Buying in to an established SME
Discussion
Summary - I want to buy into an established business but don't know how to value it/ identify a fair entry price.
I've got an opportunity to buy in to an established high end delicatessan with just one outlet in a swanky part of London.
The founder and sole director established it in 2012 since when it has become a recognised brand locally but also across Greater London.
The founder is now at a point where they don't know what to do next - it is solid financially and is weathering the current storm well. Being agile, turning to online and being a key outlet have meant trading is consistent YOY with 2019. But what next? It needs a strategic input plus an injection of energy, structure and leadership to develop it which is where I may have a role.
I have 25 years experience running revenue/ cost centre departments in larger organisations and have reasonable commercial acumen. I also share the founders passion for the product and am looking for a move away from an established but not overly interesting career.
I wouldn't want to simply manage it but would like to buy in as a minority shareholder. The founder has worked hard to establish it and I would want to offer something fair but representative of it's performance.
What I don't know is - how do you value the business and therefore establish a buy in ££?
Small business accounts for the 7 full trading years show a consistent 1.1:1 acid test at a value of circa £110,000:£100,000. I've not seen the P&L which would clearly give a better picture. Not sure about the lease status and need to investigate.
Any advice or insights would be very welcome.
I've got an opportunity to buy in to an established high end delicatessan with just one outlet in a swanky part of London.
The founder and sole director established it in 2012 since when it has become a recognised brand locally but also across Greater London.
The founder is now at a point where they don't know what to do next - it is solid financially and is weathering the current storm well. Being agile, turning to online and being a key outlet have meant trading is consistent YOY with 2019. But what next? It needs a strategic input plus an injection of energy, structure and leadership to develop it which is where I may have a role.
I have 25 years experience running revenue/ cost centre departments in larger organisations and have reasonable commercial acumen. I also share the founders passion for the product and am looking for a move away from an established but not overly interesting career.
I wouldn't want to simply manage it but would like to buy in as a minority shareholder. The founder has worked hard to establish it and I would want to offer something fair but representative of it's performance.
What I don't know is - how do you value the business and therefore establish a buy in ££?
Small business accounts for the 7 full trading years show a consistent 1.1:1 acid test at a value of circa £110,000:£100,000. I've not seen the P&L which would clearly give a better picture. Not sure about the lease status and need to investigate.
Any advice or insights would be very welcome.
How much does the founder want from you for this share that you have the chance to buy?
Will the two of you work well together to do the things that you want to do? What will it say in the shareholder agreement about how decisions etc. are made and how you and the founder get paid. What will happen if one of you wants out, or if there is an offer to buy in (or buy the lot).
Are there other potential buyers in the mix?
When you get to see the P&L etc. ask if there is any cash that doesn't make it as far as the books.
Not to put a dampener on the relevance of your experience, but it is of pretty minimal use in a business of this size.
Will the two of you work well together to do the things that you want to do? What will it say in the shareholder agreement about how decisions etc. are made and how you and the founder get paid. What will happen if one of you wants out, or if there is an offer to buy in (or buy the lot).
Are there other potential buyers in the mix?
When you get to see the P&L etc. ask if there is any cash that doesn't make it as far as the books.
Not to put a dampener on the relevance of your experience, but it is of pretty minimal use in a business of this size.
I would say how ever well it's weathering current storm,6 months time will tell what true price is.
Is this a business you really want to buy into or can you take a more relaxed view on timescale,going to be plenty bargains about imho but only bargains if they can come out the other side of current situation.?
Is this a business you really want to buy into or can you take a more relaxed view on timescale,going to be plenty bargains about imho but only bargains if they can come out the other side of current situation.?
TCX said:
I would say how ever well it's weathering current storm,6 months time will tell what true price is.
Is this a business you really want to buy into or can you take a more relaxed view on timescale,going to be plenty bargains about imho but only bargains if they can come out the other side of current situation.?
