Company buying another business

seismicryan

I was wondering if anyone here has any insight into a company buying another business, off a sole trader?

I realise that this is something that an accountant would need to be consulted on, but wanted to see if anyone here had any experience in this, and in particular the legal requirements (if any) for calculating price, or is it simply something that both parties agree on?

InsideInsurance

The price? That is just what the two parties agree on

There are a number of common ways of doing it but these are just guidelines and there is a lot of subjectivity to it as inevitably the business is worth more than its capital assets and how much "goodwill" your willing to pay depends on many factors.

For example, if your buying a hairdressing salon, if the owner was also the lead stylist and you werent introducing an anti-competition clause then you would pay less goodwill as the odds are that a fair number of clients will leave when the stylist goes, especially if they are setting up another salon in the near vicinity. If the owner had no operational role in the business you'd probably pay more for the goodwill as your likely to retain more of the customers as the change of ownership will be invisible to them

Mistral001

You would need to see at least three years accounts of the firm you wanted to buy and show it to your accountant.

Only you can decide if it is worth it as an accountant will not make that decision for you, but they will help to interpret the accounts and perhaps pin point any pitfalls that exist. (I am not an accountant BTW)

Pennywise

Mistral001 wrote: »

You would need to see at least three years accounts of the firm you wanted to buy and show it to your accountant.

Only you can decide if it is worth it as an accountant will not make that decision for you, but they will help to interpret the accounts and perhaps pin point any pitfalls that exist. (I am not an accountant BTW)

Absolutely - money well spent.

I've just done a review for someone who was offered their employer's business. The employer and their accountant produced a very convincing-looking proposal, with a valuation backed by the accounts etc. At first sight, it was a no-brainer as the way it had been calculated made it look a bargain.

I spent just an hour looking through the proposal and spotted two glaring problems - one in the business itself, the other in the method of calculating the business worth.

Result is that the business is only worth a maximum of 1/3 of the asking price, and maybe worth nothing at all, to the employee.

This is because the business needs to be VAT registered (just breached the threshold, so historic accounts don't show the drastic impact on profits), and secondly there had been no account taken of the value of the owner's time/input into the business. Both of these factors mean that the employee would be doing nothing more than "buying" their own job with little, if any, extra profits.

The amount of failures I see arising from people who've paid too much when buying a business is frightening!

heather_helo

asking price = x
value of assets = y
difference x-y = amount of goodwill your willing to pay (look at what the owner wants - do you think its a viable business to invest in (gut feeling) before even getting an accountant involved.

valuing the business is a tricky one - if there is a property etc then get an independent valuation.

also watch the stock cost - could be inflated and hold an amount of stock which would be obsolete.