Why buying a business might be better than starting from scratch.

Many people dream of being their own boss. They imagine themselves having that genius idea that is going to make them a millionaire, or just packing in the daily grind to do something they love every day. However, some people believe that the only way to do this is to start from scratch, when in reality, buying an existing business might be the ideal solution for you.

When you take the leap to become your own boss, the first thing you’ll need is the capital launch. According to my own internet research the average cost of a start-up is £93,800, making it difficult for many people to even begin. Granted, that tidy sum is accumulated over a period of start up and is not ‘day one’ capital required. Nevertheless, you are still going to need a significant sum for a good number of business sectors. If you don’t have the money in the bank to self-fund, your first thought might be to approach your bank to ask for a loan. Most start-up companies tend to be self-funded, as banks see it as a risk lending to a project that has no proven success. They are more likely to provide funding for an established business that they can see real historical turnover and profits for.

Another option may be a small business grant, but due to their limited availability, there are a number of hoops you are required to jump through during the application process, and you aren’t guaranteed success. You could also appeal to angel investors, however they are unlikely to get on board if you don’t have an idea that is completely revolutionary and sound. They want to be assured your business will be around long enough for them to see a return.

The fact is, more than 58% of start-ups fail within the first five years according to the office of national statistics. This could be, for example, because their money runs out, they’ve failed to build a reputation that secures them business or they can’t get the customers through the door. Again, money is a huge issue when maintaining a start-up company over the first few years, as it can take on average three years to start to see a return. This can be frustrating for the business owner, and also may not be viable for them in terms of their home life. After all, you still need somewhere to live and food on your table.

Buying a business can be a great alternative for someone with an entrepreneurial itch to scratch. It gives you the opportunity to be your own boss without many of the risks that come with a start-up business. The prospect of failure in the early days is significantly reduced because you’re missing out those shaky first years. You will be taking on a business with an existing customer base and reputation, which means you benefit from instant cash flow coming in.

Taking on an existing company is also a great opportunity for someone who wants to test the water with business ownership. You have all the freedom of owner management while inheriting the existing policies, procedures, and systems. Getting these in place is time consuming and costly, and can be off-putting to the new entrepreneur. Learning from tried and tested operations can be a great way of finding your feet while still having the autonomy you crave.

Many people considering buying a business have concerns that may put them off. Some are worried that the seller will take the customers with them, meaning the new owner has to find a new set themselves. Many small businesses, for example cafés, pubs and mechanics, have a certain geographic appeal to their customers. That is, the local people will go to their nearest pub, not walk miles to follow their previous landlord. Many sellers are also preparing for retirement, so they’ll have no need for any customers, new or existing. As a last resort, your legal representatives can ensure that protection is provided in the official legal documentation.

Getting the money to buy is also a concern I come across, however lenders often look more favourably on businesses with a proven track record. You can also look at what schemes are available in your local area, such as local authority grants and funding to help with renovations and even just money for taking on the business in the first place in some instances, particularly in areas requiring regeneration. It is also worth bearing in mind that purchasing an existing business is considerably less expensive than starting from scratch having regard to all the costs and risk elements. There are over 7,000 businesses advertised for sale for under the £93,800 average start up cost. This can not only make it more cost effective in the long run, but also more manageable to launch.

Buying a business is not without its problems, though. If you have no experience in the business area, you may find that you struggle to cope with the day-to-day managerial tasks. For example, can you run the accounts on your own? Do you know when the stock needs to be re-ordered? It may be helpful for you to spend some time with the previous owner before you take over, to learn from their experience and expertise; ask for an extended hand over for instance. This will also help make the transition easier for your customers, your staff and of course you. It will also increase the likelihood of the customers and staff staying with you.

There are also a number of pitfalls that you can face when you buy, for example being over-charged, or the seller not being completely honest with you about how profitable the business is, which can lead to disaster once you take over. This is where buying through a business broker can be particularly helpful, as they are able to offer impartial advice and guidance to make sure you don’t get any nasty surprises.

Taking your first step towards owning your own business can be nerve-wracking, but ultimately rewarding. Make sure you take the path that will be best for you long term and good luck with whatever route you take.

Railway arch privatisation poses threat to independent businesses

ancient-arch-arch-bridge-507410Many a small business has blossomed beneath a humble railway arch.

