Purchasing a small business 6 June 2022 at 6:17AM in Employment, jobseeking & training 13 replies 453 views

RedHitman

Apologies if this is in the wrong forum - please move as necessary...

I'll try to keep this short; I've been an employee for a small family business for nearly a decade and the owners are getting old/fed-up/disillusioned with the business now and are looking to retire. In retiring they will simply shut the business down (although the business is successful) thus making about 15 employees (which includes my wife and I) redundant. I'm very fortunate in my own life in that I only work part-time (as does my wife) as we own multiple properties and this is our main source of income.

I want to approach the owners of the business and suggest we buy the business from them. In terms of financing the purchasing, I have access to a lot of capital (although I wouldn't buy the company out-right and deplete my capital) so maybe paying 50% in a lump sum wouldn't be a problem. My idea then, based off my grandfather selling his own business before I was born, was that the other 50% would be paid to the owners in lump sums each year, taken from the profits of the business. In terms of the value of the company, Google tells me there's a few different ways to work this out, one of them being net profit multiplied by X years, or assets minus liabilities (etc etc). I assume the company would get an accountant/surveyor to value the company and then I would get a separate accountant/surveyor to value it and see where we stand.

I'm just looking for anyone with any knowledge or experience of such circumstances and how purchasing a business works? (Unfortunately my grandfather is no longer with us to be able to talk to about how he did all this).

Thanks...

Marcon

RedHitman said:

Apologies if this is in the wrong forum - please move as necessary...

I'll try to keep this short; I've been an employee for a small family business for nearly a decade and the owners are getting old/fed-up/disillusioned with the business now and are looking to retire. In retiring they will simply shut the business down (although the business is successful) thus making about 15 employees (which includes my wife and I) redundant. I'm very fortunate in my own life in that I only work part-time (as does my wife) as we own multiple properties and this is our main source of income.

I want to approach the owners of the business and suggest we buy the business from them. In terms of financing the purchasing, I have access to a lot of capital (although I wouldn't buy the company out-right and deplete my capital) so maybe paying 50% in a lump sum wouldn't be a problem. My idea then, based off my grandfather selling his own business before I was born, was that the other 50% would be paid to the owners in lump sums each year, taken from the profits of the business. In terms of the value of the company, Google tells me there's a few different ways to work this out, one of them being net profit multiplied by X years, or assets minus liabilities (etc etc). I assume the company would get an accountant/surveyor to value the company and then I would get a separate accountant/surveyor to value it and see where we stand.

I'm just looking for anyone with any knowledge or experience of such circumstances and how purchasing a business works? (Unfortunately my grandfather is no longer with us to be able to talk to about how he did all this).

Thanks...

Proper due diligence is essential - otherwise you could find yourself 'buying' things you definitely don't want, such as debt/guarantees to third parties.

If you're serious about this then your starting point, now, is to appoint an accountant once you've discussed with the current owner whether he'd be willing to engage on the sort of terms you have in mind. The alternative might be to simply start your own business - but there's no way anyone here could give you much useful help in the absence of just about every detail needed to consider that!

Good luck - hope your plans work out.

TELLIT01

As Marcon has said, proper due diligence is absolutely essential.  There need to be questions asked about why they are fed up and disillusioned with a business they have run for many years.  Is it becoming less profitable, or even losing money, in the current financial climate, etc.....

A relative of ours purchased a very small business from a friend of theirs, believing everything was fine and the place was making a good profit.  The business went bust in little over a year.  We discovered later that they had just taken their friend's word about the profitablility.  When they actually bothered to check they discovered the place (a sandwich shop) was literally making a few pounds per day profit when all running costs were deducted.  Not enough to live off and as soon as costs increased it became loss making.

MattMattMattUK

In addition to the above comments, why would they, if the business had value, just shut it down? If it had value then they would likely be looking to sell it, if it does not have value then why would you consider paying for it? If it does have value then from reading between the lines in your post it is unlikely to require any form of significant capital to purchase, otherwise they would already be looking to sell it on that basis, unless there is a premises and/or plant that they would otherwise sell off?

As others have said due diligence is absolutely key, you need proper accounts from an independent accountant (ideally audited), full access to financial records etc. 

Sandtree

The fact they are looking to shut down rather than sell speaks volumes. That isn't to say it isn't something worth buying but that it maybe something that wont be expensive to buy in which case you dont need to faff about with making a 50% purchase followed by some other agreement.

Echo the thoughts of others, unless you are proficient in doing due diligence then you need to engage an accountant initially at a minimum... a lawyer will come along not too long after especially if you want to do something funky other than a straight purchase of all the shares and/or simply buying 51% with an agreement to renegotiate over the remaining 49% at a later date. 

lincroft1710

If the owners say they want to close the business rather than sell it, then either there are no transferable assets, if there is a lease it could be about to expire, it is not saleable (for whatever reason), they do not know what they are talking about, or there is something they're not saying.


