Buying an Existing Business...

[PatchettPlumbing]

Hi All,

Some of you may know I run my own company. The one I did my apprenticeship is coming up for sale in the next few weeks as the gaffer is now coming upto his 70th birthday and has no family to pass the business down to.

The business itself is turning over about £700,000 last financial year, has 8 employees of which 3 are Gas Safe Reg'd, 2 apprentices, 2 plumbers and 1 company secretary. The company operates from a basement of a house that the gaffer owns. Basically it's an office, with a stock room, loo, kitchen and has its own door access. This is available for rent for around £400 PCM. The main operations are heating and gas services, but potential to go further. Company is now 30 years old so well respected around here.

It has 3 old shape Citroen Berlingo vans, 1 new style van (of which is on finance). No current debts, healthy bank balance. It needs bringing up to modern ways - such as employees have no company mobiles, no fuel cards (rely on boss giving cash for fuel of vans), pay scheme is paid by job not an hourly rate so no guaranteed amount per month etc!

I'm debating whether to get a business plan together, I have a very decent amount saved up in savings and have about £39k in two cars to sell.

Advice please? Worth the risk, rebrand into my company!

Thanks

 

[Ray Stafford]

Firstly, get deep into the books. He might require you to sign a NDA (non-disclosure agreement) before, but if he won't let you see everything, then don't even think about it.

Look at where the turnover is coming from. Is it lots of relatively small jobs, or is it a handful of larger clients that might owe personal loyalty to him, but not to the firm?

Then look at the overhead - how much of that it the old gaffer's costs? Forget the bank balance - cash should be treated separately for the purposes of a business sale. You buy a £1 for £1 - not a penny more or less.

Look hard at any stock. He may have paid top dollar for that box of 42mm yorkshire fittings, but will you ever use them?

As a completely separate exercise, cost out the alternative.

Say you were to put the money that you are contemplating spending on this purchase into expanding your own business. Hire the best few of his staff (but not all), get your own vans, and spend some money on advertising. If no-one else buys his business, that turnover is going begging anyway. Would that be a better option.

I have bought 3 businesses in my career. Two I got for the price of taking over the property lease obligations (no cash), the other I paid a very small sum indeed for - I signed a confidentiality agreement, so I can't say how much, but it was petty cash.

I regret all three. One we closed down, another we relocated (and effectively restarted from scratch) and the last one is still running, but we will relocate it as soon as the lease runs out. I have sworn I will never do it again - the same time, investment and effort devoted to growing the existing business, our way, has much better returns. Existing staff resent you because you are different to the old boss, existing customers want you to trade the way the old firm traded - the whole thing is fraught with time consuming issues.

But that's just my experience - other business have grown through acquisition, so its not impossible.

 

[Ray Stafford]

Another thought.

If he tells you with a nod and a wink that he takes £*** out of the business as cash, ignore it as part of the valuation. If its not on the books, then it didn't happen.

 

[lame plumber]

turnover is valueless when buying a company, its the profit on the turnover that counts. Why take over his office all you want is a phone number and van logo. As ray says stock is only of value if you need it, the rest is scrap value and the same for the vans. staff are something else, you have to take em on but are they any good and do you need them. Same as ray for customers, would a really good advertising campaign grab them anyway with out the need to buy the company. small business is only as good as the guy at the top, once they go so does everything else normally.

 

[PatchettPlumbing]

Ray - very informative post, thank you!

Profit is decent but obviously not willing to discuss too much!

 

[Ray Stafford]

Another possibility is to look at an "earn out" deal.

It works something like this.

You agree a price that the business would reasonably be worth if everything was exactly as he says it is, based on a projection that you can both believe in.

On day 1, you pay him a proportion of that - say 40%.

He stays in the business at an agreed salary (relatively small) working say 2 days a week for 12 months. At the end of that year, if the management accounts match the projection, you pay him another 30%. He leaves the firm altogether, and you work on another year. If the final accounts match the projection, you pay the final installment.

You have a pre-agreed deal regarding a lesser total figure if performance declines.

He has to have faith in your ability to manage the business, but he is asking you to have faith that the business he is selling is what he says it is, and you can't be sure of that until you are running it.

Also, insist that he indemnifies you against any VAT or Tax issues relating to the period before you take control. The taxman will chase the company - he won't care if the shareholders and management have changed - its the company that will be liable.

 

[Keefy]

Also, insist that he indemnifies you against any VAT or Tax issues relating to the period before you take control. The taxman will chase the company - he won't care if the shareholders and management have changed - its the company that will be liable.

The firm I served my time with had been around since 1933 and was taken over by one of the employees shortly before I started there. Everything had been going well with all the existing contracts - some businesses/customers had been loyal since the beginning, then my boss got hit with an asbestosis claim from an ex-employee who had [most likely] gotten the illness while on a certain job in the 1960's. The complainant won the case and my boss had to sell his house etc in a desperate bid to keep the company alive but after a few years of struggling it proved fruitless.

Although that little story isn't VAT related as Ray is talking about it's a stark reminder that unless you 'look at everything' and come up with a deal regarding the period before the business became yours then an unexpected hand could come out of the blue and slap you in the face - very, very hard.

 

[kirkgas]

Personal opinion, I wouldn't buy his firm, you are then taking on the liability it has, service of employees etc, if you want to expand then go after his customers (once he stops trading, but nothing stopping you talking to them now) tell them you are considering taking on the guys that are currently doing the job for them so they get continuity of service but the guy will have a new badge on his overall, if you take over the business and it fails you would end up paying redundancy to them all or going bankrupt to get out of paying
Customers do have affinity for a certain company but the reality is they want a good job done by anyone who can do it, so there's nothing stopping you giving them good service under your name as long as you push the connection to the old firm etc

 

[julesverne]

which business is it ? patch

am based in bradford just curious really am in eccleshill.

 

[julesverne]

also personally i wouldn't buy a business as such, too many unknowns as stated above but if you already know the business then you probaly know it inside out. just cover all angles and dont get bitten by an unforseen expense