Selling sole trader business

[Mr D]

1. The first mistake is to overload the company with debt. Debt is just a tool - but your friend, it is not! Here and there, you may need to iron out the lumps with a bit of judicially placed debt, but UK companies go for sudden growth and have to pile on the debt in huge amounts and this always comes to bite them in the end.

Can certainly agree with that.
The main thing that caused my previous company to fail wasn't lack of orders, wasn't speed of packing or hours worked.
It was paying debt.
If we hadn't had the debt payments then we'd have kept going easily.

 

[Clinton]

@Clinton keeps telling us that the only true measure of value in a company is profit - it isn't!

Profit (or, to be precise, anticipated profit in coming years) ...and net assets (or what you call "equity").

That's it.

And I don't blame her....

That is why you should join the party early and make some nice reassuring sounds to balance it all out. You know what these OPs want to hear. Others aren't willing to tell them. You should do it.

 

[gpietersz]

Two more big family owned companies: Cargill and Swire (which owns Cathy Pacific, among other things).

Family owned businesses tend to take a more long term view and care about quality whereas public companies tend to focus on extracting cash out of the brand - so they cut costs.

You find them all over the world - I can think of examples that are, or have been local to me (one sadly now out of business because of illness after the family had been butchers in the same area for centuries). I can also think of two Indian companies whose products I bought while living in Sri Lanka - one makes ceiling fans and the other food grinders but the names of both escape me for the moment.

While we are arguing about the formula and if we do not need to make things easy, we can be theoretically perfect and say its the discounted value of future cash flows. In the case of an owner managed business (especially a small one) its the value of cash flows less the opportunity cost to the owner of running the business.

 

[Financial-Modeller]

@Julie Murphy if its such a great business, would your son be interested in taking it over when he finishes his college course?

 

[Ian J]

That is why you should join the party early and make some nice reassuring sounds to balance it all out. You know what these OPs want to hear. Others aren't willing to tell them. You should do it.

I would join the party early if I had any useful input but this sort of thread is outside my area of expertise

 

[Clinton]

Expertise not required. Anybody can make sympathetic noises and tell them what they want to hear.

 

[Chris Ashdown]

It's funny that I think mainly in 2008 with the big crash all the retail companies thought it a great wease to sell of their property and rent it bank and hopefully the money would save them from really sorting the company out, now a few years down the line they want the landlords to suffer for their own problems

The food industry chains spent millions of borrowed money for fitting out or rented buildings and hoped to pay it back at £20-30 pound per head food and then rates went up, rents went up, and labour went up along with debt

Back to original question
New owner needs to know and like your industry, they most likely would need to live in your area to use the contacts, they would also need to work alongside you for maybe a few months to fully understand the way the operations work and then also see a plan to exploit the potential you see, but have for some reason not exploited

 

[The Byre]

Profit (or, to be precise, anticipated profit in coming years) ...and net assets (or what you call "equity"). That's it.

I see a difference between net assets and equity. I would put those things that may not show up on a balance sheet or a P&L account down as equity. Admittedly, a bit of 'creative' accounting may put some very funny and funky things down as assets, but definitely I would include risk or lack thereof and the degree of sensitivity analysis that has been conducted for various scenarios.

Also, not just IP but assessing if they have a way of creating IP. A typical example would be a film production company that has an in-house system for finding and/or creating new scripts and treatments and ideas - or an IT house that has dedicated teams working on new and interesting technologies.

Then there is the staff - in assessing the value of a company, talking to the staff is vital and is something that is often neglected. Books - yes. IP- yes. Staff records - yes. Company history - yes. Market analysis - yes. Legal docs - yes. But talking to staff? "We don't want to spook them or let the cat out of the bag that we are thinking of an acquisition!"

In the case of my old friend Graham, that cost the company that he sold his operation to a seven-figure sum. He knew and all the staff knew something that the purchaser did not and totally failed to spot. They bought a turkey and had to close it down (or rather "Successfully integrate existing operations into the overall structure of the company." as they put it!)

