Purchasing an existing business and funding...

[marcgti6]

I've been given the opportunity to purchase an existing business - quite an exciting opportunity.

The trouble is, I don't know if it's a pipe dream or realistic prospect due to my financial situation...

I don't have any significant capital that I could put into the business so I would need a significant loan. I've only owned my house (mortgaged) for three years so there's not much equity to secure a loan against.

I've approached a couple of banks who have said that they'd need to secure 70% of the loan against a property - unfortunately, I'm no where near with my house.

The business has been operating for 25+ years and has always been profitable with a healthy turnover and GP.

So, my question is this - other than the banks, is there anyone else who may be able to offer funding?

Cheers

[foliedouce]

What sort of business is it? eg services / products / property / manufacturing etc as that will influence funding structure options

What is the EBITDA? This will influence what type of funders you should approach

How many staff?

What assets are on the balance sheet?

Then we can point you in the right direction.

[anonymous-user]

Ask the owner if you can pay him on the drip.


If they think you are a safe pair of hands it could be of interest to them.

[marcgti6]

foliedouce said:

What sort of business is it? eg services / products / property / manufacturing etc as that will influence funding structure options

What is the EBITDA? This will influence what type of funders you should approach

How many staff?

What assets are on the balance sheet?

Then we can point you in the right direction.

It's a services/manufacturing business.

EBITDA is approx. £70k.

1 member of staff currently (plus the owner).

Current assets are stock and plant, estimated at £20k.

Thanks

[marcgti6]

desolate said:

Ask the owner if you can pay him on the drip.


If they think you are a safe pair of hands it could be of interest to them.

Yes, this is an option and probably my only one at this moment in time!

Thanks

[marcgti6]

I did approach Funding Circle but they only offer loans to new businesses

https://www.fundingcircle.com

[marcgti6]

There's also significant opportunity to grow the existing business and I have a couple of ideas which I think would work.

[Europa1]

What are the existing funding arrangements for the business? Any chance of leveraging the business itself? - eg an invoice discounting line.

[foliedouce]

How much are you paying for the business? I'd suggest it should be a low multiple given the lack of scale.

Does it have a debtor book you could leverage via invoice finance? You could use a combination of this, personal loan and loan notes to the vendor

How crucial is he to the business? eg owning customer relationships etc

[anonymous-user]

marcgti6 said:

It's a services/manufacturing business.

EBITDA is approx. £70k.

1 member of staff currently (plus the owner).

Current assets are stock and plant, estimated at £20k.

Thanks

On those figures agree a price you can afford to pay him on each month, after a deposit you can afford to pay now.
Make it a bit more interesting for him buy saying you will pay a bit extra if you are successful.

In the end you just need to take a deep breath and ask him. If you are the one member of staff I really don't think the business is worth much to anyone else other than you and him.

Or offer to buy the plant off him and go and work for yourself.

[marcgti6]

anonymous said:

[redacted]

I need to properly sit down with him again and look at his books. The figure I gave is based on what he said although I'm sure there's some 'creative accounting' involved.

80% of current business is new customers. No commercial contracts with other businesses.

He currently owns the property - it's a big unit and other business rent other spaces.

He's looking at early retirement so he's not going to compete. He has spent a lot of time building up his reputation - he's well know as the best in their field.

Sorry, not sure I understand your last question.

Cheers

[Frimley111R]

Also, if it is a small business how much would it cost you to start from scratch?

[marcgti6]

foliedouce said:

How much are you paying for the business? I'd suggest it should be a low multiple given the lack of scale.

Does it have a debtor book you could leverage via invoice finance? You could use a combination of this, personal loan and loan notes to the vendor

How crucial is he to the business? eg owning customer relationships etc

Sorry, a low multiple of what?

He has no debt to speak off.

He's crucial to the business as in he's got the skill and experience to do what he does but he would spend a significant amount of time showing me the ropes before retirement.

[marcgti6]

Frimley111R said:

Also, if it is a small business how much would it cost you to start from scratch?

I'm not sure to be honest.