Agreed, the tough part is yet to come. And I certainly don't intend to jump in right away. The idea is to provide consultancy and support to the founder for a period of circa 6-12 months and transition into the business taking a share at some point along the journey. It's all very top line at the moment but I will be writing the transition plan. Is this a business you really want to buy into or can you take a more relaxed view on timescale,going to be plenty bargains about imho but only bargains if they can come out the other side of current situation.?
My untested thoughts are to provide the consultancy not for a fee but accumulate a small share in the operation reducing risk for me and not denting cashflow for the business.
If a value for the business and a rate for my consultancy can be agreed we can work out how much of a share my input would earn. I want it to be fair for both parties and am not looking to hustle in opportunistically.
Edited by Venisonpie on Friday 29th May 06:22
Sambucket said:
The key info is, the 'SME-adjusted' annual profit? Meaning annual profit after all wages and the owner managers salary at market rate (not what is actually in accounts)
Thanks, I've not seen any P&L yet but will in due course. Is there a formula that would typically be applied to the above?Edited by Sambucket on Friday 29th May 07:01
JPJPJP said:
How much does the founder want from you for this share that you have the chance to buy?
Will the two of you work well together to do the things that you want to do? What will it say in the shareholder agreement about how decisions etc. are made and how you and the founder get paid. What will happen if one of you wants out, or if there is an offer to buy in (or buy the lot).
Are there other potential buyers in the mix?
When you get to see the P&L etc. ask if there is any cash that doesn't make it as far as the books.
Not to put a dampener on the relevance of your experience, but it is of pretty minimal use in a business of this size.
Thanks, some good points and useful questions to answer.Will the two of you work well together to do the things that you want to do? What will it say in the shareholder agreement about how decisions etc. are made and how you and the founder get paid. What will happen if one of you wants out, or if there is an offer to buy in (or buy the lot).
Are there other potential buyers in the mix?
When you get to see the P&L etc. ask if there is any cash that doesn't make it as far as the books.
Not to put a dampener on the relevance of your experience, but it is of pretty minimal use in a business of this size.
The transfer for shareholding in return for services rarely works out well. This is as much to do with subjective emotions as it is with any real perceived value because it relies upon the owner having 100% clarity on the cash-value of the services you will provide and the benefits that service will yield. Even then, having taken the initial risk, put in the graft and built the business up, there will always exist a sense of resentment that they have 'given away' a bit of their toil which can fester away over time.
You also have to consider the added-value benefit to the owner in comparison to the alternatives. For example, if you agree a service value of say, £25k, the owner could go to businesses consultants and may get a quote for £15k for the same services. Although that would take £15k out of the businesses, the owner retains full ownership and thus all the benefits when the fruits of that £15k materialise. So for this to work, you would have to demonstrate to the owner end benefit of your inputs on his remaining share of the business significantly greater than that gained from 100% of the business from the brought-in services.
If you do go down this route, it's essential that you establish very clear written agreements and a terms of reference. You need to establish a cost for the time you will apply over what time (i.e. a day-rate and numbers of days) and precise description of what you will do and the deliverables that you'll provide. If the owner has his head screwed on right, you should expect share of ownership to pass incrementally and pegged to performance.
I speak from experience on which I'd be happy to expand if it would help your thinking.
You also have to consider the added-value benefit to the owner in comparison to the alternatives. For example, if you agree a service value of say, £25k, the owner could go to businesses consultants and may get a quote for £15k for the same services. Although that would take £15k out of the businesses, the owner retains full ownership and thus all the benefits when the fruits of that £15k materialise. So for this to work, you would have to demonstrate to the owner end benefit of your inputs on his remaining share of the business significantly greater than that gained from 100% of the business from the brought-in services.
If you do go down this route, it's essential that you establish very clear written agreements and a terms of reference. You need to establish a cost for the time you will apply over what time (i.e. a day-rate and numbers of days) and precise description of what you will do and the deliverables that you'll provide. If the owner has his head screwed on right, you should expect share of ownership to pass incrementally and pegged to performance.
I speak from experience on which I'd be happy to expand if it would help your thinking.
