Where are businesses advertised for sale?

Increasingly, the Internet is a good place to start your search. Web sites, such as www.businessesforsale.com, www.daltonsbusiness.com, www.rightbiz.co.uk and www.nationwidebusinesses.co.uk help you search by business sector and location. Many sites let you search for free, but others charge a subscription or fee.

The details given in the advertisement will be very brief; it may only include the market, the general location and some indication of the income from a business. Note that a number of the advertisers may be the receivers of the business, trying to sell it as a going concern. If the advertisement is by a liquidator, the aim will be to sell off the assets or bits of the business, as it will not be possible to sell it as a going concern because there is no goodwill.

Another source to try is business transfer agents and estate agents. Carry out an Internet search for local agents. These agents are not independent advisers but are acting on behalf of the business being sold.

Finally, try asking around in the area you want. Try accountants*, solicitors* and banks. These sometimes maintain a register of businesses for sale. You can also try someone already in the industry for ideas of what might be for sale.

Conducting a search for a business

You may be able to identify other possible businesses not yet put up for sale by studying the market segment you want to enter. Carry out market research into that sector, identify the competitors and investigate the backgrounds. You may well find that the businesses already for sale are the worst buys. On the whole, go for what you want and not for what is available. There are also a number of organisations specialising in helping you to find acquisitions. These include some of the big firms of accountants. Other useful sources include:

• the membership lists of relevant trade associations;
• www.yell.com;
• databases – try business or academic libraries;
• trade exhibitions and trade journals.

What help can you get with an investigation?

It would be wise to employ an independent adviser to help you analyse a potential purchase. The most likely candidate for the role of adviser will be an accountant*, as a considerable part of the investigation will be analysing existing accounts and assessing asset values. However, accountants may be expert at the quantitative aspects of a business but miss the qualitative aspects, such as how crucial present employees are to the business. Help and advice from someone in the industry can be invaluable.

Why is the business being sold?

This can be difficult to establish satisfactorily. For example, if it is being sold because the present owner doubts that it will prove to be profitable in the future, you are not likely to be told this. Your investigation of the business prospects must try to identify this type of reason.

A frequent cause of a sale is that the owner wishes to retire. If this is the case, you need to keep your eyes open for signs that the business is running out of steam as the owner’s retirement nears. It is also possible that the business and its equipment are now out of date.

Sometimes you may come across small businesses that are being sold by larger companies. The reason given may be that it does not fit with the strategy or pattern of the larger business. The real reason may be because the large company cannot make it profitable, so you need to look for the warning signs. Look carefully at the past history and the accounting policies used.

With banks continuing to focus on strengthening their own balance sheets, small businesses may have run into difficulty because of problems renewing or raising bank loans and this could have put pressure on working capital. Although such businesses may be sound in the long term, you need to consider what makes you better placed than the current owners to ride out or solve the current problems.

If the business is in the hands of a receiver, it will be advertised for sale as a going concern. You cannot take for granted that this is so. Investigation needs to pinpoint whether the assets are actually owned by the owner, whether any genuine goodwill exists and, obviously, the reasons for the financial difficulties.

A sale for any of these reasons may present opportunities for the right business person. The ability to turn around a run-down or unprofitable business is a management and business skill, which you may possess. The important point in acquisition is to know the real reason for the sale before you negotiate to buy. Then you can price the business correctly and assess the impact you could make, post-purchase.

What is being sold?

What you are buying depends on the legal form of the business. If you want to buy a business operated by a sole trader or partnership, you are strictly buying its assets, excluding what the previous owner owed and was owed. You could buy all or only some of the assets. If the business has traded under a different name, not the owner’s personal name, you might consider buying the right to carry on using this. This is a wise decision only if there is some goodwill attached to the business name. Your agreement should be very specific about the assets you buy and the price you pay.

Alternatively, if the business is a limited company it has a life of its own, separate from the shareholders. In this case, you could be buying just the assets or you could be buying the company itself. If it is the latter, as the new owner you will acquire a business that has obligations and liabilities, such as contracts and debts, as well as assets.

Partnerships

An added ingredient if you are buying a share in a partnership is the necessity to investigate the prospective partner (or partners). All the other business aspects – for example, track record, business prospects, assets – need careful study, but it is also essential to find out what you can about the partners. This is for two reasons.