You don't say anything about the business type or premises. In my home town, there is a ridiculously high number of business premises which are sold either for conversion into housing units or demolition and new houses built on the site. If applicable this may be what the owners are hoping for.

CKhalvashi

As above, due diligence is going to be essential.

If this is a share purchase, use a starting point for negotiations in the case of a business that would be closed as assets minus liabilities.

Also ask about seller financing on the assets, at a reasonable interest rate (I've used the official HMRC interest rate plus risk factor as a guide in the past for transactions both ways). If they're sure the business can make money in the right hands they should take no issue with this.

I have invested heavily in loss-making businesses in the past knowing that with discipline and being something I'm personally passionate about it can be a profitable business, so just being loss-making on its own if it's something you know well or have a reasonable knowledge of and are willing to learn the specifics shouldn't be an issue. The last investment I made of this nature was £75 for 75% of a company last year (plus a loan into the company at 0.5%/quarter), there'll likely be a small operating surplus this year and a net profit from next year.

In short, it all depends if you're willing to lose everything if it goes wrong and you know what you're doing.

lincroft1710

CKhalvashi said:

The last investment I made of this nature was £75 for 75% of a company last year (plus a loan into the company at 0.5%/quarter), there'll likely be a small operating surplus this year and a net profit from next year.

Did you really mean £75?

CKhalvashi

lincroft1710 said:

CKhalvashi said:

The last investment I made of this nature was £75 for 75% of a company last year (plus a loan into the company at 0.5%/quarter), there'll likely be a small operating surplus this year and a net profit from next year.

Did you really mean £75?

I meant £75, the nominal value of the share capital (£100 total) on a zero cash basis, paid to someone who was passionate about what they wanted to achieve with the business, but had no idea of how to run a business. They still own 25% of the business and are far happier with someone dealing with the financial end of things. It had been trading for 6 months but didn't have any assets (other than those borrowed from my co-owner).

They'd rather have 25% of a business that can make a difference to the people it serves than 100% of a business that can't do that effectively.

RedHitman

Thanks for all the replies. To answer the recurring question about shutting it down; they are old, ready for retirement and not in the best of health. They are extremely wealthy (From the business since 2013) and are happy (one day) to just call it a day. They’re lovely people and it’s never been about the money to them. They’ve done very well and are setup for the rest of their lives. Calling it a day is the easy thing to do so they can retire to their villa!

Yes due diligence is vital of course. 

No one seems to have run me through the process or how it would be valued though? I assume I suggest the offer of a sale/purchase and they come back with how much they want? Or are they going to say “make us an offer”….? And if so, how do I know the value and is the way my grandfather sold his business (purchasing the company via profits) still something viable these days?

MattMattMattUK

RedHitman said:

Thanks for all the replies. To answer the recurring question about shutting it down; they are old, ready for retirement and not in the best of health. They are extremely wealthy (From the business since 2013) and are happy (one day) to just call it a day. They’re lovely people and it’s never been about the money to them. They’ve done very well and are setup for the rest of their lives. Calling it a day is the easy thing to do so they can retire to their villa!

Yes due diligence is vital of course. 

No one seems to have run me through the process or how it would be valued though? I assume I suggest the offer of a sale/purchase and they come back with how much they want? Or are they going to say “make us an offer”….? And if so, how do I know the value and is the way my grandfather sold his business (purchasing the company via profits) still something viable these days?

Small businesses are inherently difficult to value, there is not a method that can be applied universally, it is more a case of finding a price that the two parties can agree on. 

Just because it was profitable in the past does not mean it was now, I run my own business, my income was around £120k pa per-Covid, having built the business up, but that plummeted during Covid and the business took a huge hit to profitability, whilst that is being rebuilt now it will not be back to where it was for another year or so (although my income can recover quicker as I am now more comfortable paying dividend from the reserves) and there are many small businesses that will never recover. 

The key things in working out how much you might be willing to pay are what is the net profit within the company and what salary, if any is paid to the current owners, many owners do not pay themselves much via PAYE but take out profit via dividend, so if you need to replace them with a paid employee (a General Manager + assistant for instance) then is the business still profitable, or profitable enough. The next part is how much of the business is tied to the existing owners, do people come to the company because they like dealing with the owners (even if they do not deal with them directly) or is the relationship with the business itself. Thirdly it depends on future costs, if the premises is currently rented on a lower cost lease, but when that expires the cost is expected to rocket, or if it uses plant and/or machinery (or even IT equipment) nearing it's end of life and replacement will be expensive then that also has to be factored in to the value of the business.

Some people will suggest a methodology that states anywhere from 3-7 years net profits for a small business (medium, large and multinationals can be valued at decades of profits), but what it comes down to is how much you are willing to pay. My guess is that if they are currently planning to just shut up shop then their valuation might be quite low which is ideal for you, they might be willing to sell for little more than the value of the physical assets, but I think you need to start with an open conversation with them and see where things go from there.