Taking over an established window fitting company

[ChrisB1982]

Hi there, My brother and I have worked for our boss for 21 and 19 respectively as his only employees after he started his business in 1998 fitting windows doors etc, he is retiring at the end of the year and wants us to take on the business as he is keen for the company name to continue. So far we have not discussed a price or what further financial benefits he requires if any in the future.

We as a small company have a very good reputation in the local area and are always busy often having work booked in 2 to 3 months into the future so it’s definitely something we want to pursue.

Looking for some advice on the sorts of questions I should be asking going into the negotiations and what steps I will need to take to make the change over as smooth as possible.

Thank you

 

[The Byre]

All the pitfalls and gotchas of buying a business are listed on @Cinton 's website (member here) - well worth a read-through!

http://ukbusinessbrokers.com/buying-a-business/

There are 1001 ways to finance the deal, ranging from you-pay-he-gets, to a vendor's loan.

Make sure that you have a written agreement with your brother. Brothers are usually the very first to fall out with one another! Talk through every possible eventuality with your brother, death, illness, stealing, madness, abducted by aliens, anything and everything and put down what is to happen in that case and use that to draft a shareholders' or partners' agreement.

 

[Clinton]

Thanks for the mention @The Byre

@ChrisB1982 , if you haven't bought a business before I promise you there are tons of things you don't know you don't know and you can get seriously burnt. Get an expert on board to advise you right from the start. Do not do anything without the advice and assistance of a seasoned veteran.

This is far too small for me to act in an advisory capacity, but I saw your mention of going into negotiation and thought I'd give you this warning: whatever your knowledge of the industry, you're nowhere near competent to negotiate a deal like this.

 

[Clinton]

OK, I've got a bit of time so I'll elaborate.

Buying a business is not like buying a pound of sugar in Asda. Before you go in you need to understand the numbers inside out.

You start with 5 years' worth of accounts and management accounts. Then you recast the final accounts to work out the "real" profit in the business ...because the submitted accounts are generally a work of fiction. You need to get a true picture on the current value of assets, for example, which could be very different to the book value.

Once you've worked out the real profit and real value of (net) assets you need to also calculate various financial ratios like the current ratio, return on assets etc. You create individual charts for all those numbers - turnover, cost of goods sold, work in progress, individual expense headings, profit before tax, profit after tax, net assets, various financial ratios - and examine them for indications of problems.

It's not just downward sloping graphs that are a problem. Graphs that go up, down and all over the place are also a problem.

Once you're happy with the graphs you compare them against averages for the industry to determine whether the business is under-performing. You might need to buy industry data for this purpose.

All this analysis is required to determine whether the business is worth buying in the first place (!) and to get an idea of what might be a good price.

When you have a fair handle on the numbers, you make a list of the financial matters that you are going to discuss at the negotiation - headline price, deferred payments, earn out, working capital to be left in the business, who's paying the next corporation tax bill etc etc.

But that's just on the financial side. There's also legal due diligence and operational due diligence to be done!

It never ceases to amaze me that people with no experience of buying a business think they can do it properly themselves and without external assistance.