Purchase of an existing business

Patty11

I'm completely new to this and hoping I could get some advise.
My husband and I are looking at purchasing an existing business and do not know where to start.  
We have been offered the opportunity to purchase the cafe that my husband currently works in.  We know it is a profitable business and the owner is willing to sell this to us along with the 7 year lease.  I have been looking online and just not sure who I need to approach to ask for the loan.  We own our own home and we have just had this valued so not sure if we can use this as equity or use it against a secured loan. Any help would be greatly appreciated.

tacpot12

You can approach any bank with a business banking service for a loan to buy the business, and they might even be able to give you some advice on how to the value of the business. You might also start looking for an accountant, and they may well have some contacts that would help. The accountant will certainly be able to help you value the business. 

It would be best to avoid taking out a secured loan if you can avoid it. You can get unsecured loans of up to £25,000 that can be repaid over 7 years, which would match the lease. The other alternative to investigate is to pay part of the price out of profit, and tie the current owner into doing some consultancy to ensure that the business makes plenty of profit in its first year. 

You will also need a solicitor to check out the lease very carefully. You need to be sure that you can get out of the lease in a reasonable manner, in case the business suffers some mishap - such as one of you having a health problem.

It would be as well to have a business plan ready to discuss with the bank. The accountant can help you prepare a business plan, for a price. The business plan needs to show how the purchase will be financed, what money you will take out of the business year to year, and what you will invest money that is left in the business in, e.g. for renewing equipment, redecorating every so often, etc. An accurate budget for all the existing costs of the business would be useful - the current owner should have one already.  

As part of your due diligence, you should review whether there are any areas of the business that have not had enough investment in them from the current owner. I.T. would be one area to check. 

As the second wave of the pandemic is hitting us, it would be as well to have evidence of how the business survived the first wave, to reassure any lender that the business is resilient. 

Patty11

Thank you. This helps a lot.

Grumpy_chap

Why is the current owner looking to sell at this particular time?

Your plans must take into account the "new normal" and valuation based on a future that may be very different to past performance.

martindow

You also need to look at the contracts of the existing employees and the rights they may have under TUPE

https://www.gov.uk/transfers-takeovers

Savvy_Sue

It may have been profitable for the current owner, but it may not be profitable if you have to finance buying it and servicing a loan. Also people tend to over-value their own business quite significantly, get an independent estimate of what it's worth .... 

oldbikebloke

as a very basic start point business valuation will be:
a) market value of physical assets (ie what you'd get if you sold them)
+
b) one year's turnover (or, if you negotiate hard, profit)

Pennywise

oldbikebloke said:

as a very basic start point business valuation will be:
a) market value of physical assets (ie what you'd get if you sold them)
+
b) one year's turnover (or, if you negotiate hard, profit)

For a small owner-managed cafe, one year's turnover is waaaay too high.  One years' profit after provision for owners' wage if they work in the business is more likely.  I've a client whose just bought one for £25k where the turnover was £150k and profit was £25k.  

bris

Realistically I want to see the business last 3 tax returns, this gives a true reflection of the business.

The business should be bought on the turnover before lockdown as it will be a better indicator of how it will be after lockdown.

The price should however reflect lockdown,  but knowing what it was taking before it is crucial.

Buying just now however is a gamble as no one knows how long this is going to last. Rent and rates (if applicable) still need to be paid as well as any services, drawings and other staffs wages so think hard before committing. 

The other thing is buying a business with a lease isn't as easy as you might think. The chances are the lease may not get permission to transfer the lease to you if you are not as safe a bet as the current owner. This would leave subletting but for the existing lease holder if you go but he has to pick up the tab for any arrears so may not be willing to sell to you.

Sandtree

martindow said:

You also need to look at the contracts of the existing employees and the rights they may have under TUPE

https://www.gov.uk/transfers-takeovers

I need to read up on TUPE for something else but surely if they are buying the company then TUPE is irrelevant because the employees continue to be employed by the company. My understanding of TUPE is that it applies when the employees transfer from one company to another.

Edit - this assumes its structured as Ltd

Savvy_Sue

Sandtree said:

martindow said:

You also need to look at the contracts of the existing employees and the rights they may have under TUPE

https://www.gov.uk/transfers-takeovers

I need to read up on TUPE for something else but surely if they are buying the company then TUPE is irrelevant because the employees continue to be employed by the company. My understanding of TUPE is that it applies when the employees transfer from one company to another.

Edit - this assumes its structured as Ltd

I think you may be right, but worth understanding that TUPE or not the new owner might not be able to easily reduce the number of staff. It's often an assumption made that a new owner could work their socks off with far fewer staff, and it's never that simple ...