Business Investment - Can I fund it this way?

Jay64

An opportunity to buy a newish business (nearly at the end of its third year of trading) has come up. My wife and I believe it would be a good investment and that we would be able to make it grow. The business is up for sale at £65K but with chatting to the owner a more realistic price for us would be around £50K, the owner is also happy to accept the money in instalments.

There are several ways to fund a business but having never bought one before we are a bit stuck on which way to go and what the 'best way' is. One way we thought of, which we aren't sure we can do is -

-Give £20K upfront for the initial payment - take over the business

-Make the company give us a loan (it is a Ltd company) of £30K

-3 Months from initial payment pay a further £15K from the company loan

-a further 3 Months (so now 6 months into trading) pay the final £15K from the company loan

-I then 'owe' my company £30K, but could I just pay this back in through my salary?

For the first 1 year of trading I would have 2 jobs due to the contract of the job I am currently in, so effectively any money I make from the business I personally don't financially need... Hope this all makes sense and hopes someone can shed light on this! I am booked in to see a business adviser in a bank in a couple of weeks but... banks just want you to use them typically!

Any information I haven't put please just ask! Thanks everyone!

TCA

Does the company have borrowing facilities in place? If so, presumably the interest rate is acceptable to you?

Jay64

What I meant was taking out a directors loan, it doesn't have lending facilities per say

TheTracker

If it is valued at 50k and has 30k cash to loan you, that means the 'company' is only valued at most at 20k? Why wouldnt/couldn't the current owner take out 30k herself and then you buy the company for the 20k you already have.

Regardless: Any money you take as a directors loan is chargeable at least as high as the official rate which is currently 3%. Some accountants permit "in year" DLA movements since these wouldn't show on end of year balance sheets.

However, the issue you face is unrelated to the mechanics of the directors loan account. What you are asking the current owner to do is make you a director of the company and loan you 30k prior to sale. Yes that could all happen on the same day but I'm not sure I'd be willing to do that as an owner.

I would be suspicious of any business willing to enter into such a selling arrangement, why wouldn't they just sell to someone else who has cash? Unless you are offering them a premium. Why can't you get a personal loan?

Whenever anyone raises the prospect of business purchases I am always ultra cautious - how have you established fair value at 50k? Why couldn't you enter the market as a competitor? Maybe you only need to buy stock or contacts, not the company? Are you fully appraised of any historical risk and is it insured against? How do you know the current owner isn't just going to take her trade and customers with her?

Jay64

Thetracker thanks!

I can get a personal loan for that amount, I was just thinking the APR would be less doing it that way.

We have established the cost at 50K as the valuation (done by the charterd accountant) of 65K was done purely on the sales in their 2nd year (65K). I wouldn't be able to enter the market as a competitor as the business has USP, but also a start up would be harder to borrow for as their is no historic cash flow or P&L. The current owner is selling and moving away from the area for personal reasons, so is after a quick sale (hence being willing to accept less) but also in the SPA we would have that they cannot start a similar business in the surrounding area (perhaps the surrounding 70 miles).

Really appreciate the questions and answers! That's why I have come on here to make sure I don't look crazy when I go to see the bank! It is good to ask people who have bought business' etc before.

BrianJohnson15

I think it is a nice idea.

mollycat

BrianJohnson15 wrote: »

I think it is a nice idea.

Two posts with a total of 9 words, (the other post reply says simply "mutual funds").

Brian, call me sceptical, but you're not building up your post count to deliver some tasty spam are you?

jimjames

Jay64 wrote: »

We have established the cost at 50K as the valuation (done by the charterd accountant) of 65K was done purely on the sales in their 2nd year (65K).

How much profit does the business make? A valuation based on sales seems a strange way to value it.

How did you envisage the business borrowing the money? Does it have assets to borrow against? The current owner may not be taking customers with them but there may be a loyalty element that customers want to deal with that person so your sales may drop.

Jay64

So last year (2nd year of trading) it made just under £13K. It's forecast this year is around £20K (but that is obviously anyone's guess!) I wasn't sure how the directors loan worked if I'm honest! The assets that the business had doesn't equate to that.

Malthusian

£50,000 valuation on a business with £65,000 of sales and £13,000 of profit is dirt cheap.

Unless the current owner is the real asset. Something doesn't add up, anyway.

An SPA that the current owner can't start a business within 70 miles is decent protection if the owner is a barber, not so much if he's a web designer or another business where his customers aren't likely to mind where he's based.

Jay64

It is very good and he is only selling due to personal matters arising (don't really want to post on a public forum) we felt the 70 miles would be good, it is a small cafe/pizzeria. We also know the guy, so fairly confident it is no way a scam ha! Thus why we are interested and want to buy it!