advice please on purchasing ongoing business

ben_and_elly

Buying an ongoing business - advice please
Hi. I hope this is the right place to post - apologies if not - please send me to where I should go!

My hubbie is a mechanic and has the opportunity to buy a small garage (ongoing business)run by an elderly gentleman wishing to retire. The lease has recently run out but the owners agreed to extend to 5 years, with a year's get out clause.

We have never run our own business and don;t really know where to start, so have the following (hopefully don't sound too stupid questions)

1/ How do we know if the price of business is good
2/ What sort of information can we get from current owner (ie accounts etc.) to go to bank to see if they would lend us any money. The garage is quite old and will need a bit of work. Can we rightfully ask owner for books etc. What other info should we look at?
3/ Anything we should watch out for?

I apologise if these seem like silly questions to the more experienced of you out there, but this seems like such a good opportunity to walk away from, but having kids etc. don't want to jump straight in "all guns blazing" and not make it work.

Thank you .

CKdesigner

Hi, Sounds good at the right price.

The first thing to do would be to findout if the current owner has a price in mind, you should get to see the last 3 years of accounts but it is only history, it can't tell you anything about future business. The main thing to do would be to find a GOOD accountancy firm, not a 'one man band' glorified book keeper, but a reasonable sized firm with specialists in the different fields. This firm you choose would be able to look at the accounts and would be able to spot any problems better than you financially and then they could help put a value on the business.

Remember though there is no guarantee of future business, you will be paying the present owner for the good will.

Anyway, good luck.

slipp_digby

could you include a bit more detail about what it is you are buying.

is it the lease to a garage which the owner doesnt intend to continue to run, or are you buying a 'business' e.g a ltd company. if you are simply leasing the garage, there are no guarantees that people who have used the business previously will use it again.

you would need to know how the current owner ran it, he may have been a sole trader, partnership or ltd company.

you will definately need the services of an accountant to give you a feel for how robust the business has been performing.

you should try and find out why the current owner is leaving - business may be in decline.

if you are buying a 'business' these are very difficult to value, as often the only thing of value are assetts and equipment, and 'good will' which is effectively the customer base.

tread cautiously

paulwf

If you are buying it as a going concern do a lot of research into the existing customer base. If the current owner has owned the garage for years he may have very low overheads (having paid off loans years ago) and might be charging unrealistically low prices. I'm not saying this is always the case but some businesses run by people near retirement age are just run for the love of it.

Also do not buy the stock and tooling at valuation (SAV) if the equipment is looking ancient. Budget for any new equipment you may need. I bet £10K of tooling covers next to nothing in a garage.

Basically weigh up if it is worth paying more for the business than starting from scratch with empty premises.

ben_and_elly

Hi. yes, it is a garage business that does servicing and is also an MOT test station. The land is owned by someone else who is prepared to extend the lease (currently due to run out!) by 5 years. So primarily, the sale (30k)is for customer base and equipment etc.
The owner is in his 80's so obvious reasons for leaving! however, he has also reduced dramatically the amount of work that he can do - this may or may not be due to age I suppose. I have found a good website that has been advised on this forum at a later time which has lots of valuable advice too.
I really appreciate the kindness of those on this forum who have made the effort to reply and give us food for thought.

ben_and_elly

paulwf wrote: »

If you are buying it as a going concern do a lot of research into the existing customer base. If the current owner has owned the garage for years he may have very low overheads (having paid off loans years ago) and might be charging unrealistically low prices. I'm not saying this is always the case but some businesses run by people near retirement age are just run for the love of it.

Also do not buy the stock and tooling at valuation (SAV) if the equipment is looking ancient. Budget for any new equipment you may need. I bet £10K of tooling covers next to nothing in a garage.

Basically weigh up if it is worth paying more for the business than starting from scratch with empty premises.

