Buying a business, what to look for?
Discussion
So, a long term friend of mine has a business.
He nor his wife haven't been actively with it for the past 3/4 years and they have a manager in who makes, sells, ships and runs the whole show.
Manager doesn't own it, she doesn't want too either. It ticks over and makes good money on what they make / sell but at the moment volume is low so it just about breaks even. No one has even done any marketing on the products, the website is s
te and i am confident you could double turn over quite quickly if they had actual stock and an easy buy / sell platform.
What info / details do i need to drill down into to see if there are any snakes on this plane with a view to buying it. If it is just covering its costs now, is it worth anything other than good will to buy?
Edit - maybe buying it is to strong, taking it over as a going concern is probably better.
He nor his wife haven't been actively with it for the past 3/4 years and they have a manager in who makes, sells, ships and runs the whole show.
Manager doesn't own it, she doesn't want too either. It ticks over and makes good money on what they make / sell but at the moment volume is low so it just about breaks even. No one has even done any marketing on the products, the website is s
te and i am confident you could double turn over quite quickly if they had actual stock and an easy buy / sell platform. What info / details do i need to drill down into to see if there are any snakes on this plane with a view to buying it. If it is just covering its costs now, is it worth anything other than good will to buy?
Edit - maybe buying it is to strong, taking it over as a going concern is probably better.
Edited by VEX on Monday 11th January 19:22
Its a long standing ltd, so yes might pull the returns to get a basic picture.
I suspect the balance sheet is poor, for the last year or more turnover is down, i know what they need monthly to break even, and they haven't hit that regularaly. But they did for the past 3 - 4 months.
The problem they have had is a lack of investment, both in product components for manufacturing as well as in business, marketing, selling/website. I could bring all of that to the fore and with general margins high it wouldn't take much increase in volume to really pull them out of the mire. The owners are just to old and aren't interested in it any more.
Just need to gauge the right time to broach the subject with them.
V.
I suspect the balance sheet is poor, for the last year or more turnover is down, i know what they need monthly to break even, and they haven't hit that regularaly. But they did for the past 3 - 4 months.
The problem they have had is a lack of investment, both in product components for manufacturing as well as in business, marketing, selling/website. I could bring all of that to the fore and with general margins high it wouldn't take much increase in volume to really pull them out of the mire. The owners are just to old and aren't interested in it any more.
Just need to gauge the right time to broach the subject with them.
V.
Edited by VEX on Monday 11th January 19:23
Yes i could very easily set up a parallel business, especially if the current person who runs it comes across as she knows where to buy everything. so realistically i would be buying just the good will.
Or even just agree an earn-out / profit share based on profit levels if the books are as poor as i think they could be.
Ultimatelty i want the name, the client base and the IP to at least produce the products, not that they ever bothered to patent anything.
Or even just agree an earn-out / profit share based on profit levels if the books are as poor as i think they could be.
Ultimatelty i want the name, the client base and the IP to at least produce the products, not that they ever bothered to patent anything.
Is there a property involved or is it a garden shed type operation?
If there is, you need to delve into the detail on that - is it included in the sale or will you be lumbered with a rent with annual increases?
And I'm sure you know this but as you've used the phrase a couple of times ..... just in case.... turnover is different to profit!
If there is, you need to delve into the detail on that - is it included in the sale or will you be lumbered with a rent with annual increases?
And I'm sure you know this but as you've used the phrase a couple of times ..... just in case.... turnover is different to profit!
Yes there is a property involved, they own the unit the business operates from outright, but the business pays them rent, not quite peppercorn, but ridiculously low. I would certainly look to continue that for the significant future as it is very cheap and a good source of retirement income for them.
Absolutely, Profit is primary, at the moment the profit seems strong (by reverse engineering figures i already know) it is just getting volume and investment in the say top 10 or 20 best sellers so there is actually stock on the shelf when a customer orders it. At the moment the production is purely reactionary and usually a panic to get it made and out the door in a reasonable time. I am positive they have lost business because of this long term strategy.
Its a industry i know well and it has three strands, B2C, B2B and distribution but no sales channel is actually pushed and if the profit is as strong as i think it is then there may well be scope for giving the top 10/20 products to a couple of industry agents i know to help promote them. Whilst the actually £ profit per item is low, the volume should be able to ramp significantly so an agent should be able to earn from sales too.
Lots to play with but in my mind if it is just covering its costs with lost customers, telephone ordering only, and no marketing then there is a good opertunity here.
It certainly wouldn't support me and the manager, but i wouldn't look to give up what i am doing now, just inject fresh cash, ideas and drive it properly (which it has never had) and ultimately andy other brand builds use the manager to help run both from the same site.
Absolutely, Profit is primary, at the moment the profit seems strong (by reverse engineering figures i already know) it is just getting volume and investment in the say top 10 or 20 best sellers so there is actually stock on the shelf when a customer orders it. At the moment the production is purely reactionary and usually a panic to get it made and out the door in a reasonable time. I am positive they have lost business because of this long term strategy.