These once unwanted and dark spaces have been populated by an amazing range of fledgling entrepreneurs, drawn by affordable rents and prime town and city centre locations.
They have even passed into the nation’s psyche via our small screens. The railway arches in Coronation Street provided a home for Nick’s Bistro and Kevin Webster’s garage – before it burnt down. And, in EastEnders, there are always plenty of thrilling story lines at ‘arch-villain’ Phil Mitchell’s car repair business.
However, in the real world a new dramatic storyline has emerged which threatens the livelihoods of thousands of independent businesses operating from commercial railway arches.
It follows an announcement by Network Rail that it plans to sell off its commercial property business across England and Wales as part of a billion pound asset sale which will see current leases transferred to the new buyer.
Now a vast army of small businesses – from garages to hairdressers, gyms to cafes – face a very uncertain future. They fear that ordinary local businesses will simply be priced out of existence.
More than 4,000 commercial railway arches will be sold off by the end of this year as a package and already several global investment firms are expected to join the bidding.
Tenants have already had to bear the cost of unprecedented rent increases over the past year, some as high as 500 per cent, and a numbers have already fallen by the wayside.
Some suspect this rent review was carried out to ensure that the sell-off look more attractive to investors. Those who remain fear the impending privatisation only signals the start of further rent increases.
In reality, only high-mark up operations such as bars and clubs may be able to absorb the generally unaffordable increases.
My firm, Hilton Smythe, facilitates the sale of small and medium sized businesses, and I believe action must be taken to protect these commercial units which provide valuable spaces for innovative entrepreneurs.
Furthermore, they add a vitality and vibrancy to town and city centres up and down the country at a time when independent businesses are seen as one answer to the current retail downturn.
Of the 4,455 arch spaces let out by Network Rail, fewer than 30 are operated by national chains, which emphasises just how important they remain for the independent sector.
The publically owned body was ordered by the Government in 2015 to raise money from its assets and has argued that the money will be reinvested in the rail network.
But this short-term gain is at the expense of thriving small businesses and could further add to the woes of our town and city centres.
The asset stripping exercise fails to recognise that the railway arches could well be left deserted by unrealistic rental expectations. This would represent a real loss to communities and a blow to passion-driven small businesses.
Surely Government policy should support small businesses rather than benefit the coffers of large global investment firms.
However, the businesses involved have already banded together into a national group called Guardians of the Arches, and have written to Transport Secretary Chris Grayling urging him to stop the privatisation.
Many long-term tenants have carried out work at their own expense to improve the previously unwelcoming arches and now face being forced out. For them the situation is doubly distressing.
Let’s hope that the Government and tax payer-funded Network Rail see sense and preserve our commercial railway arches and allow the businesses using them not only to survive, but prosper.
They are a vital part of this country’s rich retail mix and not an opportunity to make a quick financial gain.

Pros and cons of buying and selling a Sole trader business.

abstract-ai-art-355948 (1)Although it is simpler to set up and arguably operate a business as a sole trader (from a paperwork perspective at least), the sole trader will be responsible for all debts and liabilities of the business, since the business and the individual are legally inseparable as far as assets and liabilities go. That means, if the business fails, the individual may be risking personal assets and their personal cash too! This is because the individual trades as, say Joes Café for instance and hence they are one in the same thing.

When it comes to buying, or selling a business that is operating as a sole trader, the process is relatively straight…

When it comes to buying, or selling a business that is operating as a sole trader, the process is relatively straight forward in most cases. A simple sale purchase agreement that can be drafted by a solicitor or even downloaded online (not recommended), will probably suffice to transfer the business.

Problems may arise with the likes of contractors, where a lease is in place or where the business requires some form of trade licence, as the licence, contracts and lease will need to be transferred from seller to buyer. Why is that an issue? Sometimes, the issuer of the licence, the customer or supplier who has a contract with the business or the landlord in the case of a lease; subject to any agreed specific terms, may refuse such a transfer. This could leave buyer and seller in a sticky position.

Whilst sole traders are required to keep a record of income and expenditure, there are no legal requirement for them to produce and maintain trading accounts…

So, the things to watch out for when buying or selling a business set up as a sole trader are things like the contracts with suppliers, any licences the business holds and customer contracts as appropriate. Make sure they can be assigned to the buyer or form a limited company moving everything across as necessary either before or after purchase (take advice if doing this). Buyers and Sellers should speak to professional advisors to ascertain the correct advice for their given situation.

Whilst sole traders are required to keep a record of income and expenditure, there are no legal requirement for them to produce and maintain trading accounts. If a sole trader is considering the sale of their business, this is highly recommended if not essential. From a buyer’s perspective, they will want to see a breakdown of income and expenditure and trading accounts are the best way to document this for buying and selling a business, supported with tax and VAT returns which will affirm some of the stated figures.

