Buying a business

dlynch9

Hi all

I have a question regarding buying an existing business.

Let me give you an example -

A business is for sale at £250k with a turnover of £200k and Profit of 50k per year.

Would it be possible to use the business to secure a business loan to pay for the business?

The loan could then be paid back from profits until it is paid off. Essentially, the buyer would not have to raise an cash personally.

Any advice would be greatly received.

Opinion

Yes, it is possible. Probable? That would depend on the vendor. I've not been involved in anything like this but a few other users have, CKhalvashi springs to mind so hopefully he will see this.

Going by your example I would be wondering why the business was being sold. If it's making £50,000 per year profit why does the owner not just take a step back and get someone in to run the business?

Aquamania

dlynch9 wrote: »

Hi all

I have a question regarding buying an existing business.

Let me give you an example -

A business is for sale at £250k with a turnover of £200k and Profit of 50k per year.

Would it be possible to use the business to secure a business loan to pay for the business?

The loan could then be paid back from profits until it is paid off. Essentially, the buyer would not have to raise an cash personally.

Any advice would be greatly received.

I could offer you £30k but I would want 99% of the business

Aquamania

Opinion wrote: »

...Going by your example I would be wondering why the business was being sold. If it's making £50,000 per year profit why does the owner not just take a step back and get someone in to run the business?

Because the owner will probably have to pay almost that in wages and associated costs, whereas they have found [STRIKE]a mug[/STRIKE] an interested party willing to take it off their hands for 5 times that amount today. :beer:

Mistral001

I cannot see why anybody would want to lend on the basis the OP is proposing. Even a close family member would probably not lend on that basis. They would want some sort of security such as property.

riderfromthenorth

Lots of private equity deals are done in a similar way. I think you would need a background in the industry to be able to access financing in this way though and probably put up some of the capital yourself.

Mistral001

riderfromthenorth wrote: »

Lots of private equity deals are done in a similar way. I think you would need a background in the industry to be able to access financing in this way though and probably put up some of the capital yourself.

I suppose it depends on the type of business. The OP has not said what type of business it is. If it was an engineering firm who was developing a new high tech product, perhaps a private equity firm might be interested. If it was a restaurant or a mobile phone webshop it might be a different situation.

bris

Not a hope in hell of getting 100% funding for this. The lenders want a minimum of 30% and even at that rate you need really good security (not the business, although that will be taken as security too) to secure that rate. 50% is nearer the mark now for a lender to really be interested.

They simply don't want to lend on businesses anymore when the buyer is not prepared to risk anything for themselves.

purdyoaten

bris wrote: »

Not a hope in hell of getting 100% funding for this. The lenders want a minimum of 30% and even at that rate you need really good security (not the business, although that will be taken as security too) to secure that rate. 50% is nearer the mark now for a lender to really be interested.

They simply don't want to lend on businesses anymore when the buyer is not prepared to risk anything for themselves.

I agree but there is so much naivety with the op.

1) Is the £250000 solely for goodwill? Is there property involved which could change the whole position (although if the op is not prepared to put anything into the business nothing changes)

2) Let's look at the first year of trading. Profit would not be £50000 - £35000 at a push on a £250000 loan at 6% (ambitious). The business would incur the loan repayments, the capital element not having any effect on profits. At the end of the year the balance sheet will show minimal assets with a whopping great loan balance - a negative figure even before taking into account any personal drawings. No bank will countenance that!

Not really a question to be fully answered on an internet forum!