Its a industry i know well and it has three strands, B2C, B2B and distribution but no sales channel is actually pushed and if the profit is as strong as i think it is then there may well be scope for giving the top 10/20 products to a couple of industry agents i know to help promote them. Whilst the actually £ profit per item is low, the volume should be able to ramp significantly so an agent should be able to earn from sales too.
Lots to play with but in my mind if it is just covering its costs with lost customers, telephone ordering only, and no marketing then there is a good opertunity here.
It certainly wouldn't support me and the manager, but i wouldn't look to give up what i am doing now, just inject fresh cash, ideas and drive it properly (which it has never had) and ultimately andy other brand builds use the manager to help run both from the same site.
Edited by VEX on Monday 11th January 19:20
VEX said:
Yes there is a property involved, they own the unit the business operates from outright, but the business pays them rent, not quite peppercorn, but ridiculously low. I would certainly look to continue that for the significant future as it is very cheap and a good source of retirement income for them.
Absolutely, Profit is primary, at the moment the profit seems strong (by reverse engineering figures i already know) it is just getting volume and investment in the say top 10 or 20 best sellers so there is actually stock on the shelf when a customer orders it. At the moment the production is purely reactionary and usually a panic to get it made and out the door in a reasonable time. I am positive they have lost business because of this long term strategy.
Its a industry i know well and it has three strands, B2C, B2B and distribution but no sales channel is actually pushed and if the profit is as strong as i think it is then there may well be scope for giving the top 10/20 products to a couple of industry agents i know to help promote them. Whilst the actually £ profit per item is low, the volume should be able to ramp significantly so an agent should be able to earn from sales too.
Lots to play with but in my mind if it is just covering its costs with lost customers, telephone ordering only, and no marketing then there is a good opertunity here.
It certainly wouldn't support me and the manager, but i wouldn't look to give up what i am doing now, just inject fresh cash, ideas and drive it properly (which it has never had) and ultimately andy other brand builds use the manager to help run both from the same site.
From your post, what jumps out to me is the low rent on the unit - if you can secure this then buying the business as opposed to setting up in competition to it would be the way to go.Absolutely, Profit is primary, at the moment the profit seems strong (by reverse engineering figures i already know) it is just getting volume and investment in the say top 10 or 20 best sellers so there is actually stock on the shelf when a customer orders it. At the moment the production is purely reactionary and usually a panic to get it made and out the door in a reasonable time. I am positive they have lost business because of this long term strategy.
Its a industry i know well and it has three strands, B2C, B2B and distribution but no sales channel is actually pushed and if the profit is as strong as i think it is then there may well be scope for giving the top 10/20 products to a couple of industry agents i know to help promote them. Whilst the actually £ profit per item is low, the volume should be able to ramp significantly so an agent should be able to earn from sales too.
Lots to play with but in my mind if it is just covering its costs with lost customers, telephone ordering only, and no marketing then there is a good opertunity here.
It certainly wouldn't support me and the manager, but i wouldn't look to give up what i am doing now, just inject fresh cash, ideas and drive it properly (which it has never had) and ultimately andy other brand builds use the manager to help run both from the same site.
Edited by VEX on Monday 11th January 19:20
Also, there is the danger your drive to modernise the business may scare off the manager who sounds like she is happy to coast in the role as it currently is so, if you take over the business, you may want to incentivise her with some profit share/bonus type structure.
Any ideas how the business has fared in the last year i.e. since covid?
Yes that was my thought, but she equally said today that she is happy to be busy, wants the be busy, but the lack of cash for components to make products means that she doesnt want to ring around customers because she has nothing to sell. Does feel like the owners just want to run it down to a stop point.
She equally doesn't want to be looking for a new job as she enjoys the process she does and is to old to learn something new.
She equally doesn't want to be looking for a new job as she enjoys the process she does and is to old to learn something new.
Because they have handed over the whole business operation to the manager, i agree it is an odd one, it is effectively her business to run, but i suppose it is / was their attempt to get the manager to understand the full costs of operation.
The only money they take from the business is the rent payment. They don't take any other profit.
The only money they take from the business is the rent payment. They don't take any other profit.
VEX said:
Just need to gauge the right time to broach the subject with them.
I'd start with the question to yourself; what problem are they looking to solve?If they have the wherewithal to buy their own commercial unit, they will likely be well aware they are not getting the correct rental value.
If they closed the business, and rented it to a different tenant, they wouldn't need to subsubsise the rent and could let it at market rate.
So that would be my starting point.
I would ask them what is the correct market rate i.e. what return should they be achieving on the unit. If you suggested it might be possible to achieve that whilst still operating the current business in the unit, you might sound a much more interesting idea which could get their attention.
I realise paying a market rent would cause the company to lose money based on the current level of sales - but if you were to going to set up from scratch, you would likely have a period anyway where you didn't make much money. And with this company, you have a base to build from.
So I would be inclined to offer market rate rent on the unit as the problem you were looking to solve for them, which of course then makes the business not that much money to buy probably.
It also depends on whether they want to maximise rent or just get enough with no hassle.
