startup Loan advice needed

[Alan_Harrison]

Hi Guy's, hope all is well.

I am looking to take over a haulage business where I have been working for the past 14 years, but have no savings to input myself.

I've spoken to an accountant which has advised me on a government backed startup loan for £25k at 6%

What I need to know is that if I can't make a go of the business before the loan is paid back, does the loan become my personal debt? or could I liquidate the company & walk away?

I welcome any advise or feedback

Many thanks in advance

Alan

 

[Mark T Jones]

It's a personal loan so us your debt from day one.

Any commercial lender will want a PG - which means debt will transfer to you if the business fails

 

[Shopclicks]

What I need to know is that if I can't make a go of the business before the loan is paid back, does the loan become my personal debt? or could I liquidate the company & walk away?

Wow! What a great incentive to go into business.

A £25k debt and no job.

 

[Porky]

Hi Alan,

As @Mark T Jones pointed out, if you use the start up loans company loan scheme you are 100% on for the loan you are the guarantee. The loan is assigned to you.

As you have worked in the business for so long, you must know the reasons why the owner wants out and should have a good idea of the viability of the business yet you are worrying that it might not work and thinking about liquidation before you have even started.

Sounds like something more to this?

Are you saying the £25k is to buy the business from the owner? How did you get to that price? Rather than taking a loan for £25k can you agree to pay him half and terms on the balance?

I have minimal experience of logisticsand probably be shot down for this comment but practically everyone I have met in the SME haulage sector hasn’t got a pot to pee in, its a really fine margin industry that you really need to work hard at and scale to make any money outside of being a small lifestyle business.

For every 1 successful logistics operator there is probably 100 at the bottom of the pond barely surviving due to costs of fuel, insurance, contract shortages, making supply chain effective A to B, etc etc.

The reason why the owner is selling could give you the clarity you need on the future viability IF they are honest with you

 

[WaveJumper]

Too little detail here, but your primary question has been answered, slightly surprised your accountant did not know the answer to this or offer additional ideas on how to obtain the business. Before even looking at a monetary figure to pay, you need to have the business properly valued, ie accounts scrutinised going back several years, contracts that might be in place, does the company have any liabilities etc etc. If your "new to business" there are a whole raft of things which could trip you up seek proper financial advice (which includes maybe a new accountant) and proper legal advice. And obviously don't use his accountant or solicitor find your own.

Welcome to the UKBF I hope you find the advice you get useful and thought provoking, sometimes advice may seem rather harsh but its defiantly not meant that way there are many threads on here where people have not sought out the proper advice and dug themselves some rather large holes. You have certainly done the right thing in my book by asking the basic questions first BEFORE jumping head long into something which you might regret no one here wants to see anyone fail. I wish you all the very best.

Our forum member @Clinton will have a whole lot to say on the topic plus I am sure links to some useful advice.

The bottom line what are you getting for 25k.

 

[Clinton]

I've spoken to an accountant which has advised me on a government backed startup loan for £25k at 6%

Does the business cost £25K? Do you realise that if you want to do a proper job of buying this business it'll cost you that much again in accountant and lawyer fees?!

Or are you planning on doing the financial due diligence into the business, the legal due diligence etc all by yourself? And drawing up the Share Purchase Agreement including negotiating of indemnities and warranties with the seller's lawyers?

And how did you arrive at the price? Did you get independent professional opinion on the valuation or are you going by the seller's quoted figure? I know a fair bit about this topic (being an accountant and having worked in the M&A industry for so long). Most businesses this size are worth a negative figure! Yes, you'd have to pay me to take one on.

The only way a high risk venture like this would be worth pursuing is if you get the seller to lower his price to £1 (because, well, it's probably a worthless business anyway) and using the £25K on good lawyers and accountants. But bear in mind you take a risk that if the lawyers and accountants eventually advise you to not proceed, you've just flushed £25K down the toilet.

<added> I was typing this when Wavejumper posted the above.

 

[The Byre]

Most businesses this size are worth a negative figure!

Amen, amen, amen!

Businesses are measured in assets and net profit, minus liabilities. Wages, leases, debts, your own labour - these are all liabilities. Assets are buildings, land, machines, vehicles, etc. (insofar as the business really does own them outright!) cash reserves and intellectual property.

