Selling my Business - advice please

[dave123456]

NDA said:

dave123456 said:

Surely buying the property increases the profit? You remove rent from the p&l?

Valuation method would depend on industry.

Current rent Vs loan repayments? Plus the additional drag of having a property tied into the transaction?

Most valuations start with a multiple of profits - that multiple can vary based on quality of income, recurring revenues, all sorts of things. But it's a good place to start.

Loan repayments don’t hit profits. And usually a buyer on a profit multiple will look at profit pre interest and depreciation.

A fairly standard commercial building owned outright would be no more onerous in a transaction than a lease necessary for trading.

See my earlier point, if it were me in the op position I’d buy property in SIPP and grant a long lease pre sale.

[NDA]

Yep - different advice to mine.

An acquirer might not want a building - or a long lease on one, or any other lengthy contingent liability. I'd simply want an easy exit based on the business as it is today.

I'd advise differently if the OP didn't want to exit.

[dave123456]

NDA said:

Yep - different advice to mine.

An acquirer might not want a building - or a long lease on one, or any other lengthy contingent liability. I'd simply want an easy exit based on the business as it is today.

I'd advise differently if the OP didn't want to exit.

He’s not a 10 year lease with 5 years remaining.

[PugwasHDJ80]

NDA said:

dave123456 said:

Surely buying the property increases the profit? You remove rent from the p&l?

Valuation method would depend on industry.

Current rent Vs loan repayments? Plus the additional drag of having a property tied into the transaction?

Most valuations start with a multiple of profits - that multiple can vary based on quality of income, recurring revenues, all sorts of things. But it's a good place to start.

Buying the building doesn't improve profits- the business needs to support a market rent, so you'd adjust profits either way when discussing with an acquirer. 90% of the time the acquirer doesn't want the building in any case and we spend most of the time extracting it as part of the transaction.

When it comes to selling businesses you also need to ensure you sell the property at a market rate, both for tax reasons and from an overall value proposition- otherwise in negotiations the value of the business starts to bleed down the value of the property which can cost clients a lot of money. The best route is to fix the value of the property (using a RICS survey) to ensure market value, and then only negotiate the value of the business.

[NDA]

dave123456 said:

He’s got a 10 year lease with 5 years remaining.

Yep. 5 years is very manageable.

Do bear in mind his wish to exit fairly soon given his partner's health, his age etc. His run rate is at a good level and a fairly straightforward exit is entirely possible.

I would advise a different course if he was in his 30's or 40's and wanting to have a longer tail to the exit.

[dave123456]

PugwasHDJ80 said:

NDA said:

dave123456 said:

Surely buying the property increases the profit? You remove rent from the p&l?

Valuation method would depend on industry.

Current rent Vs loan repayments? Plus the additional drag of having a property tied into the transaction?

Most valuations start with a multiple of profits - that multiple can vary based on quality of income, recurring revenues, all sorts of things. But it's a good place to start.

Buying the building doesn't improve profits- the business needs to support a market rent, so you'd adjust profits either way when discussing with an acquirer. 90% of the time the acquirer doesn't want the building in any case and we spend most of the time extracting it as part of the transaction.

When it comes to selling businesses you also need to ensure you sell the property at a market rate, both for tax reasons and from an overall value proposition- otherwise in negotiations the value of the business starts to bleed down the value of the property which can cost clients a lot of money. The best route is to fix the value of the property (using a RICS survey) to ensure market value, and then only negotiate the value of the business.

Yes agreed, you’d put a placeholder in, my initial point was it doesn’t reduce profits, on an all in basis it would improve profitability.

[dave123456]

As you can see there are many options. For every buyer who doesn’t want the building, there may likely be a buyer who would want to fix a secure lease to trade from.

I guess it depends on the interdependence between business and building and the alternative use options of the building.

If the business is dependant on the property without major disruption then you would pursue a different approach to if the business was transient.

If the property has multiple options for future use and you are being offered it at a reasonable price and have the liquidity to buy I would consider buying to give options around selling the business.

I’ve even bought businesses before to acquire the facility they operate from.

So good advice from someone fully informed is the best option.

[wilksy61]

Thanks for all the advise, at present my thoughts are to not buy the buildings as I wish to exit fairly shortly (assuming I can find a buyer), I fully understand that if I was staying on for the next 5 years plus it would certainly be in my best interests to buy the property, it has a small amount of land with it that one day could get planning permission for a residential property, although planning permission is doubtful.

