Opportunity to buy an established business

[Mditch]

Jeez I think I’m outta my depth here, so bear with me!

Short story: the owner/MD of the small business I work for (an established, successful company of over 30 years) wants to retire and has asked my husband and I if we’d be interested in buying the business from him.

We have been completely honest with him and advised that although we’re definitely interested, having never previously entertained the idea of owning and running our own business, not to mention a lack of equity available for his asking price(still tbc), we don’t know how or if this would even be possible without massive business loan repayments each month!

Is anyone able to offer any tips or questions we should ask when we meet with him next week to discuss?!

I’m excited about the idea as I don’t think an opportunity like this will ever come our way again, but I want to be a realist too!

 

[MBE2017]

OK, firstly nice to see you are excited, but opportunities are like buses, they come along all the time, you just need your eyes open. You both need to sit down and decide if this is what you really want first and foremost, since it would be a huge change in your lives and responsibilities.

Depending on the business this current owner might struggle to get a sale, hence his approach to yourselves. You state it is an established successful company, which I am sure you believe. What you need to do is find out if it really is.

The owner tells you he is looking to retire, but might there be other reasons? A major point to consider, apart from analysing the past 3/5 years of accounts, is, how important is the owner too the business? If he disappears, do many of the sales, or has he structured his company to run without him?

Not trying to put you off, but to get you too look at any proposal purely as a business prospect. As for finance for a purchase, that should be the least of your worries atm. If you get a good deal someone will fund it in some way, possibly even the current owner. The real time to be concerned is if people are not interested in investing, which suggests a bad deal.

 

[fisicx]

@Mditch - what sort of business is this? How much does it rely on the current MD and their network of contacts?

Could you use the next couple of years leaning how the business is run and slowly take over from the MD. Then when they are ready to retire you will already be in place and able to make an offer. I wouldn't worry about financing the deal just yet. There are loads of ways to manage this without landing yourself with a huge debt.

The key to success is the succession plan. Make sure you are able to run the business without the current MD. If they are keen to sell they should be able to mentor you.

 

[The Byre]

1. Have a read through this lot - see the column on the right under 'Other Articles' - http://ukbusinessbrokers.com/gallery/

2. Remember all the other costs of buying and running a business! You know - the ones that keen-to-sell owners gloss over — for example, spending time each month monitoring the books and supervising the business.

3. If the owner is also the MD, then it sounds as if you are buying a job. The multiples for jobs are far lower than for businesses.

4. All valuations are bunk. Never mind what the current owner THINKS he should be paid, his cause is not yours! The question you must ask yourself is "What is this company worth to me?"

5. Remember, when valuing a company, to place things like rental agreements, car leasing costs, etc. and other commitments to pay in the liabilities column. Things worth money are real assets, i.e. property, machines, vehicles, patents and customer lists and other actual saleable items.

6. When you are buying a company, you are also buying the future and right now, the future looks very bleak. When I bought our present location and business in 2000, I knew that the markets were beaten down and it made sense to offer well over the asking price to get the deal closed and done asap. Right now, the markets are just past their peak and there's a hell of a lot of pain to come - pain and failures. SMEs will be closing a six-pack at a time! Some asset classes will halve in valuation! If you think this year was bad, wait 'till you get a load of 2023! Whole national economies are going to fail! Big ones! Factor that hard truth into your valuation!

7. Also ask yourself, "Do I really, really WANT this turkey?"

8. The smaller the company, the greater the risk. Therefore, the lower the multiple of net profits. Also, small companies do not have much (if any) market share, so there is no market share worth selling!

9. You think you know the guy, but still perform due diligence. Check everything. Other companies he owns, other companies in his wife's/childrens names. Other companies located at his home or place of business. Check everything! Do a credit check on him, his family, the company itself, the lot.

10. Have the full books for the past five years looked at by someone who knows how to look at accounts and is able to sniff out what is really going on.

So much for valuations - now comes the deal and negotiating that deal. Forum member @Clinton has this article on his website -

Assisting business owners sell their business privately or through a business broker

Learn how to maximise the value you extract from your business and meet all your exit goals

ukbusinessbrokers.com

Also remember the tax implications. It took me two years of handover and payments to avoid having to pay a shed-load of taxes when we sold out.

Look upon the current owner as a possible source of credit or partial credit.

Good luck and let us all know how you get on!

 

[Mark T Jones]

To reflect much of the above - make the decision with your head not your heart. You are emotionally invested, which is a bad negotiating position.

Have a meeting with the vendor listen to what they have to say. Ask what they view as an acceptable offer and stay very, very quiet.

Rest assured, there will be no deal agreed at the end of the meeting. It's just a preliminary discussion.

If you are absolutely certain that it makes sense commercially for you to take it on, then start asking the deep, searching questions above.

