Anyone ever bought a business?

[cheekymeerkat]

Has anyone here ever bought a business?
Anything to watch out for?

I've got an ecom business doing £2m, and I have space to spare, already got the multi channel software systems, WMS, ops manager, CS/admin staff, good contracts with Hermes, yodel, Royal Mail etc so I'm thinking I should be leveraging that and buying another ecom business as a bolt on, and then integrating it as a new channel with our software, transfer the stock to our warehouse, and then well..... watch the money roll in.

If another ecom business is netting himself £30k net profit, and I know I can take his rent/rates and other overheads out of the picture, this should be a total win? All depends on price of course so how would you value a business?

If I understand correctly, there is goodwill, stock and fixtures to consider?
Is 60k of stock at cost really worth 60k?
If a business nets 30k , is there a multiplier to calculate goodwill?
Perhaps I would be better buying the companies stock, eBay/Amazon account rights and letting the owner fold what's left?

I would love to hear how any of you out there did it, and most interestingly, how you structured the deal?

[Keep it stiff]

cheekymeerkat said:

Has anyone here ever bought a business?
Anything to watch out for?

I've got an ecom business doing £2m, and I have space to spare, already got the multi channel software systems, WMS, ops manager, CS/admin staff, good contracts with Hermes, yodel, Royal Mail etc so I'm thinking I should be leveraging that and buying another ecom business as a bolt on, and then integrating it as a new channel with our software, transfer the stock to our warehouse, and then well..... watch the money roll in.

If another ecom business is netting himself £30k net profit, and I know I can take his rent/rates and other overheads out of the picture, this should be a total win? All depends on price of course so how would you value a business?

If I understand correctly, there is goodwill, stock and fixtures to consider?
Is 60k of stock at cost really worth 60k?
If a business nets 30k , is there a multiplier to calculate goodwill?
Perhaps I would be better buying the companies stock, eBay/Amazon account rights and letting the owner fold what's left?

I would love to hear how any of you out there did it, and most interestingly, how you structured the deal?

Firstly you need to decide if you want to buy the business as a complete entity, i.e.as a share purchase, or if you just want to buy the assets. One thing you don't mention in your summary is the route to market, is there a platform, how does the target secure sales and is this something you need? It also begs the question why buy this at all, if you have an established business with capacity why not just add new products and build on what you have got?

There is no hard and fast formula on the value of goodwill, if the target business generates a large proportion of turnover through repeat purchases goodwill would be of more value compared with a business that is reliant more exclusively on one off sales.

[Fatlad1973]

cheekymeerkat said:

Has anyone here ever bought a business?
Anything to watch out for?

I've got an ecom business doing £2m, and I have space to spare, already got the multi channel software systems, WMS, ops manager, CS/admin staff, good contracts with Hermes, yodel, Royal Mail etc so I'm thinking I should be leveraging that and buying another ecom business as a bolt on, and then integrating it as a new channel with our software, transfer the stock to our warehouse, and then well..... watch the money roll in.

If another ecom business is netting himself £30k net profit, and I know I can take his rent/rates and other overheads out of the picture, this should be a total win? All depends on price of course so how would you value a business?

If I understand correctly, there is goodwill, stock and fixtures to consider?
Is 60k of stock at cost really worth 60k?
If a business nets 30k , is there a multiplier to calculate goodwill?
Perhaps I would be better buying the companies stock, eBay/Amazon account rights and letting the owner fold what's left?

I would love to hear how any of you out there did it, and most interestingly, how you structured the deal?

I have bought a business as principal in the past, as well as being an adviser on buying and selling businesses for the last 20+ years. I operate typically on larger deals and the smaller deal market (sub £1m value) is a bit different, but I'll throw a few thoughts in.

Firstly, the general idea re the benefits of filling your existing capacity is spot on.

But first ask yourself why you would buy someone else's business rather than just continue to grow your own, especially if you are paying them a premium. Often it is worth doing for the already established customer base or web presence: if you can make £150k where they are making £30k it will be worth buying them. And the £30k profit needs to allow for the owner's salary (if they were only paying themselves £20k but you need to hire a replacement at £50k the real profit was nil).

Valuation? It's an art not a science (because discounted cash flow, the 'gold standard' technique relies on estimates of the future and a finger in the air about the discount rate needed to bring them to today's value). It's also a negotiation so if you meet an owner who has had one of the brokers telling him his business is worth 10x next year's profit you'll want to walk away without wasting time trying to talk sense to them. See http://ukbusinessbrokers.com/very-little-chance-of... and his article on KBS. There's a reason why only around 1 in 10 businesses taken on by brokers get sold! I have no beef with KBS and they are no worse than the rest, but that's a long way from a compliment.

The long term reality for U.K. businesses was a value in the 4-6x EBITDA range. Last year things got a bit silly with good businesses going for mid-teens EBITDA multiples (apologies, I should have said that private companies are typically valued on an Earnings Before Interest, Tax, Depreciation and Amortisation basis).

Maybe the main factor in valuation is the growth rate and predicted future earnings - google being the best example being worth a fortune before it had earned a cent, because it was clear it would become a giant. A business growing at 20% per year should be worth a lot more than one just keeping pace with inflation or shrinking. But beware the hot tub or bog roll business with massive growth this year... it's a one off from covid and they will go back to normal or worse next year. Don't pay based on this year's profit, but on the normalised sustainable profit they can make on their own. Don't pay them for the benefits you can bring post deal.