Yes, the man has owned this garage for 40+ years. Stock is really really old. Spare parts for morris minors etc.!!!
Looking into starting a car servicing/mot station business from scratch is much much more expensive and something we probably will never be able to afford to do.
Thank you for your comments - they have given us "food for thought". It's just having the bottle now to take that leap.............GLUG.

ben_and_elly

slipp_digby wrote: »

could you include a bit more detail about what it is you are buying.

is it the lease to a garage which the owner doesnt intend to continue to run, or are you buying a 'business' e.g a ltd company. if you are simply leasing the garage, there are no guarantees that people who have used the business previously will use it again.

you would need to know how the current owner ran it, he may have been a sole trader, partnership or ltd company.

you will definately need the services of an accountant to give you a feel for how robust the business has been performing.

you should try and find out why the current owner is leaving - business may be in decline.

if you are buying a 'business' these are very difficult to value, as often the only thing of value are assetts and equipment, and 'good will' which is effectively the customer base.

tread cautiously

Hello, i have replied to your kind comments further down - hopefully enough info for you. Many thanks

chickmug

Hi Ben & Elly

Put on the open market this business would be extremely difficult to sell even in good times to say the least.

Borrowing to buy would be nearly impossible as there is NO assets being offered to the lender as security. Perhasp there is other security you can offer such as your house or whatever else may be accpted

You need an accountant to analyse at least three years Profit & Loss Accounts. The accounts are better sent direct from sellers acct to your acct. And to make sure the last year end is not too old.

You need copy Vat returns if it is VAT registered.

You need proof of takings since the last accounts and/or Vat returns.

You need to get your solicitor to inspect and report back to you on the lease.

Five years left on a lease is considered a very very short amount of time especially by lenders. Seven is often the minimum they like.

Once your acct has looked at the accounts he needs to tell you the Net Profit. (the profit after all expenses are removed. Then whatever the figure is multiply by an absolute maximim of once and that may be in the area of the valuation that would be given a professional valuer.

Of course there is a lot more to carrying out this sort of valuation but do my comment guide lines make sense.

I repeat it is the sort of business that many business agents would turn down acting for unless they were paid a large up front sum to cover marketing costs.

ben_and_elly

Again, thank you for your comments.
Why do you say that this would be very difficult to sell? Is it the type of business or something else?
Also, is it safe/wise to borrow against our home - although from looking into it, the interest rates would be much lower.
The length of the lease is a concern to me, so we would try to negotiate a longer term.
Thank you for your comments.

chickmug

ben_and_elly wrote: »

Why do you say that this would be very difficult to sell? Is it the type of business or something else?

Also, is it safe/wise to borrow against our home - although from looking into it, the interest rates would be much lower.

In business sales there are diffrent divisions for the popularity of a business. Catering is usually at the top - tea rooms , coffee shops, sandwich bars. Then you may get small B&B's, self catering, certain retail businesses like village shops. But sorry to say motor trade can be towards the bottom. Howver if the price is right, the lease is right and it will make the right income for the price so £40k price means you should make the same Net Profit.

Only you can decide if you wish to offer your home as security, many do but some would chicken out. Like the SAS motto 'Who Dares Wins'?

Self employment is all about taking more risks than if you were employed. I have sure taken my share of them over a number of years in a number of new start businesses.

paulwf

I can't really see what you are paying 30K for - you mention the volume of work he carries out is now limited so a shrinking customer base, and the stock etc is worthless. Of course there might be a lot more to it than can be conveyed in a forum posting

As chickmug says the business is a tricky one to sell why not offer him say 5K or 10K? If he is in his 80's he probably wants to sell up soon and anything would be better than nothing to him. At the end of the day you could wait until he closes and approach the freeholder directly.

I think you need to do a business plan setting out the cash input required for new stock and tooling, as I can see that running into many thousands and dwarfing the cost of buying the business. As regards to raising money there are asset finance companies that lend against new equipment you purchase, although this may still need a house as a guarantee.

Whatever you do don't rush into it, perhaps do the Business Link courses as they are held fairly regularly in all parts of the country and are totally free.