making a judgement on a local business
Discussion
Im interested in buying a local small business, its a village shop with a turnover of £325k and gross profit of 25% present owners want to retire.
Ive seen 3 years accounts and the figures are suspiciously similar but i can understand these are prepared purely for tax purposes, its been established for around 35 years.
Its basically a converted 3 bedroom house with shop front but is all used for storage and small office space.
House is valued at roughly £100k and the current asking price for the business is £180k offers invited.
Im looking for advice on how to make a judgement call on the accounts as they are very brief (1 side of A4)
and when i enquired they say these are the only accounts they have.
Sounds odd to me but can anyone offer any advice on the matter?
Ive seen 3 years accounts and the figures are suspiciously similar but i can understand these are prepared purely for tax purposes, its been established for around 35 years.
Its basically a converted 3 bedroom house with shop front but is all used for storage and small office space.
House is valued at roughly £100k and the current asking price for the business is £180k offers invited.
Im looking for advice on how to make a judgement call on the accounts as they are very brief (1 side of A4)
and when i enquired they say these are the only accounts they have.
Sounds odd to me but can anyone offer any advice on the matter?
What's the net profit before tax? What salary/drawings are the current owners taking?
Bloody difficult to value that sort of business even with the right info, If they can't supply proper accounts then i'd walk away. At the very maximum i'd value it based on the value of the assets (i.e. the property, stock etc) and nothing else. You'll certainly need to do thorough due diligence to make sure there are no nasties hiding in the VAT/PAYE/CT cupboard.
If the current owners are retiring then they are probably just looking for a way to get rid. People are not queuing up to buy small shops in the current climate.
Bloody difficult to value that sort of business even with the right info, If they can't supply proper accounts then i'd walk away. At the very maximum i'd value it based on the value of the assets (i.e. the property, stock etc) and nothing else. You'll certainly need to do thorough due diligence to make sure there are no nasties hiding in the VAT/PAYE/CT cupboard.
If the current owners are retiring then they are probably just looking for a way to get rid. People are not queuing up to buy small shops in the current climate.
When the HMRC come and audit the accounts, what will they show them?
I have 4 years of accounts for my Ltd company, which has EVERY invoice, Every Bank statement, payments in and out, detailed expenses, explanations for my accountant on some receipts if it's not clear why it's a business cost. Possibly only 0.1% lacks detail, and is explained as sundry.
You need to know what sales they've made per day, per product line. What they've paid for from whom, otherwise you don't know what potential it has.
You need to judge, how price, and quality sensitive the customers are, if there are any competitors on the horizon.
You should also ask yourself why you couldn't just open a competing shop down the road. Is the goodwill really worth anything, if all the staff are leaving to retire?
Sounds like the upstairs of the shop has scope for income, from offices, or flatlets, or more sales area?
I have 4 years of accounts for my Ltd company, which has EVERY invoice, Every Bank statement, payments in and out, detailed expenses, explanations for my accountant on some receipts if it's not clear why it's a business cost. Possibly only 0.1% lacks detail, and is explained as sundry.
You need to know what sales they've made per day, per product line. What they've paid for from whom, otherwise you don't know what potential it has.
You need to judge, how price, and quality sensitive the customers are, if there are any competitors on the horizon.
You should also ask yourself why you couldn't just open a competing shop down the road. Is the goodwill really worth anything, if all the staff are leaving to retire?
Sounds like the upstairs of the shop has scope for income, from offices, or flatlets, or more sales area?
Its not a ltd company, accounts given to me were profit and loss and balance sheet all on 1 side of an A4 page.
Profit for year is listed at around £45k to £50k over the 3 years but im almost positive this figure isnt entirely accurate.
No drawings listed on the acounts from what i can see.
No real scope for room rental as its all used for stock/small office space.
Thanks for the input.
Profit for year is listed at around £45k to £50k over the 3 years but im almost positive this figure isnt entirely accurate.
No drawings listed on the acounts from what i can see.
No real scope for room rental as its all used for stock/small office space.
Thanks for the input.
ch427 said:
Im interested in buying a local small business, its a village shop with a turnover of £325k and gross profit of 25% present owners want to retire.
House is valued at roughly £100k and the current asking price for the business is £180k offers invited.
