loan to buy a company

jayremoh

an opportunity has arisen and its a bit unfamiliar territory for me, so just after some initial thoughts before seeking legal/financial advice.

owners value a company at 1.2m (stable company, constant profits for 20 years, turnover always between 600k and 1m)

contracted income 450k
current new sales 200k
current turnover 650k (lowest its been for 15 years due to climate)

overheads 230k
salaries 320k (200k directors salaries)

net profit 100k

im thinking a upfront offer of 400k then 800k over 4/5 years at 200/160k per annum depedant on newco profits. majority of this money would come from the profits of the company after removing salaries of directors (200k)

i know there not much info above, but thoughts on chances on a bank loan for 400k secured against the contracted income? if not what else would improve my chance (if any) of getting such a loan?

cheers

chalkie99

Contracted income? What is it?

Suppose it is a contract from a company to buy products or services but that company then goes out of business? The contract is then worth nothing.

Why is the business for sale anyway? Sounds like the owners may know things are going downhill and want out.

More info needed I think but the loan sounds unlikely, to say the least.

CHR15

Sounds like you aren't going to contribute ANY of your own money into this venture.

jayremoh

chalkie99 wrote: »

Contracted income? What is it?

Suppose it is a contract from a company to buy products or services but that company then goes out of business? The contract is then worth nothing.

Why is the business for sale anyway? Sounds like the owners may know things are going downhill and want out.

More info needed I think but the loan sounds unlikely, to say the least.

the contracted income is split over 200 companies, each paying about 1k-5k each per annum, and the majority have been doing for years. each new sale add about another 1-5k to the contracted.

in terms of the owner wanting out. yes that is something i will have to investigate, but i know the market pretty well. and the owner is willing to sell over 4 or 5 years, i guess is a good indication that things are not going downhill.

at the minute im just looking to see if the idea is there if you like.

jayremoh

CHR15 wrote: »

Sounds like you aren't going to contribute ANY of your own money into this venture.

thats kinda my question too, how much would i have to put in?

any substantial money i put in would have to be personal loans or remortgage anyway.

i dont mind being shot down if its just a pipe dream, but i need to know if that is the case.

ILW

£1.2 mill against net profit of £100k sounds rather a lot, unless you think the company is ripe for expansion.

jayremoh

ILW wrote: »

£1.2 mill against net profit of £100k sounds rather a lot, unless you think the company is ripe for expansion.

the profits would be 300k in a bad year without the current owners/directors.

although these profits would be buying the company for 1st 4 or 5 years.

and yes i do see decent expansion.

Tixy

On what basis has it been valued? Its all very well the owner saying £1.2m but if you are intending to borrow from a bank they will also do a valuation of what the business is worth, having seen a full detailed business plan, projections etc.

If the contracts are long term then that does add some security to the company which is good. You haven't said what the company does but something more like 4times earnings would be more typical.

Though you would need to take into account the fact that he is perhaps taking out a salary in excess of true market value. Ie if someone else would do the same work he does for a £100k salary then the adjusted earnings would be £200k per annum, so a valuation of nearer £800k would seem closer to the mark.

Obviously it does depend also on what assets are in the company, clearly if it owns a property worth £1m that would be buying that is a different situation.

As to how much a bank would loan compared to how much you might need to put in personally it will really depend on how much security you have personally (equity in your house or whatever), they will certainly expect you to give personal guarantees against the loan anyway. But realistically I would imagine they'd be expecting you to put up a quarter or so of the money personally.

Tixy

Sorry just seen your last reply, which covers part of my post above. But you cannot discount all of the current directors salaries in working out the adjusted income/profits, you need to allow for the 'fair' salaries for the work they do, when working out a value for the company. So unless they are taking a salary and literally doing nothing at all in the business you wouldn't remove the full £200k.

jayremoh

thanks tixy. very helpful info there.

the current owner does 'nothing', the company runs itself more or less.

the 2nd owner/director is involved and would probably need replacing tbf. 30-40k on such a person i think.

sorry i cant give too much away at this point. you never knew who could be reading. (yes i know im posting on a public forum, but i had to start somewhere)

thanks again, appreciated. (same to others too)

whysitallsocomplicated

Hi

Do you work for the company you want to buy?

If so, just a thought, but would it be worth discussing a VIMBO type situation?

You could tie any payment schedule to the a % of pre tax profits so if you have a bad year you are only paying out a % of profit realised rather than a set amount agreed in advance.

Once you have your P&L forecast (conservative) you could see what that % would need to be to repay the purchase price within the time limit required. You could have an agreement that any capital outstanding at the end of that period would attract an interest rate of X. As you reach the end of the period you wil know how much capital was outstanding and how much you would then be paying in interest and could refinance if you could get a better rate somewhere else.

To be honest though a price tag of £1.2m against a Nett of £100K is a bit rich. are you the only person the company has been offered too?

what are the terms of the contracted sales? are they for set peiods such as 12 months or something? How do the customers cancel the contract, if they can what is the charge for that? I dont think anyone will offer you finance against the contracted sales but only based on the Audited accounts from the past and your forecasts for the future.

Are there any assests that the company owns? Have these been valued as both an ongoing basis and a "fire" sale.

With the reduced T/O has this had an effect on cash flow? are they useing any sort of Invoice discounting?

good luck