If he needs to sell, he is probably open to lower offers, but remember with the main asset losing value atm, take this into consideration along with how many people are likely to be spending in a recession?

Would someone buy a job for £300k? Well, you are considering it. Hard to say much more with little info, this might be a specialist store or just something easily replicated.

Thanks for the reply. To br clear, I am not looking to spend 300K. I agree, and I was trying to understand what on earth I had missed in the valuation. The only value I see is in the owner who is well known for his skill set. With him gone, so goes the main asset. My current thinking is to start up fresh with my own take, with limited retail cost and mainly online, but I thought that the current brand and stock could be a hard start assuming the cost ended up being basically stock+. I was thinking stock plus 20/30K but this seems miles away from the valuation.

 

[MBE2017]

If you plan to start fresh then forget the idea and do that. Not sure what type of retail it is, but there are hard times heading everyone’s way.

Your biggest questions are can you sell online, how much stock do you truly need to hold, could your suppliers dropship any orders for instance? They might not advertise they do, but you never no until you ask. Hard to advise much more without knowing what kind of product you intend dealing in.

 

[MOIC]

You've mentioned the following:

I have never worked in retail

others have gone / on line etc

the only shop of the kind in the area is for sale. usual reason, "retirement". Not convinced as the owner is probably early 50's. Possible but...

I admit I know little about small family business valuation etc,

I have 0 interest in the freehold

Revenue of 200K and Gross profit of 90K. Which to me is a but useless?

45K, not a bad wage, let's say mid manager, but you need to buy the role?

If I am correct and they are quoting 300K, and the property is worth 150K,

Am I missing something?

If you was interested in the freehold, which you're not, then offer 65% of the value and have the 'business' thrown in for nothing, AS LONG as you see and have verified all of it's liabilities.

Walk away, would be my initial thoughts.

 

[Mark T Jones]

You have made one significant, correct observation

Their perception of the value of the business is of no relevance to you

From the list

You don't want the freehold
Current assets? Depends what they are

Goodwill? Again, it very much depends on who the client base is and why they go there

Your or our opinion of whether a physical presence will give an advantage are irrelevant - you'd need to do specific market research