The thing is, he's got a really good reputation for what he does and specialises in a particular part of the market. The margins are massive. I like the idea of having a business with an established reputation and believe that I could build on the reputation and add value to the business and work to the level that he has.

[anonymous-user]

marcgti6 said:

Sorry, a low multiple of what?

He has no debt to speak off.

He's crucial to the business as in he's got the skill and experience to do what he does but he would spend a significant amount of time showing me the ropes before retirement.

Multiple of profit/EBITDA.

A good place to start is to ask him how much he wants and try and work out how you are going to pay for it. That's what I do.

[marcgti6]

Right, I think I'll organise another meeting with him. At the very least, I need to get to the bottom of the figures and his valuation.

Unless anyone here is feeling generous?

[walm]

anonymous said:

[redacted]

O/T but I normally value big businesses for a living, and I literally NEVER understand how smaller businesses claim to be worth anything.

With £70k in EBITDA and doubtless the owner working for "free" to my mind (as an investor) you have a worthless business.

If you paid someone the proper amount to run the business (i.e. doing what the owner is doing) you would be making ZERO profit (well close to zero, depending on the maintenance capex of the business).

People who buy these businesses appear to be paying quite large sums in order to simply guarantee themselves a job.
i.e. they pay up say £150k+ and in return they get £70k of EBITDA but spend the whole time running the business and fail to take into account the fact they could be doing a normal job instead and have £150k in the bank.

It's very odd. Unless of course like the OP you think it is a massive low-capital growth opportunity.

[foliedouce]

walm said:

O/T but I normally value big businesses for a living, and I literally NEVER understand how smaller businesses claim to be worth anything.

With £70k in EBITDA and doubtless the owner working for "free" to my mind (as an investor) you have a worthless business.

If you paid someone the proper amount to run the business (i.e. doing what the owner is doing) you would be making ZERO profit (well close to zero, depending on the maintenance capex of the business).

People who buy these businesses appear to be paying quite large sums in order to simply guarantee themselves a job.
i.e. they pay up say £150k+ and in return they get £70k of EBITDA but spend the whole time running the business and fail to take into account the fact they could be doing a normal job instead and have £150k in the bank.

It's very odd. Unless of course like the OP you think it is a massive low-capital growth opportunity.

What you're saying maybe true from a pure numbers / money perspective but you omit to consider the emotional / lifestyle side. In the scenario you describe, the purchaser becomes their own boss and master of their own destiny. Some people would pay considerably more than 2-3 x their equivalent salary in a 'normal' job to make this come true. Not everyone wants to work for someone else, even on a better financial deal.

In the OPs case, in appears (from what little information he has provided) that there is potential to build it into a larger business so that brand reputation / IP maybe worth paying for (can't be sure as we know virtually nothing about the business).

[walm]

foliedouce said:

What you're saying maybe true from a pure numbers / money perspective but you omit to consider the emotional / lifestyle side. In the scenario you describe, the purchaser becomes their own boss and master of their own destiny. Some people would pay considerably more than 2-3 x their equivalent salary in a 'normal' job to make this come true. Not everyone wants to work for someone else, even on a better financial deal.

Thanks... that makes sense.
I guess it is just very hard to take that into account for valuation purposes.
I keep getting friends/family sending me a spreadsheet and saying "please value this" to which I reply - "it's totally worthless, you'd be better off shutting it down and selling the paltry assets" and yet the dude selling it thinks it's worth half a bar and is his pension.

[marcgti6]

foliedouce said:

What you're saying maybe true from a pure numbers / money perspective but you omit to consider the emotional / lifestyle side. In the scenario you describe, the purchaser becomes their own boss and master of their own destiny. Some people would pay considerably more than 2-3 x their equivalent salary in a 'normal' job to make this come true. Not everyone wants to work for someone else, even on a better financial deal.

In the OPs case, in appears (from what little information he has provided) that there is potential to build it into a larger business so that brand reputation / IP maybe worth paying for (can't be sure as we know virtually nothing about the business).

Spot on. This is an opportunity to leave where I am now and be the master of my own destiny in a business that I would own.

Thanks for your input, Walm. I appreciate your comments r.e. valuation.

Cheers