Seller Financing Advice Required

[Mearnsy]

Hello, I have been offered a company, it has been going for over 30 years and has been very successful, albeit a small number of staff.

I have yet to receive accounts to obtain a value. I have researched various ways of purchasing a company and the best way I can see is seller financing. This works for me as I don't have a ton of cash to hand out and is should work for the seller as it will give him an income for the next few years while I pay him back.

He has now said that he would like all the cash in 1 go and what I need to do is to show him how much tax he would have to pay on that compared with him allowing me to repay over a few years.

It's early days, but any help would be appreciated.

 

[Mearnsy]

Anyone, or am I in the wrong area?

 

[Scalloway]

Sunday isn't the best day to get people on this forum.

 

[The Pines]

What's the business?
Turnover?
Gross and net?

He's being very optimistic if he thinks he'll get a full sale, bank the proceeds and bugger off to Dubai for his retirement in the current climate (pun intended, Dubai, etc)
He might have been advised by his accountant to get the big lump sum to take advantage of entrepreneurs relief (10% on the first £10million).

What's the asking price?

 

[Mearnsy]

What's the business?
Turnover?
Gross and net?

He's being very optimistic if he thinks he'll get a full sale, bank the proceeds and bugger off to Dubai for his retirement in the current climate (pun intended, Dubai, etc)
He might have been advised by his accountant to get the big lump sum to take advantage of entrepreneurs relief (10% on the first £10million).

What's the asking price?

Turnover is £300k, asking price he is thinking of £150k, however I haven't got the accounts to for my accountant to look though yet. I knew he would want the money up front, however this is not possible and I need to show an example of what sort of tax he would pay on this amount.

At the end of the day he said he would work with me to achieve the sale, so my way is seller financing and that's that.

 

[Talay]

Turnover is £300k, asking price he is thinking of £150k, however I haven't got the accounts to for my accountant to look though yet. I knew he would want the money up front, however this is not possible and I need to show an example of what sort of tax he would pay on this amount.

At the end of the day he said he would work with me to achieve the sale, so my way is seller financing and that's that.

If I were to be cheeky and suggest that you actually want to finance the purchase from the profits this business would generate were the vendor not to sell then you're asking an awful lot from the vendor when he can simply continue to own the business and both have his cake and eat it !

 

[fathippy]

If I were to be cheeky and suggest that you actually want to finance the purchase from the profits this business would generate were the vendor not to sell then you're asking an awful lot from the vendor when he can simply continue to own the business and both have his cake and eat it !

I think you are spot on, but it is surprising how often this happens! The other thing to bear in mind as the seller, is if the buyer has no assets to raise funds off to buy the business in the first place, he is very likely to default at the first sign of any wobble in the business. First he will have no short term funding to invest into the business or to cover dry periods, and secondly he will have no funds to continue to pay your monthly installments.

The upshot is as seller you still have a full risk of the company without any of the upside, and also without any management involvement to make a difference in tough times. So basically a lose lose situation - in fact it is actually much worse than someone just saying "can you give me ?£300 a week out of your business for ten years and then let me have it for free !!

 

[The Pines]

If I were to be cheeky and suggest that you actually want to finance the purchase from the profits this business would generate were the vendor not to sell then you're asking an awful lot from the vendor when he can simply continue to own the business and both have his cake and eat it !

On a £300k turnover the current staffing probably consists of the vendor and maybe one other full time employee, plus a casual employee as needed. If the vendor has been operating the business for 30 years he's probably (a) utterly bored, (b) suffering from age-related health issues, and (c) realises that it won't be a multi-million pound enterprise anytime soon.

He (the vendor) wants out, and the OP might be best to negotiate the temrs rather than the price, i.e. give him the price that he wants but over the terms that the OP wants.

 

[Talay]

... So basically a lose lose situation - in fact it is actually much worse than someone just saying "can you give me ?£300 a week out of your business for ten years and then let me have it for free !!

I did manage to get one small business some years ago for around 25% down and the rent over a length of time which saw me able to pay it out of profits and I'll be honest, the vendors never saw it coming. Just over 24 months later I'd bought the place for 25% of what they wanted. Perhaps that was my Alan Bond moment.

 

[Mearnsy]

Thanks for your replies. Yes the plan was to pay the vendor out of the business profits. However, he would no longer be taking a salary and so the repayment would replace that. He no longer wants the company and has lost interest, he also has a poor pension so is looking for that to replaced with an income, until he receives his state pension at 67, hs is currently 59.

 

[The Pines]

Thanks for your replies. Yes the plan was to pay the vendor out of the business profits. However, he would no longer be taking a salary and so the repayment would replace that. He no longer wants the company and has lost interest, he also has a poor pension so is looking for that to replaced with an income, until he receives his state pension at 67, hs is currently 59.

So he needs an income for 8 years to tide him over until pensionable age?

What's his current salary? What is the business netting after his salary and all expenses?

He is clearly looking for a way out and his accountant has probably advised him to go for a lump sum, the only problem is that accountants deal in figures, not economic reality.

Is there a way you could gradually buy the business by starting off with him retaining majority shareholding, and his shareholding is reduced in stages pertaining to payments to him, e.g. for every £15k he receives, 10% of the business goes to you? You'd need to start off with approx 20% sharholding and work upwards.