Sounds odd to me but can anyone offer any advice on the matter?
It sounds too cheap.House is valued at roughly £100k and the current asking price for the business is £180k offers invited.
Sounds odd to me but can anyone offer any advice on the matter?
The current owners are happy to sell their 35-years-in-the making business for one year's gross profit? Potentially less, as it's offers invited?
House @ £100k + Profit (£325k x 25%) = £181,250
That doesn't even take into account current stock, etc.
I'd want to see the Proper Books, not the pie-in-the-sky A4 page they've cooked up themselves.
I would turn up at the shop just before opening time unnanounced and ask to spend the day there. See what the turnover for that day actually is. Do this on a few occasions on different days of the week. If you havent got the time to do it, pay someone you know (and trust).
You will soon get a feel for whether they are full of s**t or not.
Their A4 sheet of paper is 100% worthless.
Good luck.
You will soon get a feel for whether they are full of s**t or not.
Their A4 sheet of paper is 100% worthless.
Good luck.
Sake of argument, say it's open 6 days a week, less 8 bank holidays and a fortnight annual holiday.
£325k into 292 days = £1100+ turnover a day.
It should be a work of a moment to get a look at the till receipts for the past few days. If they can't\won't do that, or the figures are wildly different from the (v. rough I admit) average, they're probably in a dream world.
£325k into 292 days = £1100+ turnover a day.
It should be a work of a moment to get a look at the till receipts for the past few days. If they can't\won't do that, or the figures are wildly different from the (v. rough I admit) average, they're probably in a dream world.
Kudos said:
Did an accountant prepare the accounts or just something they did? If it was a "proper" accountant, then perhaps this may hold more water e.g. someone to sue if it was proved accounts were made up.
You could always offer a buy out/deferred payment which may buy more comfort
Yes an accountant prepared the accounts but i have not spoke with him.You could always offer a buy out/deferred payment which may buy more comfort
ch427 said:
Thanks for all the input, i personally know the business as i shop there and it always seems to be fairly busy.
[classic PH Business Forum post] Busy does not mean profitable [/classic PH Business Forum Post]I'd go with the suggestion of just pricing it on assets and perhaps a very small amount for goodwill. Then of course I'd spend the money to get the sale properly documented and have some sort of retention/deferred payment to cover any unexpected liabilities that may pop up.
therealpigdog said:
[classic PH Business Forum post] Busy does not mean profitable [/classic PH Business Forum Post]
I'd go with the suggestion of just pricing it on assets and perhaps a very small amount for goodwill. Then of course I'd spend the money to get the sale properly documented and have some sort of retention/deferred payment to cover any unexpected liabilities that may pop up.
Fair enough, i will end it here i think and do some thinking and more detailed research.I'd go with the suggestion of just pricing it on assets and perhaps a very small amount for goodwill. Then of course I'd spend the money to get the sale properly documented and have some sort of retention/deferred payment to cover any unexpected liabilities that may pop up.
Thanks all.
t.Number of ways;
1. ask them what the spend per transaction is
2. sit outside the shop for a day and count the customers.
3. Arrange to go in at the end of the day and ask for the turnover.
4. Multiply 1. by 2. and see if it similar to 3.
VAT returns can also be hard to falsify (unless it is all cash in hand which is a different topic)
Ask them what their gross profit is and use their purchase invoices from prev month to check their turnover.
1. ask them what the spend per transaction is
2. sit outside the shop for a day and count the customers.
3. Arrange to go in at the end of the day and ask for the turnover.
4. Multiply 1. by 2. and see if it similar to 3.
VAT returns can also be hard to falsify (unless it is all cash in hand which is a different topic)
Ask them what their gross profit is and use their purchase invoices from prev month to check their turnover.
ch427 said:
Thanks for all the input, i personally know the business as i shop there and it always seems to be fairly busy.
I fancied a change of career and this is something i know and think i would enjoy doing, im kidding myself though if i cant see full and detailed business accounts.
to be fair a lot of small businesses don't do full and detailed business accounts- it does not mean they are necessarily hiding something. Probably that they are just crap at accounts!I fancied a change of career and this is something i know and think i would enjoy doing, im kidding myself though if i cant see full and detailed business accounts.
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