 

[pentel]

Other things to look out for not mentioned above:

Is the business dependent on one customer or supplier? What happens if they stop using you or supplying you?

Are their any upcoming changes in legislation that will affect the business.

How many staff are there? How long have they been there? You will be taking on the liability for redundancy costs which could be substantial.

Is there up and coming competition who could have an impact on sales?

 

[The Byre]

Other things to look out for not mentioned above:

Is the business dependent on one customer or supplier? What happens if they stop using you or supplying you?

Are their any upcoming changes in legislation that will affect the business.

How many staff are there? How long have they been there? You will be taking on the liability for redundancy costs which could be substantial.

Is there up and coming competition who could have an impact on sales?

In other words - why is he REALLY selling!

Never mind all that guff about retiring. Why is he selling a cash cow? Why does he not make our brave @Mditch the manager, check the books once a month and retire anyway, but with a steady income coming in?

What's with the move to divest himself of the business when it could be earning him and his heirs money?

For example, at the time I sold my news agency, a friend sold his publishing company with about eight international titles. We took the money and ran. But why when in 1999 magazine publishing was earning money hand-over-fist - so why?

Easy - we both (and others) could see that the party was over for print. The Internet was it. It was just that most of the print world did not even have the Internet on their horizon. I argued at length with publishers, but they just said that the whole online thing had nothing to do with them and would never affect their business.

Yer, right! Within ten years, they were all out of business!

That is happening to broadcasting right now. All that spectrum they spent billions on is going to be worthless. If you are a mainstream broadcaster, bend over and kiss your butt goodbye because pretty soon, all that spectrum and all those channels will not be worth a bucket of warm spit.

The same applies IMO to most types of bricks-n-mortar shops and loads of other types of businesses - the communication age has only just started!

 

[SillyBill]

My first business was via the same route you are looking to go down. So been there and done it, commented on another thread what that involved for me (selling everything I had, including home).

Be honest with yourself about whether you have what it takes is my advice. I have not regretted overall being in business for the benefits have generally outweighed the negatives but I do also know now it takes a certain type of person to succeed. Ability to handle enormous pressure and responsibility is key. Also it isn't what it looks like on the sales brochure either. I thought the old MD swanned around in his Aston Martin living the life of Riley too, until I inherited his job and realised just what he'd done for 40 years. You can only understand when you've been in the hot seat. You are "on" 100% of the time IME. Sure most owners can attest to this, I've had moments (sometimes lasting months) when you just wish it was someone elses' problem (like when you work for someone else), ultimately everything becomes your problem to deal with. From accountants querying some obscure VAT item, customers not paying, staff not turning up, suppliers not delivering, staff toilet overflowing. And that is all before you've had your morning coffee. This to me is life now but I don't think I am far of the mark that if you put 95% of the population in my "job" they'd be hospitalised within 3 months or signed off from the doctors. Not exceptional either, SME owners have to be a different breed.

 

[pentel]

I thought the old MD swanned around in his Aston Martin living the life of Riley too, until I inherited his job and realised just what he'd done for 40 years. You can only understand when you've been in the hot seat. You are "on" 100% of the time

This. Very few people are cut out for this, it is high risk, high pressure, could be high rewards, could be a kick in the b*lls

 

[IanSuth]

Been there done it, got the tshirt and now don't have the inheritance money it cost me.

First question

What does the current owner do for the business (in terms of workload/skills and contacts)

2nd

Can you replicate that in your spare time ?

3rd

If you can't cover any part of it, what will it cost you to buy in those skills. Including replacing parts of your role you can no longer cover as doing MD job.

4th,

If you take the projected income minus the extra costs of replacing the current owners skills/experience (x2 for a bit of safety) does it still easily cover the financing costs of buying the business from him AND having enough cash in the bank for cashflow.

If it makes sense at this point you can then start adding in all the other costs for the legal hand over PLUS be prepared (i wasn't) for the landlord if you have one to want a personal guarantee (even though the old MD didn't) as you are an unknown entity to them. Other suppliers may be similar.

An awful lot depends on what the current MD brings to the table and also what you do - if you are already doing all the work then the company has little value to an outside purchaser as you could just walk out with all the knowledge. If you could be easily replaced and the old MD does little day to day currently then it has more market value. Etc etc

 

[Kleenezeworkfromhome]

Your question reminds me of a similar request which I was asked to finance, some years ago. The sale price will inevitably include Goodwill, which a new owner does not have to pay. I suggested that instead of buying the business, that he start a new, similar business, using incentives that were available to him, costing considerably less. As it happened, that weekend the building where the business he had contemplated buying, was burnt to the ground, causing a total loss to the owner. My customer was immensely relieved that my advice had saved him from an enormous loss.