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Frequently Asked Questions Please find below a
number of frequent questions we are often asked in relation
to Business purchase and transfers and our Business Buying
guide
1. Can you afford to buy a
business?
2. Now I've decided to be my
own Boss, What kind of Business?
3. Where do I start?
4.
The Bridgers Countrywide
Guide to Buying & Selling
5. A Guide to
Business Size
6. Value of the Business
7. The Value of a Business
8. Commissions &
Confidentiality
9. Contracts
10. Taxation
11. Planning
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1. Can you afford to buy a
business?
Raising finance on a business is easier than most
people think. Everybody reads in the newspapers that Banks
are tightening their belts, but this is not always the case,
to quote a recent comment made by a local Bank Manager,
"money is readily available to lend to people wishing to
purchase the right business". Most people have more money
than they think. Just because a potential purchaser doesn't
have vast savings does not mean that the idea has to be
ruled out. If for example, you have a house worth £60,000,
most Banks and Building Societies are willing to lend
(subject to status) up to 75% of the value, in this example
£45,000 (less any outstanding mortgage). Additional finance
can be obtained from other sources if required, subject of
course to status and satisfactory accounting information
which is readily available on most businesses for sale.
Other ways to release money tied up in your house, is to
sell your property and then invest the money into a business
with accommodation, which again can be part financed by
Banks and Building Societies. The cost of borrowing from
Banks and Building Societies can be reasonable and
quotations can be easily obtained. Of course, it would be
prudent for purchasers to take their own independent advice.
The key to being your own boss is only a small step away and
as I have explained above, anybody can buy their own
business. |
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2. Now I've decided to be my
own Boss, What kind of Business?
Everybody has their own thoughts on what kind of business
they could see themselves working in, from Post Offices,
Newsagents, Fish and Chip Shops, convenience stores,
sandwich bars and cafes, pubs and restaurants. Businesses
vary in prices from a few thousand pounds up to the million
pounds mark. Businesses vary in many other different ways,
not only price, some have accommodation, and others are just
lock-up. One of the main decisions when buying a business is
whether to buy freehold (i.e. buying the property) or
leasehold (with the property on rent). Some operate from
home, others from retail premises, some from commercial
units and some are run from a vehicle. Whichever way you
choose will more than likely depend on your price range but
either way there is plenty of choice and you can look around
until you find one that's suitable for you. |
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3. Where do I start?
Once you have established
loosely what type of business you would be interested in and
what price range you can afford to go up to, this is when
the going gets a little easier. Speak to one of the friendly
sales staff at Bridgers Countrywide who will carefully
prepare a selection of suitable businesses within your
desired price range, area etc. Visit as many businesses as
you like - the experience will be valuable to you in making
the correct decision for you. Once you have been to look
around the businesses you will have a short list of 2 or 3
which will be ideal for your situation and are potential
purchases. The next step is to obtain copies of the trading
accounts which will show the sales figures and profits etc.
Once your accountant has approved the accounts, a price for
the business can be agreed and you can go forward and
arrange a completion date. Buying a business is a straight
forward process, once you have set out your objectives.
Along the way you should get advice from Accountants and
Solicitors who will make sure there are no pit falls. During
the coming weeks we will be highlighting different kinds of
businesses but in the meantime why not give us a ring to
discuss buying a business and we will be delighted to send
further information. If you would like to discuss the
different kind of businesses and profit margins in further
detail, give us a ring on 02089593326.
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4.
The Bridgers Countrywide
Guide to Buying & Selling
We find that our clients often ask the same type of
questions about business sales. They frequently have a very
good understanding of how to run their businesses but know
less about selling or buying businesses. To add to the
difficulty, there are very few sources of good professional
advice on valuation and methods of sale. Often the sale of a
business represents the culmination of many years work or
sometimes a lifetime's work. It is important that the sale
be handled well because the difference between a good result
and a poor result is often a large amount of money. Given
the above remarks, we have prepared this guide in order to
assist our clients and potential clients. The guide should
enable business owners to gain a reasonable understanding
of:
The procedures
of business valuation
Methods of finding a buyer
The pros and cons of appointing an agent or conducting your
own sale
Typical costs and time for the total transaction
Problems, pitfalls and issued to be considered
The guide is intended only to assist potential vendors in
acquiring a basic understanding of business sales. It is not
intended to be a definitive text or to provide answers to
all of the possible questions. The sale of a business is a
very time consuming and difficult process and it is
therefore not possible to distil all of our knowledge of the
pitfalls and problems in a short text such as this.
We hope that this booklet is of value to prospective buyers
and sellers. If, after reading the guide you, or your
professional advisers, would like to know more about our
services, please contact us a Bridgers Countrywide.
Telephone: 02089593326.
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5. A Guide
Business Size
Size is important! The market for businesses seems to fall
into three size categories and the valuation methods in each
category tend to be different.
SMALL
BUSINESSES (net profit less than £60k).