I think going forward I will start to market the company for sale with an aim of being out by the end of this year, that way the debit for the remaining purchase of the company will be settled in full.

The next thing I have absolutely no knowledge of is how do you sell a business in terms of where might you find a suitable buyer.

[dave123456]

wilksy61 said:

Thanks for all the advise, at present my thoughts are to not buy the buildings as I wish to exit fairly shortly (assuming I can find a buyer), I fully understand that if I was staying on for the next 5 years plus it would certainly be in my best interests to buy the property, it has a small amount of land with it that one day could get planning permission for a residential property, although planning permission is doubtful.

I think going forward I will start to market the company for sale with an aim of being out by the end of this year, that way the debit for the remaining purchase of the company will be settled in full.

The next thing I have absolutely no knowledge of is how do you sell a business in terms of where might you find a suitable buyer.

Before you market it openly it may be worth identifying a few potential buyers you can approach early doors. I don’t know your industry but marketing a business can sometimes diminish its value if it’s a fairly closed industry, or barriers to entry are low.

There are advisors who will help, meet 2 or 3 before committing, obviously the waters in that area are shark infested.

[NDA]

dave123456 said:

Before you market it openly it may be worth identifying a few potential buyers you can approach early doors. I don’t know your industry but marketing a business can sometimes diminish its value if it’s a fairly closed industry, or barriers to entry are low.

There are advisors who will help, meet 2 or 3 before committing, obviously the waters in that area are shark infested.

Good advice.

I have advised on several acquisitions, large and small. Trailing your skirts discreetly and informally quite often leads to the deal you want.

[RC1807]

dave123456 said:

Could you buy the building personally and rent to the business on a long lease, sell the business and enjoy rental income?

This is what my brother did.
His Ltd company pays rent to him, and the building will be part of his pension fund when he sells his business and retires in 2 years.

[JonPH]

1. The OP has a clear objective to sell his shareholding by the end of the year.

2. All decisions, including buying the building or not, should be seen through this lens.

3. The OP has also identified the clear importance of finding a buyer. That buyer population is a factor, including whether there is another MBO type opportunity. Equally, whether the likely buyer group may prefer to operate from this site or move post completion.

4. With 5 years to go on the lease, it should be straightforward to leave as a rental. Do not underestimate the importance of simplicity in such small transactions, which also have a clear rationale for the owner/operator exiting. Understand if change of control clauses in the lease.

5. The OP typically would not need to wait until the loan is repaid to sell. Therefore, I suggest he starts work on the disposal process ASAP.

6. That said the acquisition of the building can still have merit in the highly unlikely event of the building owner(s) wanting a quick and lower value exit. e.g. If business valued at say 5x EBITDA, 5x £40k = £200k value. This has happened to me more than once, hence I include.

[PugwasHDJ80]

RC1807 said:

dave123456 said:

Could you buy the building personally and rent to the business on a long lease, sell the business and enjoy rental income?

This is what my brother did.
His Ltd company pays rent to him, and the building will be part of his pension fund when he sells his business and retires in 2 years.

except if the buyer really doesn't want the lease, they'll charge back the cost of the lease to the transaction.

If you are going to sell the business then maximise the sale price of the business, and then during that process, work out the best way of maximising the value of the property- eitehrr selling it to the acquirer, or granting a lease to the acquirers and then if necessary selling the lease to a new owner )or stick it in your SIPP) and take the benefit).

Almost al the time the value of the business is worth way more than the property.

[dave123456]

PugwasHDJ80 said:

RC1807 said:

dave123456 said:

Could you buy the building personally and rent to the business on a long lease, sell the business and enjoy rental income?

This is what my brother did.
His Ltd company pays rent to him, and the building will be part of his pension fund when he sells his business and retires in 2 years.

except if the buyer really doesn't want the lease, they'll charge back the cost of the lease to the transaction.

If you are going to sell the business then maximise the sale price of the business, and then during that process, work out the best way of maximising the value of the property- eitehrr selling it to the acquirer, or granting a lease to the acquirers and then if necessary selling the lease to a new owner )or stick it in your SIPP) and take the benefit).

Almost al the time the value of the business is worth way more than the property.

As I said above it’s impossible to say this generally.