The value of a company is the net amount (discounted for inflation and other factors) that can be extracted from the company over its projected lifetime. Most small businesses rely on the owner working themselves half to death and calling their labour 'Net Profit' when in reality it is a liability, along with all the other wages.

(Your first job is to do due diligence on the present owner and the company - everything. Past companies, debts, credit rating, the lot! Any gremlins and that either tells you to lower the price - for the assets only, not the company - or to walk away!)

My 30 cents worth would be to do a realistic calculation, including the cost of a decent and experienced manager, even if that manager is going to be you in the end. You still will need to eat!

Once you have that figure, sit down with the present owner and have an honest heart-2-heart talk about how the business (i.e. not you, but the business itself!) can pay him or her to walk away and hand it over to you.

Once you have found a model that works for both of you, bullet-point the main parts and take that outline to a lawyer to be turned into a working contract.

Our friend @Clinton has written many articles on the subject of valuation - here's a sample - http://ukbusinessbrokers.com/dispelling-business-valuation-myths/ and the full list is here - http://ukbusinessbrokers.com/gallery/ and you will see that coming up with a figure involves a great deal of star-gazing and soul-searching.

Good luck and try to avoid debt! "Neither borrower nor lender be!" (Though Polonius only said that because he was probably afraid that his son Laertes was about to bend his ear for a Fiver!)

 

[japancool]

Do they actually give startup loans to buy companies?

 

[Alan_Harrison]

The company has assets (Trailers) worth £35k which I would lease buy over a 3 year period, the £25k would be used to obtain a DVSA operators licence (as they put it, financial standing) and to cover wages for 3 staff and yard rent until money started coming in.

I trust my boss as he's more of a friend & ive worked with him for 14 years.

The reason that he's looking to retire is that he's had enough, we have had a really bad 6 months where vehicles have been breaking down and the parts have cost a small fortune. I would eliminate this by leasing 3 tractor units with full Repair & Maintenance.

Hope this makes it more clear & thanks for all the feedback

 

[Paul Kelly ICHYB]

Why not negotiate a deal where you pay the boss out over a period?

Also, is the DVSA licence for the business or a person?

 

[Mark T Jones]

I trust my boss as he's more of a friend & ive worked with him for 14 years.

No, no, no, no, no.

It's a business transaction requiring

Valuation
Due diligence
Proper process

I would eliminate this by leasing 3 tractor units with full Repair & Maintenance.

Have you established that you would get credit?

 

[Mark T Jones]

Do they actually give startup loans to buy companies?

In some circumstances.

 

[Alan_Harrison]

I will be paying him for the trailers over a period, I just need the £26k for wages & rent until money starts coming in.

The DVSA operators licence is for the business (£8000 for the first vehicle & £4500 for ever additional vehicle)

 

[Porky]

Hi Alan,

Then realistically IF you are going to run with this and you are confident that your working capital requirement is £26k then to get your hands on that cash you only have two options really:-
1. Self fund from savings/friends/family
2. Take out a loan from a provider
You are to early for an equity deal IMO unless you know someone who wants to come in with you and help finance it?

The start up loans scheme is your starting point. Put your business plan together (they have templates if you are struggling) and submit it for £25k or less if you can add a little more yourself and see what they say:-

Home Page

Whether you are looking to start up a business or want to grow, our Government backed Start Up Loans offer up to £25,000 alongside mentoring and support.

www.startuploans.co.uk

You would however be responsible for the loan. You would be unlikely to get a better rate than that scheme. If they don't grant the loan then at least having done the business plan and projections for it you could use the documents to try other providers.

If they decline and your own bank declines then you could try regional lenders. I don't know where you are based, the one for the West Midlands is BCRS, if you are not in this region you could call them and ask who supports where you are:-

Business loans from £10,000- £150,000 - BCRS Business Loans

BCRS Business Loans supports West Midlands businesses that are unable to raise finance from traditional lenders, offering loans from £10000 to £150000.

bcrs.org.uk

The rate from them would be significantly higher but its as good as it gets. Main thing really for you Alan is to go into real details with your business plan and be sure of your numbers. I don't know your business, are the trailers you want really worth £35k? can you get a second hand trailer cheaper?