StevieBee said:
The transfer for shareholding in return for services rarely works out well. This is as much to do with subjective emotions as it is with any real perceived value because it relies upon the owner having 100% clarity on the cash-value of the services you will provide and the benefits that service will yield. Even then, having taken the initial risk, put in the graft and built the business up, there will always exist a sense of resentment that they have 'given away' a bit of their toil which can fester away over time.
You also have to consider the added-value benefit to the owner in comparison to the alternatives. For example, if you agree a service value of say, £25k, the owner could go to businesses consultants and may get a quote for £15k for the same services. Although that would take £15k out of the businesses, the owner retains full ownership and thus all the benefits when the fruits of that £15k materialise. So for this to work, you would have to demonstrate to the owner end benefit of your inputs on his remaining share of the business significantly greater than that gained from 100% of the business from the brought-in services.
If you do go down this route, it's essential that you establish very clear written agreements and a terms of reference. You need to establish a cost for the time you will apply over what time (i.e. a day-rate and numbers of days) and precise description of what you will do and the deliverables that you'll provide. If the owner has his head screwed on right, you should expect share of ownership to pass incrementally and pegged to performance.
I speak from experience on which I'd be happy to expand if it would help your thinking.
Thanks for this, really useful. What you've described is how I see it working. You also have to consider the added-value benefit to the owner in comparison to the alternatives. For example, if you agree a service value of say, £25k, the owner could go to businesses consultants and may get a quote for £15k for the same services. Although that would take £15k out of the businesses, the owner retains full ownership and thus all the benefits when the fruits of that £15k materialise. So for this to work, you would have to demonstrate to the owner end benefit of your inputs on his remaining share of the business significantly greater than that gained from 100% of the business from the brought-in services.
If you do go down this route, it's essential that you establish very clear written agreements and a terms of reference. You need to establish a cost for the time you will apply over what time (i.e. a day-rate and numbers of days) and precise description of what you will do and the deliverables that you'll provide. If the owner has his head screwed on right, you should expect share of ownership to pass incrementally and pegged to performance.
I speak from experience on which I'd be happy to expand if it would help your thinking.
The other way I thought was to invoice the business for my time, bank the cash and then buy in using a fresh transaction with said cash.
The founder is very keen for me to be a long term fixture and would hire me tomorrow. That's all a bit speedy for me and doesn't give either party a properly thought out strategy which is what I'm looking to create.
I could just buy into it but I'd have to sell my Lotus..
Venisonpie said:
The other way I thought was to invoice the business for my time, bank the cash and then buy in using a fresh transaction with said cash.
I'd strongly recommend you do this. It simplifies the transaction and eliminates the perceptional risks I mention. It will also afford you the opportunity to consider if it's really something you want to throw yourself into. StevieBee said:
Venisonpie said:
The other way I thought was to invoice the business for my time, bank the cash and then buy in using a fresh transaction with said cash.
I'd strongly recommend you do this. It simplifies the transaction and eliminates the perceptional risks I mention. It will also afford you the opportunity to consider if it's really something you want to throw yourself into. My overriding advice is get the hard business agreement done and use the relationship as icing on the cake. Too many people rely on the relationship which can then be changed because of the rub of working together or even factors outside of the business and outside your control.
Hitch said:
Might be worth creating stages for your buy-in so that you have a right to acquire a percentage of shares at an agreed price over a period of time should certain performance measures be met. Otherwise the fee you are paid may not be enough to buy into what will be a bigger and more profitable enterprise...because of the value you've added.
My overriding advice is get the hard business agreement done and use the relationship as icing on the cake. Too many people rely on the relationship which can then be changed because of the rub of working together or even factors outside of the business and outside your control.
Thanks, agree. It's effectively what I'm working on at the moment- there needs to be a formal structure in place. Stages are a good idea.My overriding advice is get the hard business agreement done and use the relationship as icing on the cake. Too many people rely on the relationship which can then be changed because of the rub of working together or even factors outside of the business and outside your control.
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