[PugwasHDJ80]

dave123456 said:

PugwasHDJ80 said:

RC1807 said:

dave123456 said:

Could you buy the building personally and rent to the business on a long lease, sell the business and enjoy rental income?

This is what my brother did.
His Ltd company pays rent to him, and the building will be part of his pension fund when he sells his business and retires in 2 years.

except if the buyer really doesn't want the lease, they'll charge back the cost of the lease to the transaction.

If you are going to sell the business then maximise the sale price of the business, and then during that process, work out the best way of maximising the value of the property- eitehrr selling it to the acquirer, or granting a lease to the acquirers and then if necessary selling the lease to a new owner )or stick it in your SIPP) and take the benefit).

Almost al the time the value of the business is worth way more than the property.

As I said above it’s impossible to say this generally.

i'd say in the 250+ mid market and upper SME transactions I've led or overseen, in the vast majority of them the buyer doesn't want the property, and trying to create a new lease to bind a buyer over a long period is perceived very negatively.

Sure there are outliers, but my experience does make it possible to make this general statement. Sure i can also point to times this hasn't proven the case, but unless OP wants to get into the weeds, then i can only make general statements

[MaxFromage]

PugwasHDJ80 said:

i'd say in the 250+ mid market and upper SME transactions I've led or overseen, in the vast majority of them the buyer doesn't want the property, and trying to create a new lease to bind a buyer over a long period is perceived very negatively.

Sure there are outliers, but my experience does make it possible to make this general statement. Sure i can also point to times this hasn't proven the case, but unless OP wants to get into the weeds, then i can only make general statements

Agreed, it's fairly rare a buyer wants the property.

[dave123456]

PugwasHDJ80 said:

dave123456 said:

PugwasHDJ80 said:

RC1807 said:

dave123456 said:

Could you buy the building personally and rent to the business on a long lease, sell the business and enjoy rental income?

This is what my brother did.
His Ltd company pays rent to him, and the building will be part of his pension fund when he sells his business and retires in 2 years.

except if the buyer really doesn't want the lease, they'll charge back the cost of the lease to the transaction.

If you are going to sell the business then maximise the sale price of the business, and then during that process, work out the best way of maximising the value of the property- eitehrr selling it to the acquirer, or granting a lease to the acquirers and then if necessary selling the lease to a new owner )or stick it in your SIPP) and take the benefit).

Almost al the time the value of the business is worth way more than the property.

As I said above it’s impossible to say this generally.

i'd say in the 250+ mid market and upper SME transactions I've led or overseen, in the vast majority of them the buyer doesn't want the property, and trying to create a new lease to bind a buyer over a long period is perceived very negatively.

Sure there are outliers, but my experience does make it possible to make this general statement. Sure i can also point to times this hasn't proven the case, but unless OP wants to get into the weeds, then i can only make general statements

Ok. I’d say without knowing this particular deal your general advice is rather meaningless but you’ve led 250+ mid market and upper sme transactions so I’ll bow to your superior knowledge…

[PugwasHDJ80]

dave123456 said:

PugwasHDJ80 said:

dave123456 said:

PugwasHDJ80 said:

RC1807 said:

dave123456 said:

Could you buy the building personally and rent to the business on a long lease, sell the business and enjoy rental income?

This is what my brother did.
His Ltd company pays rent to him, and the building will be part of his pension fund when he sells his business and retires in 2 years.

except if the buyer really doesn't want the lease, they'll charge back the cost of the lease to the transaction.

If you are going to sell the business then maximise the sale price of the business, and then during that process, work out the best way of maximising the value of the property- eitehrr selling it to the acquirer, or granting a lease to the acquirers and then if necessary selling the lease to a new owner )or stick it in your SIPP) and take the benefit).

Almost al the time the value of the business is worth way more than the property.

As I said above it’s impossible to say this generally.

i'd say in the 250+ mid market and upper SME transactions I've led or overseen, in the vast majority of them the buyer doesn't want the property, and trying to create a new lease to bind a buyer over a long period is perceived very negatively.

Sure there are outliers, but my experience does make it possible to make this general statement. Sure i can also point to times this hasn't proven the case, but unless OP wants to get into the weeds, then i can only make general statements

Ok. I’d say without knowing this particular deal your general advice is rather meaningless but you’ve led 250+ mid market and upper sme transactions so I’ll bow to your superior knowledge…

It wasn't an indication of a "big i am", but context as to why a general statement is probably accurate in this instance.