The sellers tax liability when selling as a sole trader is primarily Capital Gains at the current rate, less any personal allowance that may be in place at the time of sale. This can vary of course with changes in government budget and should be checked on the www.gov.uk website, or ask an accountant.

The final point is on staff. All employment is protected in the UK by TUPE (Transfer of Undertakings (Protection of Employment) Regulations 1981). In short, and without going in to the fine detail, employees are expected to transfer to the new owner, i.e. the buyer of the business on the same terms and conditions. Exceptions to this could be redundancy or the business trading insolvent. In those circumstances, it is important to be clear about the costs involved in making redundancies for example and whether the buyer is going to pay those costs or indeed whether the seller is expected to foot the bill through the price paid for the business.

The sellers tax liability when selling as a sole trader is primarily Capital Gains at the current rate…

This is by no means a conclusive guide as to the buying or selling of a business, but it outlines some of the key points.

Buyers have the need for speed, but solicitors are dragging their heels!

Solicitors dragging their heels when buying a business.If you’ve ever bought a business, or indeed a new home, you will have been through what is a lengthy and laborious experience. It can be incredibly frustrating, particularly when you’re in a flush of excitement about starting the next phase of your life, and everything seems to be stuck in purgatory for months, with no end in sight.

Recently, Secretary of State for Housing, Communities and Local Government Sajid Javid MP raised questions about how to speed up conveyancing when buying a house, in order to make the process quicker and less stressful. I think this is a sensible approach, and one that should be replicated in the buying and selling of businesses.

Buying a business can be as stressful as buying a house. It requires a large investment, and, particularly in the cases of the small and medium sized businesses we deal with at Hilton Smythe, it will be the owners only source of income. All of their eggs will be in this business’s basket, and any delay in starting to trade will mean a loss of income.

Behind the scenes, we know that the legal process for a sale of business transaction might be as little as eight to ten hours’ work, yet our latest research shows that it is taking just shy of 100 days to complete the average sale. This is incredibly frustrating for the clients, who are waiting for months on end to finalise buying their business.

We deal with a lot of leasehold properties, and often it is waiting for third parties, such as landlords, solicitors, and banks that holds the transaction up. A letter can be sent out, usually by ‘snail mail’, this has to be physically signed and returned. You’re relying on people to act quickly and efficiently, which they often don’t, and this holds the whole process up.

The amount of information requested by solicitors, which I appreciate are standard documents, is also off putting for many small business owners. They will put the request to one side for later, because it seems like a big job, or they will simply avoid doing it, because it seems too hard, or they do not understand what is expected of them. In an attempt to speed the process up for our clients, we offer help with these forms and information to support them, something that I feel should be standard for business in our line of work.

I believe that there are still many solicitors stuck in the dark ages, who aren’t focused on how best to serve the client, helping them to get deal through quickly and efficiently. Some can be very particular about speaking with the agent, or rather avoiding speaking to them, when they are simply trying to speed the transaction up and chase outstanding documentation or information.

The introduction of 21st Century technology, such as electronic signatures, would help to speed up the process immensely, rather than waiting for someone to receive a hard copy, read it, sign it, and post it back. From a government perspective, some relaxation in the red tape would undoubtedly help, as there is a lot of information requested that seems unnecessary, laborious, and off-putting.

The final suggestion I would make is for solicitors to ensure they are more aware of the nature of the business involved in the sale and the size of the transaction being made. Often, we see hold ups where solicitors end up negotiating what are, in the grand scheme of things, pointless terms of the contract with little justification, and all this serves to do is hold up the sale and frustrate all parties involved.

If the government sees value in speeding up the buying process for potential homeowners, it needs to do the same for potential business owners too. This will not only have a positive impact on the economy, as the businesses will be up and running faster, but a personal benefit for the new owners who get stuck in limbo. If we all work together, the process could be faster, more efficient, and better for everyone.

How are businesses valued?

How are businesses valued?There are many reasons why you should consider valuing your business, the more obvious of the reasons may be as you approach the prospect of selling the business, or you may be splitting from your business partner and need to know the value of the business to buy him or her out. Whatever the reason, you should seek professional help to value any business. This article is designed to talk you through the approaches a valuer would take to value a business as well as spelling out some of the pros and cons of business valuation.

