Financing a business purchase
Financing a business purchase
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Seancp

Original Poster:

59 posts

194 months

Wednesday 19th October 2022
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Not sure if this is better placed in here or finance, but any help is much appreciated!

I’ve got the opportunity to buy a business that I’ve sub contracted to for 7ish years and was also employed by for a couple of years. So know it and the owner well.

The business is in the construction industry, turn over is £1.4million and running at 30% profit for the last year so is healthy from what I can see.

The agreement we’ve come to is that I’ll buy percentages over the next 3-4years with him keeping 20% at the end and acting as a silent partner as he is retiring.

Obviously I’ll be doing all due diligence, but financing it is my 1st hurdle. I have the cash to cover the 1st 20%, he obviously isn’t keen on me borrowing against the company, at least at first. Can anyone give me any pointers where to look first? Is there a way I can borrow against the company with all the liability on me?

Stig

11,823 posts

300 months

Wednesday 19th October 2022
quotequote all
Seancp said:
Not sure if this is better placed in here or finance, but any help is much appreciated!

I’ve got the opportunity to buy a business that I’ve sub contracted to for 7ish years and was also employed by for a couple of years. So know it and the owner well.

The business is in the construction industry, turn over is £1.4million and running at 30% profit for the last year so is healthy from what I can see.

The agreement we’ve come to is that I’ll buy percentages over the next 3-4years with him keeping 20% at the end and acting as a silent partner as he is retiring.

Obviously I’ll be doing all due diligence, but financing it is my 1st hurdle. I have the cash to cover the 1st 20%, he obviously isn’t keen on me borrowing against the company, at least at first. Can anyone give me any pointers where to look first? Is there a way I can borrow against the company with all the liability on me?
Sounds like an MBO. Can't you agree to use the profits to purchase the company over the next 3 years or is he wanting a big chunk up front?

LastPoster

2,996 posts

199 months

Wednesday 19th October 2022
quotequote all
I can't help with the finance but the owner retaining 20% seems unappealing. Unless you value his input highly, it seems that you will be doing all of the work for 80% of the profit, when you could agree to buy 100% over five years instead of 80% over four.

Seancp

Original Poster:

59 posts

194 months

Wednesday 19th October 2022
quotequote all
Thanks stig, using profits is an option. Cash flow may become an issue if I took all the profits out as I’d have no buffer. 30-60day invoices are pretty standard, so I’d be wanting to build up the cash that he is taking out. Just trying to work out what all my options are.

Seancp

Original Poster:

59 posts

194 months

Wednesday 19th October 2022
quotequote all
LastPoster said:
I can't help with the finance but the owner retaining 20% seems unappealing. Unless you value his input highly, it seems that you will be doing all of the work for 80% of the profit, when you could agree to buy 100% over five years instead of 80% over four.
I completely agree, it’s not ideal for me. It’s something I’ll be talking to him about.

Stig

11,823 posts

300 months

Wednesday 19th October 2022
quotequote all
Seancp said:
Thanks stig, using profits is an option. Cash flow may become an issue if I took all the profits out as I’d have no buffer. 30-60day invoices are pretty standard, so I’d be wanting to build up the cash that he is taking out. Just trying to work out what all my options are.
See if he's amenable to leaving a cashflow lump in as a loan that can be repaid at the conclusion of the SPA - even if you agree an interest rate in it.

As a seller, he'll be looking for minimum of fuss too, though (from experience and human nature), they'll obviously want to squeeze what they can from it.

As above, I'd go for complete buyout, otherwise you'll be funding their retirement with no input/effort from them.

Seancp

Original Poster:

59 posts

194 months

Thursday 20th October 2022
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Stig said:
See if he's amenable to leaving a cashflow lump in as a loan that can be repaid at the conclusion of the SPA - even if you agree an interest rate in it.

As a seller, he'll be looking for minimum of fuss too, though (from experience and human nature), they'll obviously want to squeeze what they can from it.

As above, I'd go for complete buyout, otherwise you'll be funding their retirement with no input/effort from them.
We did discuss him leaving a cash flow in there for a couple of years as an interest free loan, which will help massively. I suppose when I get a proper look at the accounts it will become clearer how much I’ll need.

Thanks for your input!

Bogsye

406 posts

168 months

Thursday 20th October 2022
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Reading this with interest.
I’m absolutely no expert, but would the current owner not be better off leaving the cash in the business and you negotiate a share sale. Would a share sale not attract lower tax for him whereas taking cash out he’d get hit for a much higher rate?
Happy to be corrected if I have the wrong end of the stick.

LooneyTunes

8,316 posts

174 months

Friday 21st October 2022
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Without wanting to be unduly negative, is there a chance that the business could be hit by increasing interest rates/consumer spending being cut? If so, it might be worth thinking carefully about how you structure any deal, especially with respect to valuations. It wouldn’t be pleasant to be in a position where turnover/profitability changed and left you facing payments that were no longer reflective of a sensible valuation (or in an extreme case maybe couldn’t be made at all).

You might also consider a buyout of the the remaking 20% against a pre-determined formula in the future? At a minimum you want restrictions on who it can be sold to and a right of first refusal/to match any serious offer.. Minority shareholdings can still add awkwardness, and things that seem benign (such as, for example, a right to appoint a director) might seem less so in the future if that ownership changes.

Mr Overheads

2,533 posts

192 months

Friday 21st October 2022
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You need to be talking to the Corporate Finance department of a mid-tier or large local Accountancy practice. They'll have done lots of these deals and will also be able to advise on your tax situation and make the deal structure work for you.

Don't employ the accountancy firm that the Company currently uses.