SO YOU'RE THINKING OF BUYING A BUSINESS?

© 2017 - Guy Simmonds Business Transfers Limited

Why?

Almost everyone at some stage in their life has dreamt of running their own business. And why not? "Being my own boss", "managing my own work life balance", "being rewarded properly according to my own efforts", "securing my income and future wealth for my family", and "doing something I really enjoy" are all common and valid reasons for people wanting their own business.

The Same Old Thinkings

You may currently be employed in a job where little satisfaction or appreciation is gained. Maybe you are subjected to a pressurised corporate/working environment, facing/taking redundancy or simply want a change of lifestyle.

But it's a big decision and naturally it shouldn not be taken lightly. You should do the appropriate research, be prepared to work extremely hard with full commitment and ensure you have the necessary financial resources to purchase or lease/rent your desired business.

We have been successfully selling businesses, on a national basis, for over 35 years. Most of our clients have reaped substantial lifestyle and financial rewards from owning their own business. However, we would always advise new business owners that in order to maximise profits, success and longevity, it is essential to be fully dedicated to the business, and you will no doubt also need 'Aspiration, Inspiration and Perspiration'. As with most things in life, the following anecdote should hopefully apply: the harder you work - the luckier and more successful you should become.

One of the major advantages of owning your own business (either freehold or leasehold) is that in addition to the existing (and hopefully healthy) net profits/income, there is the further goal and natural ambition with most owners to increase turnover/profits. Enhanced profits, should also increase the value of your business/goodwill, when the time eventually comes for you to sell or retire. Should you decide to purchase your own business, we are interested to hear how you progress and we also offer vendors, subsequent free valuations and on-going advice.

Naturally, we are keen for you to successfully run your own business and we have put together this basic guide to initially help you:

Compared to the challenge of creating an entirely new business from scratch, the advantage of buying a business (or a going concern as we say) is that you have a good idea of how many customers the business has and the degree of customer loyalty it enjoys, that its products/services are in demand, and what profits the business is hopefully generating (although you will need to request full accounts after viewing to substantiate this).

Upon completing your purchase you should have an immediate income stream, and can then focus on building up existing trade and improving the business in terms of its appeal, profits and capital value - in a wide variety of ways.

You can buy a business freehold where you own both the business and the business premises, or leasehold where you own the business and rent the premises from the freeholder (your landlord). Many businesses (freehold or leasehold) have living accommodation included with a flat over the shop, and living accommodation is normal with businesses such as Bed & Breakfast establishments.

You need liquid funds/savings, not only to buy the business but also to buy stock, pay legal expenses and various professional fees, to acquire additional equipment or make property improvements, and you will need working capital i.e. cash in the bank - the amount of which will depend on the cash-flow of the business i.e. the amount and speed with which money will flow into your business via its sales compared to the amount and speed with which your business will need to spend money on stock replenishment and overheads such as energy and staff wages.

Many businesses can only function with the help of staff, which poses additional challenges for a proprietor. Nevertheless, providing you already possess, or can develop the skills to deal with these challenges, the financial and personal rewards can be extremely rewarding.

Liquid Funds

If you do need a partial loan, then it is possible to raise finance for freehold and sometimes leasehold businesses, although banks have always favoured lending against freehold security.

With leasehold businesses, there is no security for the bank in the event of loan default and so the bank is basically lending against the expectation of profits. This limits the exposure lenders are prepared to commit to, but by you compiling a solid and professional Business Plan a lender may be willing to lend you a proportion of the cost of the business, particularly if you have additional security e.g. residential property (to re-mortgage), shares, investments, personal guarantee from family/friend etc.

However, as in most things in life, 'cash is king' and you should make sure you are in a position to buy, before making written offers on any business/property. In any event, a reputable agent, will insist on proof of finance before taking an offer further, and vendors understandably will always favour a potential purchaser in a position to proceed immediately (without recourse to borrowing).

The right business for you?

These days, with the power of the internet, you will not be hindered in your search for a business. In fact, the sheer range and number of business opportunities on offer can be a bewildering choice.

In searching for a business you will need to consider your own skill set, your personal and business strengths, experience and passion. Very importantly, you need to determine what role you will play in the business, the extent of hands-on involvement you will have and hence how dependent you will be on others to operate or even manage your business. Many businesses can be successfully operated by a sole proprietor or a husband-&-wife team, or you may elect to employ a manager to deal with the day-to-day running.

When you buy a business you should not be constrained as to location (within reason) - you can buy a business anywhere, and therefore live anywhere. You may however, want to consider a range of factors which are not directly related to the business as such, but are personal considerations such as the type of area, housing, local amenities, distance from relatives, and schools for your children.