Graham was mightily chuffed though. That was 20 years ago and it still raises a huge smile when I mention it!

 

[Mr D]

It's funny that I think mainly in 2008 with the big crash all the retail companies thought it a great wease to sell of their property and rent it bank and hopefully the money would save them from really sorting the company out, now a few years down the line they want the landlords to suffer for their own problems

The food industry chains spent millions of borrowed money for fitting out or rented buildings and hoped to pay it back at £20-30 pound per head food and then rates went up, rents went up, and labour went up along with debt

Back to original question
New owner needs to know and like your industry, they most likely would need to live in your area to use the contacts, they would also need to work alongside you for maybe a few months to fully understand the way the operations work and then also see a plan to exploit the potential you see, but have for some reason not exploited

The alternative for the companies is they go under and the landlords get diddly compared to what they could get over remaining lease. Companies use the same options available to them as to us much smaller companies. Perhaps the option used means the company is competitive again and able to limp on another few years. Perhaps come out of it stronger - getting rid of its least profitable sites that seemed such a great deal 15 years ago.

Prior to the crash in 2008 there was a push to sell buildings and rent them back. PFI predated the crash by some years - new hospital for £180 million or £1million a month. Whoever was deciding reckoned £12 million a year was better than near enough up front payment of £180 million (yes, would have been over a couple of years)..
Civil service was leasing space in buildings owned by others back in the early and mid 90s.

 

[Bronco78th]

So this thread is very informative for someone like me.

I do have a possibly stupid question though; I get the difference between turnover and profit.

But what I don’t get is this (as a sole trader, not as a limited as the PAYE and salaries basically cover it)

Taking Julie’s numbers 20k turnover, I would pay myself 16k with 3k expenses…for example…I then have 1k left over….this id consider my safety net….you know for when I get a nice tax bill because I screwed up my tax return or my car goes Kaput etc….would this 1k be considered profit even though it has a reason for being there?

I’m just thinking to myself as a sole trader, just starting out on my venture, im never going to have a profit….Id pay the expenses, have a safety net of hopefully several thousand for the bad times built up……then stick everything left over into my back pocket month on month….and live a life of Riley to the best of my abilities…....regardless of how big or small the turnover figures are.

Presumably its pretty rare then to find a 'one man band' who has a good profit?

 

[gpietersz]

Removed because I misunderstood the message I replied to

 

[Mr D]

So this thread is very informative for someone like me.

I do have a possibly stupid question though; I get the difference between turnover and profit.

But what I don’t get is this (as a sole trader, not as a limited as the PAYE and salaries basically cover it)

Taking Julie’s numbers 20k turnover, I would pay myself 16k with 3k expenses…for example…I then have 1k left over….this id consider my safety net….you know for when I get a nice tax bill because I screwed up my tax return or my car goes Kaput etc….would this 1k be considered profit even though it has a reason for being there?

I’m just thinking to myself as a sole trader, just starting out on my venture, im never going to have a profit….Id pay the expenses, have a safety net of hopefully several thousand for the bad times built up……then stick everything left over into my back pocket month on month….and live a life of Riley to the best of my abilities…....regardless of how big or small the turnover figures are.

Presumably its pretty rare then to find a 'one man band' who has a good profit?

Sole trader your personal income is the profit.
Doesn't matter if you take 16k and leave 1k in the bank, your profit is 17k so the tax is on the 17k - subject to tax free allowance.

 

[Clinton]

Taking Julie’s numbers 20k turnover, I would pay myself 16k with 3k expenses…for example...

Buyers don't give a damn what you paid yourself (or didn't pay yourself). They'll mentally deduct from your takings a figure that they feel is a fair market wage for the time you put in.

And given you'll underplay the time you spend on the business (all OMBs do that), he add on a few more hours.

If he figures you've spent 50 hours a week and worked for 50 weeks, he's thinking 2,500 hours. If he values the input you made (based on your skill and knowledge) at £20 an hour, he'll calculate that this business should have paid you £50K. If the business is only making £20K it's running at a £30K loss per year.