If you have paid on a multiple of profits basis you don't then also pay for the stock etc. The vendor may disagree with this, but it's not like the company could make the profits without the stock, machinery, website etc. Goodwill is simply the difference between the book value of the target's net assets and the price you paid. I have done a deal once where there was massive negative goodwill as the business was losing money and my client was paid to take it away from the group! Sadly it wasn't a bargain even then...

Take care of why a business is being sold. Even with the tax benefit of selling your business (which is why most likely you will buy a company, not the trade and assets of the business) it is normally better financially for an owner to keep a business if they are prepared to live with the pressure, stress and responsibility of owning it. Retirement sales are ok, but other sales may be undertaken because there are hidden horrors going on. A bad deal is far worse than no deal (not a brexit comment!).

For you maybe think of it this way: how many months of the target's future profits are you happy to pay? In your situation I would cap it around 2 years but as above if you can transform a £30k profit business to £150k that doesn't mean you should pay £300k. You should pay perhaps £150k - £180k but only if you are confident that customers and suppliers of the target will continue to trade post-deal at the same levels (or better!).

And that's before we start thinking about earn-out based deals, where the price paid is at least partly dependant on performance post-deal. This is pretty normal on decent sized deals but the associated legals may be too expensive for this to work on a small deal.

Oh, and make sure you use a corporate lawyer and not a generalist trying to blag their way through a deal. And consider how you fund the deal: a low profit business with lots of stock and debtors can allow a large proportion of the price to be funded through debt. That was the characteristic of the business I bought and is what I will look for again.

And make sure any debt (not trade creditors or similar, but bank debt, invoice factoring etc) is deducted from the price. 'Free cash' (i.e. the amount that can be extracted from the business without it needed a future injection to continue funding) is added to the price. Watch out for TUPE if you do buy trade and assets but don't want all/any of the staff. Allow for the cost of getting rid of staff if needed...

Ok, long enough post already! Best of luck.

[DSLiverpool]

Just plug another importer / supplier into your existing systems. Nothing to buy and lots more to sell.

[loafer123]

Great post, FatLad1973!

[sleepezy]

Fatlad has provided a brilliant summary of my experience well on buy, sell and advise engagements so I won't repeat what he's said.

The only thing I would add is that the vast majority of what I am seeing being touted at the moment is utter rubbish. Seems anyone with a decent business is holding for the moment as value is so weak - the only ones selling are doing so out of desperation and even so in many cases are holding out for a value that is, literally, 'so last year'.

Opportunities still exist but i've not looked at a deal with value paid for several months now - everything is about investment requirement going forward with some form of deferred consideration. I am advising on a sale at the moment - but the value fits the above profile, shame they didn't sell 12-18 months ago when they had a good offer but got greedy - likely to get c 50% of that know on a good day.

[The Moose]

sleepezy said:

Fatlad has provided a brilliant summary of my experience well on buy, sell and advise engagements so I won't repeat what he's said.

The only thing I would add is that the vast majority of what I am seeing being touted at the moment is utter rubbish. Seems anyone with a decent business is holding for the moment as value is so weak - the only ones selling are doing so out of desperation and even so in many cases are holding out for a value that is, literally, 'so last year'.

Opportunities still exist but i've not looked at a deal with value paid for several months now - everything is about investment requirement going forward with some form of deferred consideration. I am advising on a sale at the moment - but the value fits the above profile, shame they didn't sell 12-18 months ago when they had a good offer but got greedy - likely to get c 50% of that know on a good day.

I guess everyone knows the COVID situation is going to give most people a kicking. Got to push through it, return to normal and prove that COVID was the unusual period, not the trend.

Sucks if you don’t want to work for the next 2/3 years.

[Fatlad1973]

The Moose said:

sleepezy said:

Fatlad has provided a brilliant summary of my experience well on buy, sell and advise engagements so I won't repeat what he's said.

The only thing I would add is that the vast majority of what I am seeing being touted at the moment is utter rubbish. Seems anyone with a decent business is holding for the moment as value is so weak - the only ones selling are doing so out of desperation and even so in many cases are holding out for a value that is, literally, 'so last year'.

Opportunities still exist but i've not looked at a deal with value paid for several months now - everything is about investment requirement going forward with some form of deferred consideration. I am advising on a sale at the moment - but the value fits the above profile, shame they didn't sell 12-18 months ago when they had a good offer but got greedy - likely to get c 50% of that know on a good day.

I guess everyone knows the COVID situation is going to give most people a kicking. Got to push through it, return to normal and prove that COVID was the unusual period, not the trend.

Sucks if you don’t want to work for the next 2/3 years.

Spot on. My hope is that as soon as we get some normality back we will see retirement aged owners of decent 'survivor' businesses trying to sell at sensible prices to avoid the risk and stress of the next 2/3 years.

[loafer123]

The real issue is that good businesses generate good cash flow, so why sell good cash flow? Bring in management, incentivise appropriately and let the majority still roll in...

If you sell up, what are you going to reinvest the proceeds in which will generate yield?

[DSLiverpool]

I am going to repost this as I know its not 150 words and deep as the ocean but its the logical, sensible and first thing I would do.


Just plug another importer / supplier into your existing systems. Nothing to buy and lots more to sell.