Running A Business

The balance between the lifestyle your business offers you and your financial objectives is yours to determine. Many people buy and operate businesses as lifestyle businesses where their main objective is to take control of their time, work for themselves, live in an attractive location, and run the business without the need for many staff. Many country restaurants, B&Bs, leisure businesses and sub Post Offices etc are examples of lifestyle businesses. Other business owners are more entrepreneurial and tend to focus their ambitions on making serious money, often by compromising the lifestyle aspects of their working environment and business location, in return for potentially far higher profits.

Research

Ensure you do your own homework. You simply cannot do too much research in the business you are interested in purchasing:

Financial Performance

What is the right price for a business?

There is a variety of methods for valuing businesses. Perhaps most common is the profits method whereby the value of the business is a multiple of the annual profits it produces. A purchaser may want to consider his return on investment and if (for example) a leasehold business is valued at 3x its reconstituted net profits (including trade fixtures and fittings), then the business is returning the lessee/tenant/operator a high return, on purchase price/ capital invested of circa 33% per annum. If valued or selling at (for example) 2 x reconstituted net profit this would equate to circa 50% annual return on your investment.

Again, only as an example, a freehold business may be valued at around 10 x its reconstituted net profits, equating to a 10% annual return on purchase price/capital invested.

Obviously all valuations can be variable, and may depend upon, desirability, profits, geographical location, size/condition of premises etc

The purchaser will assess the return from the business in comparison with what return he could obtain on his money if it were invested in the market or in a different business proposition. Obviously an important consideration is whether the business includes domestic accommodation saving the proprietor the considerable expense of owning a separate domestic dwelling.

Return On Investment

Where a business has valuable fixed assets such as plant & machinery, it might be valued on those assets rather than the business profits. This is known as the asset valuation method. Another way of assessing the value of a going concern is to calculate what it would cost to establish a similar business and produce similar profits from scratch. This is known as the entry cost form of valuation.

You can see that valuing businesses is something of a specialist activity, but the most sensible approach for a purchaser is to assess what annual return the business will give him on his investment and hence, how long it should take him/her to recover the initial investment/purchase price. It is also essential to look at what comparable businesses are selling for.

In the final analysis, the only true value of a business is (quite simply)... "A FIGURE THAT A PURCHASER IS WILLING (OR ABLE) TO PAY, AND THAT WHICH A VENDOR IS WILLING TO ACCEPT".

Assess Affordability

The cost of buying a business is obviously not just the cost of the business. As described above, you will need cash to acquire the business, purchase existing stock at cost price, acquire new stock, pay legal fees (possibly including those of your property landlord), pay professional fees such as accountant, surveyor, finance broker, acquire new equipment or to make property improvements, and most importantly to have cash in the bank as working capital.

If you don't have all the required cash yourself, you will need to raise finance - the most common source being High Street banks willing to lend to small businesses. Lenders will have 2 important considerations when assessing loan applications. Firstly, does the business produce sufficient profits to comfortably service the loan? Secondly, what security is the borrower offering the lender, i.e. a chargeable asset pledged to the lender to cover the possibility of the borrower defaulting on the loan.

As mentioned, banks/lending sources, do not see any security in a leasehold business, and their lending decision is based upon the profit performance of the business. Banks will usually require security to be pledged in some form of asset e.g. other property, shares, investments owned by the borrower, guarantor etc. If, you do need to raise some capital, one of the simplest ways, if you have a residential property, is to re-mortgage this with your existing lender, at favourable rates.

This would then release unencumbered cash funds to make an offer and proceed to purchase your desired business. Often, this residential property is then rented out, to provide income, frequently self-cancelling the loan/re-mortgage, or at least contribute a significant proportion towards this.

A freehold business offers a lender security via a legal charge on the property, but of course freehold properties are usually more expensive than leasehold properties. Also please be aware that the loan to ratio (LTR) for freehold commercial businesses is almost always significantly lower (perhaps around half of that offered on residential homes/properties).

If you need to borrow it is crucial that you know your borrowing capability and what the business can safely support. You should know what investment you are equipped to make into a business and you should find out what extent of borrowing banks would consider on the type of business you are thinking of. You should do this well in advance of starting your business search, to prevent wasted effort in looking at businesses you simply cannot afford to buy. You can talk directly to a Business Advisor at a High Street bank or approach a commercial finance broker who will have contact with a range of potential lenders, but who will charge you for his services in arranging a loan facility. A good commercial finance broker will give you an initial verbal view (usually at no cost) of the approximate parameters and lending criteria available, on a specific business, after viewing the accounts and having your personal financial details. We have access to specialist commercial finance brokers, and would be pleased to give you their details on request.

When you are ready to make a loan application in respect of a specific business you will need to provide prospective lenders with (a) proof of your own funds (b) historical evidence of the business profits (you will need recent formal accounts of the business) and (c) your Business Plan giving the lender an insight into how you propose to run the business, your product(s), target market, pricing strategy, competitors, marketing/advertising strategy, staffing, financing, and financial projections.

