Many entrepreneurs start in business by buying an existing business or taking on a franchise. These can be great ways to get started. What is surprising is how few people contemplating such an investment, which can change their lives, ask for independent advice or an appraisal of the proposed purchase.
If you were buying a house, would you part with the money before you had the property independently valued? Vendors of businesses, not unreasonably, want to get as much as possible for their business. Business sales agents act for the vendor and are usually paid on commission – so they are keen to get the most for the vendor. Often the only person on the buyer’s side is their solicitor and they understand the legal side but not the business.
It makes sense to let someone who understands accounts and businesses look at the information provided and dig deeper if necessary. This is a service we provide. We will look at the figures and other information provided and can often compare with similar businesses to see how realistic the information is. There will be tax and, possibly, VAT implications. Our website contains a weekly blog; click here to see what other information may be of help to you.
A few stories might convince you that an independent eye will be beneficial for you in the long run to help protect yourself.
Garage business – not what it seemed
Client came to us having bought a nice little garage carrying out repairs particularly for a couple of customers with small fleets of vans. The price seemed reasonable based on the accounts. What we spotted was that the vendor’s brother ran a similar business just a few miles away and the vendor went to work for him. Guess where the fleet work went? New purchaser lasted just over a year because the income just wasn’t there as expected, and he didn’t have the cashflow to support his family (wife and two children). He came to us too late for us to be able to do anything.
Mother and father came to us having bought a retail business for their disabled son. When asked why they had spent £45,000 on buying the business they said that the agent had said it was a good buy at that price and the agent was acting in their interests, wasn’t he? Clearly that wasn’t the case. When we examined the accounts provided by the previous owner we spotted several warning signs.
One of the warning signs was that they hadn’t bought the whole business and the previous owners were keeping a “small part” of it which they intended to run from a shop just a few doors away. The buyers were prohibited from competing with this spin off. It was obvious that the “small part” was where the profit was. We analysed the figures and advised them that the business they had bought was heavily loss making. In less than a year they closed but were still committed to paying rent on a long-term lease they had signed. This lasted nearly two further years until they could pass the lease on to someone else.
Massaged accounts in a pub
We examined the accounts for a pub, luckily before the purchase was completed. The figures didn’t look quite right so we started asking questions. What we found was that the daughter of the owner was doing outside catering and her sales had been included in the pub accounts for the previous year, but not for the years prior. The outside catering was not included in the price and excluding them made the figures more realistic. The vendor admitted privately that the figures had been enhanced purely to get a better price.
Understated sales – don’t believe it
An existing client decided to buy a restaurant. We examined the accounts and spotted several things. The first was that income from a rented property had been included in the sales but the existence of the property had been hidden. We found it by examining accounts for previous years where the property hadn’t been hidden quite as well.
The second thing we spotted was that all the staff were being paid below the minimum wage – and quite a lot below. Taking this into account, and making the business legal, virtually doubled the wages bill.
When we recalculated the potential profits based on the information we had found, our opinion was that the business was loss making by quite a substantial amount.
Unfortunately, the client didn’t take our advice and went ahead with the purchase. The vendor convinced him that the actual sales were higher, and he was under-declaring sales by around 30%. We didn’t believe this and said so. We were proved to be correct because the restaurant made substantial losses.
We found out later one of the ways the vendor had convinced the buyer that the figures in the accounts (and VAT) returns were incorrect. One of the remaining members of staff told us, quite a few months later, that whenever the potential buyer was due to visit the restaurant the vendor invited friends for a free meal, so the restaurant always looked busy.
What we are trying to illustrate is that someone trying to sell a business will do quite a lot to make the business look better than it is, because the result can be many thousands of £££s more on the price. Scepticism is highly recommended as is getting someone like Central Business Services on your side. We are professional advisors for Quickbooks® Online, KashFlow, Xero and Sage Business Cloud so can help you get organised when you buy your business or take on your franchise. We can even help you form a company if that is the best method of operating your new business.
For more information or just a general chat about either a franchise business or buying your own please do not hesitate to call us on (01509) 816150 or visit our website one of team will be happy to assist you.