This is colloquially known as the owner
driver type of business and consists of a large number of
owner managed small retail shops, pubs, newsagents,
convenience stores etc. The value is nearly always an asset
and goodwill valuation. The assets are the stock (at
independent valuation) and the plant, equipment, fixtures
and fittings at written down value, open market value or
replacement cost (whichever is appropriate or negotiable).
Freehold property may be included in the sale at open market
value, as an empty property or with its particular usage.
The book assets and liabilities (e.g. creditors, debts,
loans etc.) do not generally form part of the transaction
but remain the responsibility of the vendor. Goodwill is
valued mainly against profit and is often valued by applying
a valuation factor to the pre tax net profits. The pre tax
profit used in the calculation may be the profit shown in
the accounts or (more likely) the net profit with owner
benefits added back. These benefits are items such as
salary, pension contributions, and motor car expenses. The
Valuation factor applied will often be a well-known factor
for that trade. However, the valuation factor will also vary
depending, primarily o the future prospects for the
business. Is it possible, for example, that the
profitability can be improved significantly? Is the industry
outlook poor? In these cases the factor may be modified. In
addition issued such as the trading name, and licensing
rights copyrights etc. will influence the factor. As a
general indication, factors being applied at present are
between 1 and 2.
MEDIUM SIZED
BUSINESSES (net profit between £60,000 and £300,000)
At higher profit levels, there is
generally a formal management structure in place an a
business will be viewed more as an investment than as an
owner driver business. As a consequence, the valuation
methods will tend to be more formal and include attention to
the following: The financial and accounting information, in
particular whether the expenses are appropriate and whether
they can be reduced. Comparison with industry performance
levels to find areas for improvement in profit. Preparation
of a financial forecast which will probably have cash flow
as its bottom line rather than earnings. A required
financial rate of return being applied to the cash flow
forecast to obtain a value. Liquidation values being taken
into account. In these more formal evaluations, the emphasis
shifts away from typical values that can be observed in the
market for small businesses. The emphasis is more on the
level of sustainable income which can be obtained from the
investment. Apart from the earnings or cash flow forecast,
the key fact determining value is the required term of
return. Calculation of a required rate for a particular
industry or business can be complex and it outside the scope
of this short guide. The mixture of types of asset (e.g.
property, stock, intangibles) should be considered and the
level of gearing should be taken into account. As a rule of
thumb, it is likely that the required pre-tax return (EBIT)
on net assets will be between 15% and 20%. The required
return on equity (before tax) is likely to be between 25%
and 40%. Returns on equity actually achieved over the long
term in UK medium sized businesses are typically between 15%
and 20%.
LARGER
BUSINESSES (i.e. Net Assets + £3M. Profits above £300,000
p.a)
Apart from the issues which effect the
valuation of smaller and medium sized businesses (as above),
the issues in valuation of a larger business expand beyond
financial matters. Attention is paid to factors such as
market position, potential value to another business (see
below) and position of the business within an industry and
competitive activity. Businesses with a turnover in excess
of around £5M are often well known or maybe prominent in a
particular industry. The purchase of this type of business
is often of interest to a competitor (larger or smaller).
Alternatively, another business which is involved in that
trade (e.g. customers, suppliers, similar producers etc.)
may be interested in acquiring a related business. Issues
which become the focus of attention (in addition to the
financial forecasts) are, for example: Market share,
competitive positioning, geographic markets, segmentation
Product Competitive pricing, product development, brand
image Facilities How the production facilities would fit
with the purchaser To summarize, a trade purchaser for the
larger business is often interested in how the acquisition
may fit with a wider business strategy or expansion
programme. The trade purchaser in this position is likely to
place more value on intangibles such as market share,
product positioning, reputation and fit with their own
business strategy.
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6. Value of the Business
VALUE TO ANOTHER BUSINESS
There are often situations where, if two businesses are
managed as one, the profitability of the combined business
is better than the profits of the individual businesses
added together. Typical reasons for this are:
Production
Economics: It may be possible to reduce production
costs through longer runs, better machine utilisation or
rationalisation of product lines.
Administration
Expenses: Similarly, the total cost of administration
may be reduced through economies of scale, reduction in
office space or more efficient administration.
Market Economies:
There may be benefits in rationalisation of marketing and
distribution costs or in supplying additional products to
existing customers of both businesses.
In general, any benefits of this type
will accrue to the purchaser and it will be difficult for a
vendor to obtain additional value on this basis. However, if
vendors are in a strong bargaining position, they may be
able to obtain some of the additional value. For example, if
there are several potential purchasers with similar
objectives then a seller can certainly expect to take some
of the benefit. Also, a vendor may be ambivalent about
selling but there is a large advantage to a keen buyer.
Again, some of the benefit could be asked for by the seller
when setting the price.