Perhaps most importantly of all: if your own cash plus a sensible amount of borrowing is not enough to finance your business then YOU CAN'T AFFORD TO BUY THAT BUSINESS. Walk away and look at alternatives. The most common reason for a business failure is that the business is too heavily indebted, and this often occurs from the very outset.

Make Your Offer

Having completed your research, made your own assessment of the value of the business, ensured you have the requisite 'cash' resources to proceed, you are ready to make an offer. The following procedure applies to those businesses where we act as the selling agent for the vendor. When you make an offer we will then put your offer to our vendor client who will accept, decline or ask us to negotiate accordingly.

Thumbs Up

Once the offer/purchase price is agreed and accepted, you should formally submit the agreed offer price in writing/email to us, together with details of the commercial solicitors who will be acting for you. You should ensure you appoint your own solicitor specialising in commercial conveyancing and an accountant who services business owners. Your written and agreed offer should be stated on the basis of subject to contract and will be accepted on the same basis. This means you have the opportunity to withdraw if, before the formal exchange of contracts, there are insurmountable contractual issues or problems encountered within the due diligence process by your solicitor or other advisor(s).

Again, assuming we are acting as the agent, you will then be required to submit to us your proof of finance, which will comprise of proof of your ability to purchase the business. This will be in the form of bank/building society statement, letter from solicitor confirming total funds, and/or official bank/finance loan offer, etc.

Under money laundering regulations 2007, we will also need to verify your identity, consequently will need a photocopy/scan of your passport or photo driving licence etc.

We will also require a preliminary and fully refundable deposit, to show your good faith/desire to proceed, and our website will then be endorsed accordingly to this effect. This has been our successful policy for over 35 years. Your deposit is held by us as stakeholders in a separate account until completion. (In the unlikely event of the sale not proceeding to exchange of contracts for any reason whatsoever, then we undertake to refund your deposit in full upon written/email request within 3 working days).

We will then take our vendor clients instructions and proceed to issue Heads of Terms to both parties solicitors, who will then commence with the legalities/ formal due diligence of the transaction/sale.

As mentioned, you should have engaged the services of a solicitor and accountant specialising in commercial transactions.

Please note and beware: If any agent ever asks you for a substantial non-refundable deposit, under the guise of reserving the business/persuading you to sign a lockout contract, then you should report this matter to your own solicitor, who will inevitably advise you not to do this because of the obvious risk of you forfeiting your deposit due to circumstances entirely beyond your control. You should then seek to buy a business elsewhere. Please be assured that lodging substantial (many thousands of pounds) in non-refundable deposits is not normal commercial practice. Any such request from an agent should be regarded as suspicious, and of a dubious and probably desperate nature. A company search via your accountant/solicitor, or by yourself on-line via Companies House/Company Check, may well confirm the precarious net worth of any such agent. Any sale can fall through or not proceed, due to no fault of the purchaser, and as such it would be completely wrong for a purchaser to lose his/her substantial non-refundable deposit. Likewise, it is also, of course, completely wrong for an agent to financially benefit from a purchaser for whatever the reason a sale falls through and does not complete. All solicitors acting in their purchasing clients best interests will, of course, strongly advise against paying a substantial non-refundable deposit.

Due Diligence/legalities

Due diligence is the process by which you, your solicitor and any other advisor verify information on which your decision to purchase a business is based including financial, commercial and property enquiries. This process will require the involvement of your solicitor and possibly an accountant, and will include:

  • Establishing tenure, searches etc, legal issues such as licences required to operate the business, obligations towards existing staff (which you will be obliged to take on under TUPE regulations), compliance with statutory regulations, contractual obligations of the business including compliance with any lease, contractual terms with suppliers to the business etc, etc.

Completion

Deal Done

Completion of your acquisition of the business is handled between your solicitor and the solicitor acting for the seller. You will be formally taking ownership of the business and all contracts and licences related to it. Your solicitor will release all completion monies to the sellers solicitor.

In parallel with all the above you will need (with the help of your solicitor/business advisor and accountant) to prepare and organise your business affairs, including but not limited to the following:

  • name & brand your business
  • determine your trading entity: Sole Trader, Partnership, Limited Liability Partnership, or Limited Company, and register appropriately
  • register with HMRC for your business, tax & VAT purposes and staff PAYE
  • secure your supply lines
  • arrange marketing & promotional material
  • create your impressive, innovative, business website, apps and social media presence etc.
  • arrange business bank account and merchant facility
  • arrange your accounting system
  • organise your technology - POS, phones etc
  • assign responsibilities and construct a staff recruitment plan and training plan
  • organise insurancess - property, business, public & employer's liability
  • implement mandatory policies e.g. Health & Safety
  • plan business launch programme