Anyhow, your question is specifically finance related so hope above helps but there are other considerations here for sure. My only other comment is, i appreciate you consider your boss is "your friend" but seriously Alan, you just cant trust the majority of people these days, its sad but it's how it is now. Just be careful

Good Luck

 

[MBE2017]

The company has assets (Trailers) worth £35k which I would lease buy over a 3 year period, the £25k would be used to obtain a DVSA operators licence (as they put it, financial standing) and to cover wages for 3 staff and yard rent until money started coming in.

I trust my boss as he's more of a friend & ive worked with him for 14 years.

The reason that he's looking to retire is that he's had enough, we have had a really bad 6 months where vehicles have been breaking down and the parts have cost a small fortune. I would eliminate this by leasing 3 tractor units with full Repair & Maintenance.

Hope this makes it more clear & thanks for all the feedback

First, your boss is not your friend in this potential buy out.
Secondly, you have worked for him for 14 years, yet six bad months has caused him to want to quit? Maybe there are more problems than you realise.

Have you considered you will be also be inheriting the current companies obligations, and the potential costs that would involve? You will need to consider other costs, such as due diligence, the TUPE requirements etc, solicitor and legal fees?

I personally think your £25k amount sounds much too low a figure to cover salaries, operating costs plus 30-60 day type accounts. I think it means you will be at a high risk from day one. Obviously you might be working on a cash model.

I am not trying to be negative, but transport is a notoriously tough game to be in. I would recommend allowing for 30% more costs and at least a third less turnover in working out your figures. People tend to be over enthusiastic in their projections, plus the UK is beginning to enter a hard recession, which is likely to cause at least a 2-3 year slowdown.

I wish you well, this could be a great opportunity or a potential nightmare, take your time and ensure you are fully aware of all the potential pitfalls, after all, this money would be your debt in your name.

 

[Clinton]

@Alan_Harrison , it would appear that you intend to still go ahead with this. And without paying a few grand to a good corporate solicitor.

Now I'm just going to cover my eyes to avoid having to watch this tractor crash. Good luck.

 

[Financial-Modeller]

So many red flags are flying on this one.

Importantly, if there is no revenue, its not really a business. You're potentially taking on the costs of making the existing owners' team redundant when you run out of cash that you have borrowed and need to repay because it will be secured on yor house!

...I just need the £26k for wages & rent until money starts coming in...

 

[The Byre]

So many red flags are flying on this one.

Nothing but!

Importantly, if there is no revenue, its not really a business.

THIS! And with knobs on!

I will be paying him for the trailers over a period, I just need the £26k for wages & rent until money starts coming in.

That's IF the money ever comes in!

it will be secured on yor house!

Every economic indicator is pointing at the word RECESSION and this time it will be worldwide. The lights are all flashing red and the Klaxon horns are sounding. 2008 was just the opening act and only affected a few countries. The effects only lasted a couple of years and governments everywhere went back to their old crazy ways - borrow and spend, spend, spend.

Ten years of ultra-low interest rates and the debt bubble just got bigger and bigger!

In the present macroeconomic environment, the very last thing I would do is risk my family's security and the roof over their heads on a wild dream of running my own dog-and-pony show.

Every proper economist (i.e. those that are not paid to toe the government's line) such as Jeremy Grantham, Steve Hanke, David Rosenberg, Rick Rule and heaven knows how many others, as well as all the more notable fund managers, are telling us to brace for a very hard landing.

Nobody knows what the time frame will be, but the bird is in the air - house prices are falling (in the UK at 15% p.a. in real terms!) commercial property is tanking more or less everywhere, food inflation in the UK is running at nearly 30% - but the indicator to watch is employment figures.

But here's the good news - give it a year or two and that will be the time to start a business. Recessions are golden opportunities for business! That is when all the established players who thought that the Good Times would never end will be handing in their dinner pails and turning their faces to the wall.

Give it time and the music will change - "Let the Good Times Roll!" will be replaced with "Buddy, Can You Spare a Dime?" And that sign saying Eat My Shorts! will be replaced with one stating Will Work for Food!

Get a job, save the pennies and when the time comes - strike hard!