Buying a business with no working capital
Discussion
Hi guys, I have been offered a company to buy which I currently work for. As an employee things the business appears to be productive and making a profit. The 2006 figures show a turnover is about £260'000 and a profit of £25'000. The accounts show between 40-60k consistantly available. My concerns begin that the owner wishes to remove all of money from the company before the sale and also wants me to pay £36'000. The company hasn't been valued but I suspect this is over the actual value. My questions are:
1) How do I go about valuing the company to get an approx value without the cost and time of an accountant?
2) I can't seem to understand how the owner can legitimately remove all money from the business?
3) If I do buy the business and the accounts have been unlawfully taken will I be responsible to then pay this back?
Any help, tips or advise would be great. Thanks in advance, Dan
1) How do I go about valuing the company to get an approx value without the cost and time of an accountant?
2) I can't seem to understand how the owner can legitimately remove all money from the business?
3) If I do buy the business and the accounts have been unlawfully taken will I be responsible to then pay this back?
Any help, tips or advise would be great. Thanks in advance, Dan
My concern is not really that the company will have £0 in the bank but how the owner could do this and the implications to me as the new owner. The last thing I want to do is find out a couple of months down the road that i owe anything upto £60k.A lot of company sales are done on a cash free, debt free basis (I'm sure someone much more knowledgeable will be along in a minute explain more clearly)
ie you agree a price then factor x debt & y cash to give the figure that you would pay the vendor
So let’s say that the business is worth £96k (4 x £24k profit)
There is no debt
There is £60k cash in the bank
You would pay the vendor £156k for the business (or let him take the cash out and pay £96k)
I hope that makes sense, however if he is only asking £36k for a business that makes £24k per annum sounds too good to be true to me.
ie you agree a price then factor x debt & y cash to give the figure that you would pay the vendor
So let’s say that the business is worth £96k (4 x £24k profit)
There is no debt
There is £60k cash in the bank
You would pay the vendor £156k for the business (or let him take the cash out and pay £96k)
I hope that makes sense, however if he is only asking £36k for a business that makes £24k per annum sounds too good to be true to me.
flyingjase said:
I hope that makes sense, however if he is only asking £36k for a business that makes £24k per annum sounds too good to be true to me.
Does it? The accounts only show £25k profit; that's no better than having a normaly job. It wouldn't be worth paying any more than £36k for that kind of proposition.To the OP - If you want the seller to leave the £60k of cash in the business, and only pay him £36k for it, then basically you're getting him to pay you £24k to take the business off him. Why do you think that be right? (I'm sure you don't think that would be right).
I think the o/p is asking, amongst other things, "can the owner withdraw capital from a company?" i.e. completely irrespective of the company's sale, can the owner take a chunk of capital off the balance sheet and transfer it to himself? From my very feeble grasp of such things, I'd have thought the answer was "sometimes yes, sometimes no". However, I'd be rather surprised if a new owner could become liable to personally recapitalise the company ... but things could get very messy.
If there's any question about this, get some professional advice. Obviously you want to keep your costs down, but if you aren't familiar with the law, you're not confident valuing the business, then you'd be mad to go ahead without it.
There are many ways to value a company, and the most appropriate method depends entirely on the individual company being valued. You'd need to consider how much the company is likely to be able to grow, the confidence you have in its level of trade (e.g. are recent sales a fluke, or are they based on long-term realtionships with trustworthy customers), how much would it cost someone else to set up in competition and pinch your current and future customers, how much are the firm's tangible assets worth, etc, etc
If there's any question about this, get some professional advice. Obviously you want to keep your costs down, but if you aren't familiar with the law, you're not confident valuing the business, then you'd be mad to go ahead without it.
There are many ways to value a company, and the most appropriate method depends entirely on the individual company being valued. You'd need to consider how much the company is likely to be able to grow, the confidence you have in its level of trade (e.g. are recent sales a fluke, or are they based on long-term realtionships with trustworthy customers), how much would it cost someone else to set up in competition and pinch your current and future customers, how much are the firm's tangible assets worth, etc, etc
[quote=RichBurley][quote=flyingjase]
The accounts only show £25k profit; that's no better than having a normaly job. It wouldn't be worth paying any more than £36k for that kind of proposition.
How much is paid out in salary/dividends/bonuses etc, if he has paid himself a decent wage and still made 25k net then it could be alot better than a normal job, don't forget the more proft you make the more CT you pay, I know lots of successful companies that don't have large profits for this very reason
The accounts only show £25k profit; that's no better than having a normaly job. It wouldn't be worth paying any more than £36k for that kind of proposition.
How much is paid out in salary/dividends/bonuses etc, if he has paid himself a decent wage and still made 25k net then it could be alot better than a normal job, don't forget the more proft you make the more CT you pay, I know lots of successful companies that don't have large profits for this very reason
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