First, as a partner you are jointly and severally liable for the debts of the partnership. In practice, what this means is that if there are bills to be paid and your partners do not pay up their share, either because they do not have the assets to cover the debts or because they refuse, you can be made to pay for the whole debt, not just your share of it. You must satisfy yourself that the new partners hold some assets that would cover the likely value of their share of any debts and find out their track record of paying bills. A history of unpaid bills or lack of assets of any value (for example, a house) might raise question marks in your mind about their suitability as partners.

Second, the ability to coexist amicably in a partnership is crucial. Personality conflicts can be crippling and may mean, whatever the economic sense of the partnership, the future of the business would be in jeopardy.

If you are buying a share in a partnership in which there are already two or more partners, be prepared for the negotiation to take a long time. Two or more people have to agree; it is not just one person deciding, as would be the case if you were buying from a sole trader.

Use a solicitor* to help you to draw up a written partnership agreement or to vet the one offered to you by the partnership (see p. 63 for an idea of what needs to be covered). It might be wise to attach a note to the partnership agreement that would cover areas such as how the business is to be run, who has responsibility for what, what is the extent of the decision-making for each partner and so on. These are not strictly part of a written formal agreement, but it is crucial that each of you has a clear understanding of how the business will be run.

The accounts

The past accounts of the business are written evidence of what has happened in the last few years. But how good is the evidence? The minimum you should insist on seeing is the accounts for the last three years; these should be handed over to your accountant for stringent analysis. However, there are some points you should bear in mind. If the business is a sole trader, partnership or small company (see p. 63), accounts do not have to be audited. Indeed, the only reason that accounts need to be prepared is for tax purposes, and the accounts need only be a statement of sales and expenses; a balance sheet is not necessarily required. The evidence about the track record could be decidedly patchy and even inaccurate.

The fact that the accounts are prepared for tax purposes may suggest that the sales are understated; indeed, vendors may claim just that. But you should be wary of accepting that profits are really higher than stated in the accounts.

As well as published accounts, ask to see all the management accounts and accounting books, debtors’ and creditors’ lists and bank statements.

Once your accountant has examined the accounts thoroughly, you should begin questioning whether there are any specific reasons why, for example, the profits were high during the period reviewed. Was there no competition? If so, is there now? If the business is retail, has the pattern of shopping facilities altered to make the location less attractive now than formerly? Will there be a rent review, with a likely increase in rent that will make a dent in future profits? And so on. Query anything that you think might have affected the results of the present owner, favourably or unfavourably.

Land and buildings

With land and buildings you need to consider the following points:

• Position: this is particularly important for shops. You need to study a shop’s location very carefully. What are the other shops in the immediate area selling? Direct competition need not be a disadvantage, as customers sometimes like to have a choice and will go to a location with two or more shops selling similar products. The population of the shop’s immediate catchment area could be crucial to the success of the business; you should not assume that you can persuade people to travel far to your particular store. What type of population lives nearby? Is there high unemployment? Are inhabitants likely to have high purchasing power?
  The future plans for the area, if any, need to be discovered. Are any redevelopments planned? Any road changes mooted? Has planning permission been given for facilities that might undermine your trade – for example, a superstore nearby – or enhance it – say, a new leisure centre that might draw extra trade to the area, or a large new housing estate. The effect of these needs to be considered.
  An important consideration for many types of retail business is how many potential customers will pass the shop each day, for example on the way to work or to do other shopping. Test this out for yourself by standing outside the shop on days that are likely to be busy for the business and on days likely to be quiet.
• Tenure: if the property is not freehold, what are the terms of the lease? For how much longer does the present lease run? When is the next rent review due, and is there any indication of the likely increase? Who has the responsibility for maintaining the exterior of the building? Check that the seller has the right to transfer the lease. Would you be able to sell or sublet at some future date? With a freehold property, bear in mind that the current owner might own it outright. If you’ll have to borrow, you would need a higher level of profits than the current owner to make the business viable, because you’ll have interest payments to cover.
• Business rates: these are based on the property’s estimated rentable value not the profits you generate. Make sure they seem reasonable given the level of trade you are likely to attract. For example, rateable values for shops in a run-down high street are often still assessed on the basis that this is a prime retail area even if the bulk of trade has moved elsewhere.
• Condition: pay for a survey to be carried out to establish the extent of your likely bills for the property. Run your eye over the decoration and shop or office fittings. Are there any improvements you could make that would improve the potential of the property, and what would these cost?
• Space: what is the useful selling space? Is this sufficient to stock the quantity and range of goods you intend to carry? Will there be any surplus space? Could this be used profitably – by you or some other business?
• Insurance: what insurance currently covers the property? Is this relatively expensive or cheap?
• Valuation: take expert advice on the value of the property. You should also ask your solicitor to check the title, any covenants that apply and the likelihood of planning changes.