BREAK-UP VALUE
The assets of a business often consist of several
component parts - freehold or leasehold property, stock,
plant and equipment, trade name or customer list and other
intangibles. One of the important questions to consider when
valuing a business is whether the business needs all of the
assets. Maybe some of the assets could be sold individually
or put to different uses. For example, a business may be
occupying a potentially valuable site which could be put to
a different use (e.g. residential development). In this
case, the business (i.e. plant, machinery, trade name etc.)
could be transferred to a different site and the land sold
off. There are many examples where spectacular gains have
been made by getting planning permission for development and
selling the business separately. The 'break up' approach to
maximising value is not confined to separating the property.
There are also cases where a business may have excess stock
or unused plant and machinery. In these cases, separate sale
of excess assets should be considered. As part of preparing
a business for sale (which may take place over a couple of
years) owners ought to be considering: W
To reiterate the first point on
valuation, there is no single correct price for a business.
There are a number of standard approaches to valuation which
will provide a range of values. However, every business is
different. In order to get the best value for a business,
different aspects and potential values should be considered.
This is particularly the case for medium sized and large
businesses. Looking at different options and alternatives is
perhaps less important for smaller businesses where standard
approaches to valuation are more relevant.
Which are the profitable activities?
How the assets could be rationalised How the more profitable
activities could be expanded
SUMMARY OF
VALUATION
NEGOTIATION
If there is one particular skill which a vendor
(or more probably the broker) needs when selling a business
it is the art of negotiation. If the vendor is negotiating
the sale himself, it may be useful to do some homework on
negotiation. Most good bookshops will have a few books on
the subject. Typical standard pieces of advice are:
Set clear objectives for yourself
Understand of the other side's point of view
How to handle negotiating tactics and psychology
Look for win - win results
Force a conclusion if necessary
The problem in negotiating a business
sale is less to do with understanding the theory but
applying it in practice. Vendors often have an emotional
attachment to their business and will tend to overvalue it.
Buyers will see a lot of risk and uncertainty and will not
want to overpay. Bringing the two parties together and
getting a mutually acceptable result (a win - win) requires
a lot of skill and business experience. Being a good
negotiator, who can maximise the value of the business and
finalise a deal, is probably the single most important skill
of a business broker.
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7. The Value of a Business
There is no correct price for a business. The 'value' is
largely dependent on the buyer and the seller and their
circumstances. The right price is one that a willing buyer
is prepared to pay and a willing seller is prepared to
accept. In view of this, the valuation of a business can
only ever be an informed opinion of the valuer. It is
his/her opinion of what it is reasonable to expect a buyer
to pay, given the nature of the business, the industry and
the state of the economy. On the following pages, we have
described some of the main issued to be considered in
valuing a business.
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8. Commissions &
Confidentiality
Typical commissions charged are between 2% and 5%
of the total consideration. Although commission charges are
generally tailored to each individual business and can vary
considerably.
CONFIDENTIALITY AGREEMENTS
Before any important, commercially
sensitive information is released, it is important to have a
confidentiality agreement signed by the prospective vendors.
If properly drawn up, this will prevent the vendors from
divulging any confidential information.
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9. Contracts
Once a sale has been agreed, it is useful to prepare draft
terms (or heads of agreement). Buyers will then often want
to undertake 'due diligence' work. This will be done in
order to verify all claims that have been made and ascertain
whether there are any hidden details, which can effect the
value of the business. After completion of the 'due
diligence' stage, contracts of sale can be drawn up. The
terms of the contract tend to be fairly standard and will be
well known to a solicitors specialising in commercial law.
Typical fees for the legal work for a business transfer
range from £500 rising to £5,000 for larger transactions.
One legal issue that deserves special mention is agreement
to restrict the future business activity of the vendor. In
most transfers, there will be some restriction on the
vendors, which prevents them from setting up a similar
business within a given area. These agreements have to be
reasonable since they may contravene UK and EU laws on
competition.
10.
Taxation
Capital gains tax affects nearly all
business sales. Realised gains may be taxed at the top rate
of income tax which is 40%. This can make a big hole in the
proceeds of a sale. There are a number of reliefs that may
be available including retirement, rollover and reinvestment
relief. This guide is not concerned with tax specifically
but two useful pieces of advise are:
Take advice from a tax expert
Plan your exit carefully |
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11. Planning
When considering the sale of a business (particularly medium
and larger business), it is advisable to work out a
realistic plan. A good play may extend over two or three
years and take into account:
The present value and market conditions
Potential for value improvement
Timing of the proposed sale
Time needed to find a buyer
Contingency plans (what if there are no buyers?)
When planning the sale of a business,
it is important to have a realistic commercial valuation
undertaken. If the value falls below expectations and/or
requirements, then a value improvement programme should be
considered. A typical programme would involve:
Assessing the business against industry
performance levels in order to identify potential for
improvement.
Implementing a cost reduction programme (where necessary).
Implementing a sales improvement plan (if appropriate). This
would focus on either increasing sales or increasing
margins.
Executing a business expansion plan. |
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