One of the ways you can accelerate the growth of your business is to buy another business that someone else has already grown. It will cost you money, but it will accelerate the development of your own enterprise. Buying another business is not for the faint-hearted, and the path can be a minefield. We have done it four times to date, and we are only now starting to properly understand all the pitfalls and unexpected potholes along the way.
Purchases and sales are two sides of the same coin. You cannot have one without the other. Let me explain.
If you intend to buy a business, then of necessity, there must be someone who wants to sell a business. You cannot have one without the other. The reason that this is important is that when you come to buy, you need to understand what is going on in the head of the seller. What are his or her goals? What are their concerns? Why are they selling? What do they want to get out of the deal?
So, where do you start? Before you buy or sell something, you need to have an idea of what it is worth. Remember, it is easy to sell a business that has been significantly undervalued. On the other hand, maybe there is a reason for the low value that you do not yet understand.
Business valuations
At the end of the day, valuing a business is like valuing a house. If there are a lot around just like it, there will be a narrow range of values based upon the known market rates. But if it’s a bit different to others around it, where do you start?
In the case of a business, the lowest price is the amount that the assets could be sold for on a dispersal sale. Break it all up and sell to the highest bidder.
The only reason to increase this valuation is when the combined assets taken together and operating in a particular sector and location can generate a higher return through trading activity. In this case, you have goodwill, an intangible asset.
The value of the business is the realisable value of the tangible assets, property, equipment, debtors, cash, etc., plus the goodwill.
We have looked at several businesses over the years. Sometimes the value suggested by the profits (potential return on investment) is lower than the realisable value of the business assets. In a case like this, you would value the business at the value that the assets could realise. You could just break it up and sell it off.
The only time you would pay more than the “break-up” value for a struggling business is either when you can see potential for turning it around or when combining it with your existing business enables you to make economies of scale or cut out duplicated overheads, thereby making the purchase worthwhile.
Apportioning the price
Something that virtually everyone forgets, if they are not buying shares in a company, is to apportion the price between stock, equipment, goodwill and property. This is important as it can potentially save you a lot of tax. Only certain assets qualify for capital allowances.
Paying for a business
There are two important rules that you need to understand. They are quite simple.
- Everything is negotiable.
- You do not need money to buy a business.
Anyone who has bought one or more businesses will already understand both of these important rules.
Firstly, whatever price a seller places on a business will be based on their own thoughts and feelings about the business, and this will include an element reflecting their appetite for a sale. The keener they are to sell, the lower the price they are willing to accept. Whatever the price is on the table, it is always fluid. It may become softer or harder, higher or lower as more facts are disclosed during the due diligence and negotiation process.
Secondly, there are a multitude of ways to finance the eventual deal. Deferred consideration is very common. The buyer pays something up front and the balance over a fixed period of time.
Buying a business – what do you need to know?
You don’t need an encyclopaedic knowledge. You just need to know enough. What is enough? Well, in all probability, it’s what you know right now.
So:
- You don’t need a degree in business administration. You can hire professionals to take care of the numbers as well as the all-important tax details and legalities for you, and also to give business advice.
- You can hire a manager or management team to take care of the day-to-day operations for you.
Buying a business is not rocket science. There is nothing technically difficult about the process, but you do need to do the simple things properly, and that is where experience helps.
Alan E Long
The Long Partnership
07770 738770