We leased an office off a friend on a business park that was 10 times larger than what Regus supplied because our landlord was a retired friend who preferred to deal with us and not deal with estate agents, new companies, etc.
We leased an office off a friend on a business park that was 10 times larger than what Regus supplied because our landlord was a retired friend who preferred to deal with us and not deal with estate agents, new companies, etc.
Thanks Eddie and Frimley.
I talked it through with mrs v last night and we came to a similar conclusion.
The manufacturing side is actually fairly simple and could be done from a garden shed, the manager has even said she could do that, which instantly wipes £800 off the costs and, once restart costs have been repaid, puts the company into good profit.
There is even a chance of getting all the kit out of the current office for nothing, which means rolling into a new site and home office would be very easy.
We also don't know if any C19 grants have been applied for.
I talked it through with mrs v last night and we came to a similar conclusion.
The manufacturing side is actually fairly simple and could be done from a garden shed, the manager has even said she could do that, which instantly wipes £800 off the costs and, once restart costs have been repaid, puts the company into good profit.
There is even a chance of getting all the kit out of the current office for nothing, which means rolling into a new site and home office would be very easy.
We also don't know if any C19 grants have been applied for.
C350Akra said:
If the business owns the property why are they paying themselves rent?
Because it acknowledges the opportunity cost of the property.It's not uncommon for businesses which have some freehold properties in their estate to make market rent payments from the P&L of the business unit, back to the centre.
For example, if a retailer has ten shops, five freehold and five leasehold, the latter five will pay rent to their respective landlords and the first five will pay rent back to the parent company. It ensures that each shop shows an accurate P&L of its trading and the centre can account for the income stream they would receive if they pulled their own business out.
V8mate said:
C350Akra said:
If the business owns the property why are they paying themselves rent?
Because it acknowledges the opportunity cost of the property.It's not uncommon for businesses which have some freehold properties in their estate to make market rent payments from the P&L of the business unit, back to the centre.
For example, if a retailer has ten shops, five freehold and five leasehold, the latter five will pay rent to their respective landlords and the first five will pay rent back to the parent company. It ensures that each shop shows an accurate P&L of its trading and the centre can account for the income stream they would receive if they pulled their own business out.
MustangGT said:
Agreed, but not a simple small one business operation. Is likely the business owner's paying themselves rent from the business, not particularly tax efficient.
It depends upon whether they've put the property into a SIPP, in which case this can still make a lot of sense.SpeedBash said:
VEX said:
Yes there is a property involved, they own the unit the business operates from outright, but the business pays them rent, not quite peppercorn, but ridiculously low. I would certainly look to continue that for the significant future as it is very cheap and a good source of retirement income for them.
Absolutely, Profit is primary, at the moment the profit seems strong (by reverse engineering figures i already know) it is just getting volume and investment in the say top 10 or 20 best sellers so there is actually stock on the shelf when a customer orders it. At the moment the production is purely reactionary and usually a panic to get it made and out the door in a reasonable time. I am positive they have lost business because of this long term strategy.
Its a industry i know well and it has three strands, B2C, B2B and distribution but no sales channel is actually pushed and if the profit is as strong as i think it is then there may well be scope for giving the top 10/20 products to a couple of industry agents i know to help promote them. Whilst the actually £ profit per item is low, the volume should be able to ramp significantly so an agent should be able to earn from sales too.
Lots to play with but in my mind if it is just covering its costs with lost customers, telephone ordering only, and no marketing then there is a good opertunity here.
It certainly wouldn't support me and the manager, but i wouldn't look to give up what i am doing now, just inject fresh cash, ideas and drive it properly (which it has never had) and ultimately andy other brand builds use the manager to help run both from the same site.
From your post, what jumps out to me is the low rent on the unit - if you can secure this then buying the business as opposed to setting up in competition to it would be the way to go.Absolutely, Profit is primary, at the moment the profit seems strong (by reverse engineering figures i already know) it is just getting volume and investment in the say top 10 or 20 best sellers so there is actually stock on the shelf when a customer orders it. At the moment the production is purely reactionary and usually a panic to get it made and out the door in a reasonable time. I am positive they have lost business because of this long term strategy.
Its a industry i know well and it has three strands, B2C, B2B and distribution but no sales channel is actually pushed and if the profit is as strong as i think it is then there may well be scope for giving the top 10/20 products to a couple of industry agents i know to help promote them. Whilst the actually £ profit per item is low, the volume should be able to ramp significantly so an agent should be able to earn from sales too.
Lots to play with but in my mind if it is just covering its costs with lost customers, telephone ordering only, and no marketing then there is a good opertunity here.
It certainly wouldn't support me and the manager, but i wouldn't look to give up what i am doing now, just inject fresh cash, ideas and drive it properly (which it has never had) and ultimately andy other brand builds use the manager to help run both from the same site.
Edited by VEX on Monday 11th January 19:20
Also, there is the danger your drive to modernise the business may scare off the manager who sounds like she is happy to coast in the role as it currently is so, if you take over the business, you may want to incentivise her with some profit share/bonus type structure.
Any ideas how the business has fared in the last year i.e. since covid?
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