Plant and equipment

With plant and equipment you need to cover the following points at least:

• Condition: is the plant and equipment old or badly maintained? Is the technology outdated? What volume of business or production levels could the equipment deal with? Can it cope with periods of maximum demand?
• Value: this can be a problem to establish to both vendor’s and buyer’s satisfaction. The vendor may well seek to be paid a value based on the cost of the equipment. As a potential buyer, you need to look closely at the market value, as this may well be less than cost. Indeed, if the equipment can be used in that business only, the market value may be very low, although the value to this business may well be higher than that. You will have to negotiate a price.
• Future commitments: if you are buying a company, you should investigate what capital expenditure has been contracted for which you would be responsible. This may also apply to any advertising expenditure to which the company is committed.

Stock

Stock is likely to be the major area of disappointment after a purchase. Opt for ruthless reductions in the value in the accounts or make an agreement to buy subject to certain conditions being met, if you can. At least, check:

• How much: first of all, establish that the amount of stock in the business agrees with the figure in the accounts (particularly if you are buying the business, not just selected assets). Once you have established how much stock there is, you need to analyse whether this is the right amount and the right sort for that business. Get guidance on the mix of stock from an expert in the industry. Be wary of buying too much stock, even at apparent bargain prices. Keep an eye out for any outdated or damaged stock as well. You should also check if the business has had a proper stock control system. If it has not, this should raise questions about quoted amounts. It can also be worthwhile to find out whether it is possible to return any stock items to suppliers.
• Value: as with plant and equipment, it is likely that the seller will hope to be paid the higher of cost or market value for the business stock. You, on the other hand, may only be willing to settle for the lower of cost or market value (and that may be a very low figure indeed). You should not deviate far from your value of the stock.

Debtors: the customers who owe you money

Your investigation should cover:

• How old? your main query about debtors must be: ‘Will they pay and when?’ Ask the seller for what is known as an age analysis of debts. This should show how much is owed and how long it has been owing. Very old bills may suggest they will not be paid or simply that the owner is very dilatory about collecting money. You need to know which.
• Credit rating: the analysis of debtors should pinpoint which customers owe the larger sums. Assuming that you were to keep these customers if you purchased the business, it is worth checking the credit backgrounds of those businesses (p. 333). You do not want to buy a business that relies heavily on a few customers who are bad payers.
• Credit collection: investigate how the existing owner collected debts. An improvement in this could enhance the profitability of the business.
• Value: once you have made a careful analysis of unlikely payers and allowed for the cost of collecting the debts, you should be able to arrive at an estimate of the value of the debtors.

Other assets

There are a range of other assets that the business may hold:

• Cash: confirm the level with the bank or wherever the cash is held.
• Patents, trade marks, etc.: investigate their status; for example, is the trade mark registered? You should find out what would happen to these ‘intangible assets’ if the business should fail. They may prove to be unrealisable assets if the rights revert to their original owner, for example. (Patents and trade marks are dealt with in Chapter 10, ‘Beating the pirates’.)
• Investments: if the business holds investments, perhaps in other companies, your accountant should ensure that an appropriate value is placed on them.
• Goodwill: the price you will eventually fix is unlikely to be the sum of the values you set on the individual assets. Negotiation may result in a price above the asset value. The surplus is known as goodwill. Goodwill can also be described as the reputation of the business and what you are paying to acquire that reputation. Valuing goodwill is a very uncertain process. Will the goodwill disappear once the present owner is no longer part of the business? Will customers and suppliers stay with the business on the same terms, assuming those to be satisfactory?