There is a phrase in our industry, ‘a business is only ever worth what someone is willing to pay for it’. Well, in my opinion this is absolutely correct. If there isn’t a buyer out there willing to pay the price of the business in question, then the business simply isn’t worth the money you are asking for it. That said, for the purpose of a valuation for loan or security purposes, whether a buyer is out there who is willing to pay a particular price, can only be determined from historic transactions for broadly similar businesses, namely, comparable evidence. It is essential to note that valuation is only ever a starting point for negotiations to commence. That said, there are of course instances where that isn’t the case, but when it comes to selling a business, it is just a starting point.

I think it is essential, whether starting out in business or indeed having been in business for some time, that you know well in advance, preferably from the beginning what the exit strategy is going to be. If that could be through selling the business, then build your business with selling in mind and regularly assessing the strength and growth of your business by its sale price is essential to achieving maximum potential when selling.

I am often asked when the best time to sell is. Frankly, I couldn’t honestly say to sell in January is better than to sell in December. The best time to sell is when you are prepared and ready. Of course, depending on your business, seasonality may well play a part, but primarily, your business needs to be ready for sale. Too many sellers go to market ill prepared for sale and, guess what; they never achieve maximum value.

There are many number of ways to value a business, depending on the buyer and the industry norms. For the purpose of generality and application to a broad spectrum of business types. we will look at two areas, multiple of profits (EBITDA to be exact) and Asset value.

EBITDA Multiple

EBITDA stands for Earnings Before Interest Tax Depreciation and Amortisation. EBIT, i.e. Earnings Before Interest and Tax is essentially the businesses Operating Profit or Net Profit before any tax or interest charges are deducted.

Depreciation and Amortisation are accounting principles that allow the writing off of tangible and intangible (assets you can touch such as a desk or a machine and assets you can’t touch such as goodwill) business assets on the balance sheet by applying a cost to the profit and loss account which represent an annual cost of the particular asset based on its perceived operating life. For example, a company van that is bought for £25,000 and perceived to last 5 years will be charged to the balance sheet at £5,000 per year for example.

Multiples vary with sector and the businesses position, but essentially the EBITDA multiple is exactly what it says; a multiplier that is multiplied against the EBITDA figure. It is worthy noting, that one off and exceptional costs should always be added back in to EBITDA too, although there is no acronym for this.

It is possible to see a wide range of multiples used in business valuation, from one times EBITDA to twenty odd times. For the majority of small, owner operated businesses, you would be looking to achieve between one and three times EBITDA. A good broker can share actual sale prices and multiples with you which means you know the price you are asking is a good negotiation starting point.

Asset Value

Where the assets of the business are worth more than the EBITDA multiplied sum above, it would be unrealistic to use the multiple valuation method. Instead, the value is in the assets and so you would want to sell the assets for current value.

If you are a limited company, you may need to do certain things to prepare for sale, such as reconstituting your balance sheet, i.e. bringing the actual value of fixed assets for example up to date to reflect the market value of those assets rather than the artificial depreciated value that your accountant has put into the balance sheet.

If you are a sole trader or partnership, i.e. not a limited company, you will simply need to make sure you know the value of your assets and ensure they are free from any encumbrance, namely finance agreements or other restrictions.

In reality, a sole trader or partnership could value the assets themselves by looking on the internet to get valuations of similar assets. You may achieve a small premium for the fact the business is in situ and trading so again, seeking advice is key to achieving the best value.

Top Tips for success:

Build your business with selling in mind.

If you intend to sell, don’t leave it until you’re ready to take the plunge to prepare the business, it can take atlas three years to properly prepare for sale. Too many business sellers are ill prepared for sale and, guess what, they lose value!

Don’t make yourself indispensable

A business owner that does all of the work is, by all accounts, all of the business. If you have staff, use them wisely and try to build a business that could easily operate without you. The more reliance the business has on you to succeed; the lower the value will be.

Accounting for the tax man

I hear so many times, that a businesses accountant shows the accounts in the best possible way to save tax. So often, this results in lower stated profits. If your business is making money, then why wouldn’t you pay the tax that’s due. In any case, whatever your stance on this topic, the more you can show in the bottom line in the few years leading up to sale, the better and the more you will get at sale. If you’re not prepared to do that, be prepared to take less when selling it’s that simple.

Get advice

A good advisor is essential. Someone with experience in your sector and who has handled the sale of similar businesses. A final point, if you instruct professional advisors, check the terms of business because all too often they contain cancellation clauses. Also, don’t be wowed by an over exuberant asking price, check the market and see what else is for sale similar to compare pricing and never be afraid to ask for real examples of sold prices.

 

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