Buying a business?
Updated: Jun 21, 2021
With restrictions easing and the anticipation of some return to normality, some businesses are coming out of this latest lockdown in a more favourable financial position than they expected. In fact, recent conversations with current and previous clients has shown that in some cases turnover has more than doubled in the last 12 months. Add then the financial support offered by government through loans, furlough, rate or payment holidays and some balance sheets are looking remarkably positive. It may not be a coincidence therefore that in the last week I’ve spoken to three individuals or execs looking at buying a business or buying out a Partner/Director, and who are looking for some pointers on ascertaining the ‘value’ of the business.
But what is the value of a business? How is it determined and who can help you determine this?
It’s difficult formula to apply on a blanket case. Some work on multiples of turnover; others profit (EBITDA or EBIT or Net); cash in hand; assets; forward orders; brand value - the list goes on and on. It can also be highly subjective and when some parties are looking to sell their business or shares they can be somewhat disappointed in the real term value of their holding.
The above may be more or less applicable to larger business and PLCs (they aren’t my area of expertise) but if you are looking at buying out a fellow director or acquiring a stake in an established small or medium business here a few things to consider before you do:
1. Looking at a P&L rarely gives you the full picture – Yes it may give headline figures but each company reports differently and in many cases without critical detail or knowledge you may be missing key information that will impact future bottom line stats. What is down the road in the form of a rent increase or review; a loan or repayment or any other such expense or cost that is not factored into your current P&L? You need to consider the contracts and commitments that the company has signed up to or obligated to maintain in the future. Be mindful that in some cases balance sheets may not be reflective of ‘normal trading conditions’ with the CV19 measures and support schemes – you must look at historic data and consider the information in its totality.
A example of one such cost that can have a double impact: an insurance claim. It could yield an unexpected income but also could push up the liabilities for the coming year exponentially. This won’t happen often but is the kind of thing that can skew figures.
2. People – In almost every single case people have the biggest input into the success or failure of a business. Who makes up the team at the business you are looking to acquire? How well supported are they? What about training and development – how much have they been given and how much is needed? Is there enough resource or has the headcount been reduced for the purposes of sale (it does happen)? People often boast ‘my business cannot function without me’ but if this is materially true (and it’s not a great way to run a business) then how much of an impact will this person make if they left or were the person you were buying a business off? Clearly, self-employed or microbusinesses are often dependent on the reputation of an individual and therefore consider this carefully if they are to leave with the completion of a sale.
3. Financing - How will you do this and what is the most appropriate way of doing so? Could it be self-funding through the sacrifice of profit each year over a determined number of years? What conditions are you tying into the financing such as performance milestones or in return for hours worked by an departing Director? Are you seeking finance through a specific facility, bank or private investment? Are there cheaper alternatives or some that are more flexible than others? You don’t have to commit to the sum until you’ve completed your DD but looking how you would fund the purchase should be considered early on.
4. Are you the best person to consider the value or viability of a business? Business brokers vary in their size and reach. Some employ large teams and churn out new sales every day, others handle few sales but do so with great care and with great skill. In the most part, regardless of their size or operational setup, most get a fee from the sellers and therefore may or may not be overly helpful to you as a buyer. There are of course plenty of M&A solicitors to choose from so shop around and get a feel for who you think might be best depending on your circumstances/budget. Speaking to an accountant could also be helpful and some will be able to offer guidance and advice on the matter for a fee. You may also wish to consider an independent (like Hascombes) that will interrogate and review information, conduct a thorough audit and due diligence on the proposed purchase and report on the findings. It could save a lot of time and money but also provide a independent third party through whom communication with the sellers and buyers can go – which should help maintain relationships and goodwill. It may be a combination of the above but whatever and whoever you decide to appoint, make sure you are satisfied that you have as much information as possible to make an informed decision.
The above isn’t an exhaustive list by any means but it should get you thinking about what you need to consider before parting with your cash. If you need a starting point, ask yourself why? Why are they selling and why should I buy it?
Acquiring a business or shares in a business could be a short, sharp way of getting a ready made income or complimentary service to your existing setup, it could also be a cheap way of getting into a business that has real growth potential. Equally, it may be decision you live to regret if you don’t consider it carefully. Fortunately there are many avenues to seeking help so shop around and get that help when and if you need it.