Liabilities: what the business owes

The main liabilities to be investigated are:

• Loans, debentures and overdrafts: establish the amount, the conditions, the period of the loans and the interest rate.
• Creditors: an examination of an age analysis of creditors should give you some idea of the sort of credit periods suppliers have been extending to the business in the past. If the business has paid very slowly, it may suggest that its reputation with suppliers is fairly low.

Sales

To estimate the potential of the business, you will need to look carefully at the sales figures. Carry out a product or service analysis. Does one product account for the vast bulk of the sales? What is the profit margin on this product? Does your analysis suggest scope for streamlining the product list?

Your study of the debtors will also have thrown up information about the customer structure. Does the business rely on one or a few customers? Do those customers account for the major portion of the profits as well as the sales? An over-reliance on a few can mean the business may be fairly risky and prone to sudden downturns should a customer cease using the product.

Crucial information about sales potential can be ascertained by talks with the major customers. These may throw light on the quality and reputation of the business and product. Further evidence can be obtained by a study of the level and nature of credit notes and a study of the percentage of substandard goods produced.

Look for any special relationships that exist with major customers, such as an extended credit or returns arrangement.

Other aspects of the sales figures you should study include:

• the element of windfall sales that are unlikely to be repeated;
• the sales by territory or area;
• the pricing and discount structure, including the existence of fixed-price or fixed-volume contracts, particularly if buying a company;
• the distribution of the product;
• competition;
• the seasonality.

The products

If the business is the manufacture or distribution of a product, you will need to find out more about it. The areas you should concentrate on are:

• Cost: ask yourself if there are any reasons why the costs should rise or fall in the near future. Have there been any changes in the prices of raw materials, and are there seasonal variations? Is there a shortage of skilled labour to make the product? Are any changes likely among the suppliers? Are there any key supplies that need careful management?
• Profit margin: an examination should also be made of the cost of each individual product compared with its price. Do all the products cover direct costs and make a contribution to overheads? Which gives the highest contribution and which the lowest? What is the pricing policy? Have discounts been offered? Turn to Chapter 25, ‘Moving ahead’, for information about profit margins, contribution and overheads and Chapter 15, ‘How to set a price’, for pricing.
• Orders: if it is a company, what is the quantity of advance orders? Will these all be retained if ownership of the company changes hands?

Employees

If the present owner has staff, you will have to find out what your obligations will be to them. If the owner is a sole trader and you are buying some of the assets, there will probably be no legal obligation to offer continued employment; but there may be if you are carrying on the business. If the business is a company, you will most likely have legal obligations to the employees. This is particularly important if it is your intention to replace the staff or make them redundant. You will need to ask your solicitor* for advice.

Even more crucial than the legal responsibilities for employees can be the extent to which the business relies on key personnel. You need to understand their calibre, attitudes and responsibilities – before the deal. It is vital to sustain their enthusiasm and commitment through the period of ownership change.

Asset value

Your investigation will have helped you to set values for individual assets. If you are buying the whole business or it is a company, the figure you are interested in is the net asset value – that is, the value of the assets less the value of the liabilities. There is no rule on whether you should use the cost of the asset or its market value as a basis for your price estimate, although you will be wise to choose the lower of the two.

The final value agreed upon is unlikely to be a simple sum of the individual assets; any additional value is called goodwill.

If property forms a major part of the business, you may automatically think that the price you pay is asset value. However, it is very important to look at what sort of profits those assets will be able to earn for you. See Example 1 in the box below.

Earnings multiple

A second way of valuing a business is to apply some multiple to the earnings from the business, perhaps two or three times. Clearly, you will not take the present owner’s figures for earnings at face value; apart from investigating whether they are a fair reflection of what has happened, you also need to take into account in your calculations what interest charges you would be paying after the purchase of the business. This should include loans for any improvements you intend making. See the following Example 2.

Return on capital employed

To assess value on this basis you need to decide in advance on a rate of return that you require on the money you invest. This should certainly be more than the rate of interest you could get from leaving your money in a building society account. Once you have decided, you work out what the income before interest and tax is as a percentage of the capital invested.

If the figure you get as a result of this calculation is less than your required rate, you would decide not to buy or to lower the figure you were prepared to pay.

Other chapters to read

1 ‘You and your ideas’ (p. 1); 3 ‘Who will buy?’ (p. 21); 9 ‘Franchises’ (p. 93); 23 ‘Raising the money’ (p. 303).