Business Purchases & Sales
Business Purchases & Sales
Purchases and sales are two sides of the same coin. You cannot have the 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?
On the other hand, if you want to sell your business, you need to understand what goes on in the mind of a potential buyer. Are they genuine, or just nosing around on the prowl for a seller who undersells and undervalues their own business? Are they genuinely interested in your business or do they intend to sell it on at a profit within a year or two after some strategic adjustments to the business to increase the value, things that you could have done yourself with a little guidance?
So, where do you start? Before you buy or sell something, you need to have an idea of what it is worth. Let’s consider valuing a business.
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? If you cannot rely on the existence of a market rate, perhaps you could look at the cost to replace it.
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.
How do you value goodwill? People write books about that so this is not the place for long winded explanations, but it is likely to revolve around what return the purchaser can generate. You would look at the price paid and the profits that can be generated either now or in the future. The purchaser will be looking for a certain level of return on their investment. Grossing up the profits using this level of return will tell you the value that purchaser would be willing to pay and that in turn identifies any valuable goodwill.
We have looked at a number of 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. At the end of the day, no profit means no goodwill. So, 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 that 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. On the other hand, if you are selling, the profit you make on each component can save you or cost you tax. This is not the place for detailed explanations but keep it in mind and get advice before you conclude your transaction.
Paying for a business
There are two important rules that you need to understand. They are quite simple.
Anyone who has bought one or more businesses will already understand both of these important rules.
Firstly, whatever price a buyer or seller places on a business will be based in parton their own thoughts and feelings about the business and this will include an element reflecting their appetite for a sale or purchase at this time. The keener they are to sell, the lower the price they are willing to accept. The keener they are to buy, the higher the price they are prepared to pay. Whatever 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. How fluid it is depends on what is going on in the heads of the seller and buyer respectively and they will influence one another.
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. This may be for the whole business, or perhaps it will just be a part of the business initially, with the anticipation of acquiring more in the future.
You can also look at some bank funding, particularly if a property is involved, or perhaps acquiring the equipment on a hire purses of finance lease.
There are plenty of options and you just need to find the combination that works for you.
Buying a business – what do you need 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:
Not rocket science
Buying or selling 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.
Not only have we bought and sold businesses ourselves but we have advised on various aspects of the process, and helped our clients get through the process. We can do the same for you.