Looking to buy my employers business, help!

jonesMUFCforever

Do you own a property? Would you be prepared to put it up for security for the business loan?
If you have a partner would they sign willingly? (If it goes wrong you could be forced to sell)?
I have no knowledge on commercial leases but 3 or 5 years - then what? Is the incentivised lease short term?
Why would the leaseholder do this, could they in theory chuck you out if someone like Starbucks decide they want your cafe?

Thrugelmir

How much has the business been offered to you for?  You could be taking on sizable liabilities for the TUPE'd staff.  

Savvy_Sue

Also you'd need to be very careful to ensure that e.g. you'd be able to furlough staff TUPEd to a new employer. You might find you weren't able to access support because you're a new business. 

Grumpy_chap

You say you need a business loan of £20 - 25k.  How much is the total finance required?  The bank will want to see that you are taking a large part of the financial risk.

Pennywise

bestfuzz said:

shes offered it to me for substantially less than it's being advertised for 

If she's using one of the national business sales "specialists", it's probably advertised at 2 or 3 times it's "real" value.  It's like the wild west out there with the national agents.  They are all tripping over eachother giving higher "valuations" than their competitors to seduce the seller into using them - their business model is up front fees for advertising etc., so they're not actually too interested in selling businesses - they're more interested in signing up.  Yes, occasionally a mug comes along and pays somewhere near the asking price, but that's very rare indeed.
Realistic actual selling prices are typically half the asking price in my experience.  The last couple of business purchases where I was advising the buyer, one was a small cafe/bakery - on the market at £50k, my client bought it for £25k.  The one before that was a dance school on the market for £150k, my client bought it for £50k on vendor finance (i.e. paid the vendor the £50k by monthly instalments over 3 years!).
Cafes are notorious for being over-valued.  People think they're little gold mines when they see a Bacon Bun sell for £2.50 that only "costs" 50p of food, or a cup of tea for £1.50 that only "costs" a teabag and water.  What they don't see are the labour costs (and yes, the proprietors time is a cost!), utilities, insurance, security, waste disposal, bank charges, VAT.  Every pound of "profit" is hard work.  They're usually grossly over-priced because of "rose tinted glasses" of buyers wanting a "lifestyle" business.  In reality it's long hours for the proprietor at often minimum wage rate, or less.
So take the asking price with a huge pinch of salt.  Get your own accountant to run over the numbers and give you a realistic figure of what it's worth to you.

CKhalvashi

You've been given some good advice here already, however the main pointers that you need to take into account are as follows (numbered for your own convenience);

1. What is the purchase price as a multiple of price, minus actual value of assets, divided by profit.
2. How much time does the existing owner put in weekly? Will they need to be replaced?
3. How is everything structured? If as a Limited company, it's a share sale, which comes with other potential liabilities but also potential advantages.
4. What liabilities would you be taking on with regards to TUPE if the business were to fail/demand drops long term? (The rates are here, if you don't know rates of pay, £10/hour would be more than sufficient as a guide). From experience, it's often quicker and easier to pay people to resign (voluntary redundancy, there are legal provisions that will need to be taken into account with this), which is more expensive than the legal rates.
5. Who owns which assets, the current owner or a finance company? If some are financed, what are the terms of these?
6. Is the business cash positive or cash negative at the moment?
7. What support would you be entitled to in this venture at this time? I don't know the answer to this with regard to a new business venture.
8. Are you inheriting any potential other liabilities, such as issued gift cards that haven't yet been redeemed? I know a few coffee shops in my local area are selling them.
9. Is the LL willing to sign a new lease with a clause that gives you a guaranteed right to renew at the end of the term at a reasonable rent? This is essential to ensure that you're not taking on a business now in the bad times and losing it when things get good. A long lease with tenant-only break clauses at fixed points may be valuable here.

bestfuzz

hi all! more answers to questions.
she originally listed the cafe for 90k about a year ago. this is what it cost her to set up 12 years ago. shes reduced the price a few times, it's currently listed at 35k, although she has told me she would accept 20k. shes offered it to me for 10k. my redundancy would be nearly 5k, another member of staff 4k and nothing to the last member of staff. Although this gets taken out of the equation if I take over, so she would in effect almost get the 20k. i could get away without replacing her hours until trade gets back to normal, with the addition of a saturday girl, the remaining staff could cope quite easily. I don't have anything I could put up for equity, and the landlord is very happy to keep tenants in the building for as long as they like. my employer has leased this unit for over 35 years with a few different businesses so I'm not worried about the landlord kicking me out at the end of the lease. he would want about 5k in deposits. in regards to structure, shes listed as a sole trader, and she owns all the equipment, fixtures fittings etc. the business is cash positive, and during times we have been able to trade we haven't made a loss. we've never done loyalty cards so nothing to worry about there.

jonesMUFCforever

By the looks of it ,wait for a few months and she will pay you for the business!

CKhalvashi

Thanks for the answers.

If it's selling for £20k, as part of my risk strategy, bearing in mind that you'll be working full-time presumably, I'd be looking at around £35k in profit last year, minus half of whatever assets there are, minus your current salary to make it worthwhile. This is on the following basis:

You'll want a £25k-ish 'salary' for yourself, which would be based on around £10/hour at 50 hours a week (to include trips to the cash and carry etc).

A 2x profit on the above basis plus assets premium for the business, in this case £20000 over 2 years. If there are profits of £5k/year, I'd expect to see £10k in other assets as a replacement value. This is presumably a small business and therefore you will be an instrumental part of this, meaning that the profit element is a premium for taking on the potential liabilities.

Potential redundancies don't look too much of a threat and are taken into account with the 2x profit.

Ensure that the LL deposit is kept in a client account held by the landlord for your own protection.

Would the seller be willing to finance if looking to retire? It may be worth offering 3-5% above the Beneficial Loan Arrangement interest rate. Bear in mind that if the business fails, you will be liable for the loan. Details on current BLA rate is here. Although I can tell you it's currently 2.5%, I'd rather show you the government guidance. Terms would typically be up to yourselves to negotiate, however if you have a 5 year lease, I'd expect it to be a 4 year loan at between 5.5% and 7.5% on the outstanding balance.

I would be tempted to throw something like this into a Limited company, pay a salary to myself at around the £10/hour mark (or whatever you're earning now) and save any spare cash in the company for a few years. If you can afford to service a loan mentioned above over 4 years at £500/month and the seller is happy, you may be onto a winner long term, especially if you can get a delivery service for local businesses and possibly online and app ordering for collection.

Another question I forgot to ask (which is more relevant now I know she's a sole trader) is in relation to the contracts of any card machines. These can be quite long and expensive to get out of, so it's important to understand the situation with this.

kazwookie

Sorry but if you need a loan of £20k to £25K that is a hell of a lot of sandwiches / cakes / chips / pies / salads / drinks you need to sell to cover that, the interest /wages / overheads / insurances / rent / taxes etc.................. IMO it is a none starter.

Don't touch it with a barge pole. Owners has already reduced it several times.

Sorry but I wish you well.