Buying an existing business

broke=skint

Hi!
I have been offered the opportunity to buy a very well established business for a really good price and I don't want to let the opportunity pass.
I have to raise x amount of cash to buy the current owner out and I was wondering what the best way of getting finance for it was.

A friend of mine has suggested speaking with the Princes Trust about startup loans/grants, but the eligibility criteria says you must be in receipt of JSA, which I am not as I work full time. She told me she got one a few years back when she was working full time. Has this recently changed? Or is this something different offered by the Princes Trust?

If thats not the way to go, is there any other schemes out there to help people on low wages? Or to help people with no formal qualifications start up in business?

Thanks in advance :-)

paddyrg

How much are we talking? £00's, £'000's or £0000's? Your sig suggests you may have problems finding the money you need, sadly, loans will not come easily to you and would need to be secured or guaranteed. Is the business worth it? Make sure you study the books closely with someone experienced and independent - the current vendor must have a reason for selling!

broke=skint

Hi paddyrg, thanks for your reply.

The business owner is moving on to bigger and better things, it makes a nice little profit but not enough for him. He wants it off his hands so he can free up some cash to progress on with his bigger plans.
He is asking £20000 for the business as it stands. There are increased profits during certain times of the year which he hasn't seen yet as he has only owned the business for 6 months (he got it as a sort of package deal when the last owner ran off, this shop was included and another which is twice as profitable).
I have had an independent financial advisor look over the figures since 2008 and he agreed that is was a fantastic opportunity. I also failed to mention that the business at present is valued at more than double his asking price and its under achieving!

If I were to take out a business loan for this amount would it be based on my credit score or could I secure it against the value of the business?

paddyrg

Really tough one - I expect you will need physical assets which could be sold valued at more than £20k to borrow £20k - I suggest what you may need to find is a sleeping partner - they bring the cash, you bring the work, you split the profits. Not an easy find though from strangers! How about that IFA - do they want to come in for half or more?

Premier_2

broke=skint wrote: »

...I have had an independent financial advisor look over the figures since 2008 and he agreed that is was a fantastic opportunity. I also failed to mention that the business at present is valued at more than double his asking price and its under achieving!...

Didn't that IFA discuss with you possible funding options?

motorguy

broke=skint wrote: »

Hi paddyrg, thanks for your reply.

The business owner is moving on to bigger and better things, it makes a nice little profit but not enough for him. He wants it off his hands so he can free up some cash to progress on with his bigger plans.
He is asking £20000 for the business as it stands. There are increased profits during certain times of the year which he hasn't seen yet as he has only owned the business for 6 months (he got it as a sort of package deal when the last owner ran off, this shop was included and another which is twice as profitable).
I have had an independent financial advisor look over the figures since 2008 and he agreed that is was a fantastic opportunity. I also failed to mention that the business at present is valued at more than double his asking price and its under achieving!

If I were to take out a business loan for this amount would it be based on my credit score or could I secure it against the value of the business?

I am always extremely wary of a business being sold on so quickly. In this day and age, who gets rid of a business that seems to be making money and seems to have so much potential?

Is there any sort of lease agreement here on premises that is perhaps up for renewal soon? Any danger of anyone else starting / about to start similar business? Any imminent change in the market place that will soon make this business obsolete? Does the effort required as the business owner outweigh the profit being made? If so much money can potentially be made by growth in the future, what is the cost of that growth - extra staff, extra hours, bigger premises? If you need bigger premises in the future, can you get out of the current lease? Assuming you get someone to lend you the money, what does the profit look like after you've taken out heft loan repayments over say, the next five years? Can the business afford those loan repayments and make you a decent wage on its current profits, or would you be relying on growth?

Be wary of wearing rose tinted glasses on this. Listen to the tiniest of doubts that are in the back of your mind and address them fully. Don't rely on friends and relatives to advise you - they will tell you what you want to hear, and in fact, you will most likely subconciously tell them what they need to hear to get the right responses.

Do you know anyone whos really experienced in business who you can talk to objectively about this, and get their opinion?

Not saying this isnt a viable business, and sorry to come across as negative, but please be very careful here. You are being asked to fund £20,000 which is a hefty debt in itself, but a business that later goes bad can suck in tens of thousands more all of which YOU will be responsible for paying back.

Your biggest problem will be raising the cash. I would say you have little chance to.

What about looking at a part cash payment, part cash repayment scheme? Say, £10,000 cash, then £250 a month? If its as good a business as he is making out, then he will have no doubts your ability to repay?

motorguy

broke=skint wrote: »

I also failed to mention that the business at present is valued at more than double his asking price and its under achieving!

Who has valued the business at double the asking price? Is it a Bank for the purposes of a loan? Or is it someone with a vested interest in a high valuation?

Whys it really underachieving? What will it take to make it achieve its potential?

Why is someone selling a goose that sees to be able to lay golden eggs?

COOLTRIKERCHICK

If the last owner 'ran off' first of all why? and how did the current owner have hteir trading figures going back to 2008?

If it was a good investment, why dont the owners of all but 6 months put a manager in there?

what type of shop is it? does the owner want to sell it quick as there was been planning permission passed for some huge competitor, or is a similar sort of chain store due to open up soon? are they turning the road system around so there will be no easy access? etc.

I think you might struggle to rasise the whole 20k by means of a loan etc.... would might look better if you try and put in a % of the 20k yourself, as most banks/lenders want to see some sort of financial commitment from yourself too... so if there anything you could sell to raise some capital to invest in this business?

paulwf

The amount of capital you require isn't £20K as that is just to buy the business. Firstly you'll have to pay legal fees. Then there is stock at valuation (SAV). Next chances are it hasn't seen any decent investment in years given the history of it so you might need to do some repairs, get new fixtures and fittings, set up a new website etc etc.

You'll then need working capital as chances are most of the stock you will buy with the business is obsolete or won't be what you need in the right quantities. Most startups are now put on cash on delivery or 7 days so don't think you can "wing it" you need cash in the bank to get your stock.

Rent needs paying in advance and you need something to live on for 6 months whilst you build up the business. Staffing costs will be higher at first whilst you train them up and tweak opening hours etc.

Basically you need to write out a business plan with all your startup costs and a realistic 5 year financial plan with great emphasis on the first 12 months. Without knowing all the details my rough estimate would be to have access to £40K of credit with immediate access to £35K. Quite simply in the current climate if you get behind at all with payments suppliers will pull the plug and you'll be stuffed.

COOLTRIKERCHICK

I totally agree with paulwf ( again..lol..)

I have been trading 4 years with an excellent credit rating, but any new business i deal with still send me pro-forma invoices..

paulwf

As to getting a loan a rough calculation is 1/3 put in by you in cash and 2/3 bank loan with security to cover that amount e.g. a house. Unless you've got £10-15K to inject (based on my required capital calculations) a bank won't want to know.