Buying a Business....What's it worth?

ScottySmog

I've recently been given the opportunity to purchase a business. The asking price is £50K but I don't think I'm getting a good deal. A few salient points I've got from the accounts I've been given are:

1) Business has traded for just over a year - turnover c. £70K p.a
2) There is no property (bricks & mortar) involved
3) Stock is not included in the sale price.
4) Balance sheet shows business (Ltd Co) is technically insolvent to the tune of £10K
5) Fixed Asset value (inc leasehold property lease capitalised) is £18K
6) 1st year trading loss of c. £9K
7) Directors capital introduced of over £40K

Initially, the words "Don't touch it with a bargepole" come to mind but it's obvious to me the business is being badly run and has potential.

If anyone in the know (friendly accountant? ) could advise me what a realistic offer for the business would be, I'd be grateful. I can supply further info if the above is not enough to work with.

Thanks in advance.:beer:

SS

WHA

Are they offering the business or the limited company containing the business, i.e. are you buying the business from their limited company, or are you buying their shares in the limited company?

Massive differences depending on which way.

MORPH3US

ScottySmog wrote: »

1) Business has traded for just over a year - turnover c. £70K p.a
6) 1st year trading loss of c. £9K

Turnover doesn't really mean anything so try to ignore it a little. PROFIT is the key word and any idiot can lose £9k a year...

"Turnover is vanity, profit is sanity!!!"

Can you give more details about the business so we can help you a little....

If not then on the basis of what detail you have given, I would steer well clear!

M

ScottySmog

WHA wrote: »

Are they offering the business or the limited company containing the business, i.e. are you buying the business from their limited company, or are you buying their shares in the limited company?

Massive differences depending on which way.

WHA,

They are offering the limited company containing the business. Please advise how this would affect your opinion.

Thanks,

SS

ScottySmog

MORPH3US wrote: »

Turnover doesn't really mean anything so try to ignore it a little. PROFIT is the key word and any idiot can lose £9k a year...

"Turnover is vanity, profit is sanity!!!"

Can you give more details about the business so we can help you a little....

If not then on the basis of what detail you have given, I would steer well clear!

M

Morph3us,

The business is a small food retail outlet specialising in the higher end of the market. Please could you let me know what further information you'd need and I'll put it up on here - providing it can't be used to identify the business in question.:rolleyes:

Thanks,

SS

WHA

ScottySmog wrote: »

WHA,

They are offering the limited company containing the business. Please advise how this would affect your opinion.

Thanks,

SS

Well, just about everything really.

Firstly, my advice would almost always be to buy the business from their company, leaving them with the problem of winding up the company themselves, and giving you a clean slate to start again. Problems invariably appear when you buy someone else's company and it is expensive to get an accountant and lawyer involved to do the due diligence to put your mind at rest as to the level of potential issues unresolved.

Secondly, the company owes the directors £40,000 and you are proposing buying the company for £50,000, so unless the directors loan is removed before the deal, they get £50k for their shares and the company still owes them another £40k, so in effect you are paying £90k for it. Can you now start to see why buying their company is not the best idea?

Thirdly, what liabilities are inherent in the company. What are the terms of the lease - can the company escape its lease liabilities if you can't turn it around? Can the lease be transferred to you or do you have to enter into a new lease yourselves (usually personal guarantees are required for new start-ups making the limited liability worthless!). Is the equipment leased - what lease terms for equipment, signage, alarms, etc are you taking on?

At the end of the day, the only assets they have is £18k, some of which relates to a lease which may turn out worthless depending on the term of the lease. Why would you pay more than the value of the underlying assets. It's turnover is not particularly high for the type of business and it's making losses. It is arguable whether there is any goodwill in there at all. What have they done so wrong to make the business lose so much money - are you sure you can turn it around - if you have to invest time or money to turn it round, you should keep all the profits it generates - not pay someone else for their failure!

It sounds more like the existing directors/shareholders just want to escape their liabilities, hoping to get back what they invested, so as to limit their future exposure. If they're tied into leases, perhaps with personal guarantees to bank or leasors, they'd probably be grateful for anything to limit or eliminate their future losses.

You need to do a lot more digging and get proper advice from a business link consultant (there are some good ones out there) or an accountant as the first step, and then if you are intending to progress further, due diligence is a necessity, despite its costs.

ScottySmog

I didn't think it was a good deal and your reply not only confirms this but paints an even bleaker picture than I'd imagined.

I was considering a seriously reduced offer around the £20K mark but thanks to your insight, I'll stay well clear!

Thanks WHA :beer:

COOLTRIKERCHICK

years ago i bought an existing business... there were bricks and mortar involved.. so at least i had something to seel when things went belly up.....

in reality.. imo......there is no such thing as good will when buying a business.......as the previous owner of a business could do well, you take it over and business drops like a sack of .......so unless you have assests or something you can dispose of/sell to get some money back if you failed in the business....i would personally leave well alone..

as the saying goes..... if in dought ...dont....

this might sound sly.... but hay business is business.. why dont you start a similar business from scratch...( if this is the line of business you want to do )

i know my input is not as constructive as the above posts......and maybe i could have worded it better....

but think carefully.......

MORPH3US

COOLTRIKERCHICK wrote: »

this might sound sly.... but hay business is business.. why dont you start a similar business from scratch...( if this is the line of business you want to do )

Exactly what I was thinking!

Still not sure what the OP means by "small food retail outlet specialising in the higher end of the market" - is this a corner shop selling caviar and champagne?!?

M

ScottySmog

MORPH3US wrote: »

Exactly what I was thinking!

Still not sure what the OP means by "small food retail outlet specialising in the higher end of the market" - is this a corner shop selling caviar and champagne?!?

M

Not actually too wide of the mark Morph3us!

I had already investigated the "starting from scratch" route and this now appears to be the way forward.

Thanks everyone for their comments.

kimbatty

I would have said to just start from scratch and do it yourself if you feel its a viable business opportunity

Often when you're first starting out it may seem like a huge minefield of unknowns but many many successful businesses are started from scratch and if you're determined and resourceful then you will reap the rewards. I know of a few people who've bought a going concern and paid a lot of money for it and once they're down the road a few months they've realised they could have actually done it themselves and saved an awful lot of money from the start

Best of luck whatever you decide but the proposition you've asked about doesn't sound too good to me