BizSale Small Business Blog. Small businesses for sale.

Using the services of professional valuers will go some way towards ensuring you don't pay more than necessary when buying a business. That, and taking a thorough look at stock levels, customer traffic and the books of account for tax returns.

Because it's illegal to under-report tax returns to the authorities, submitting the wrong figures after buying a business will attract penalties, notes business consultancy boss Joseph Kirubi, who's been having a look at the advantages of buying a business over starting one from scratch.

Acquiring "a tried and tested formula" is preferable, he reckons, since the only challenge you face is polishing the venture before you. Unless a business has been put on the market because of poor sales, of course.

"The prospective new owner should find out if the reason the seller is leaving the business is uncooperative staff, because this can confront the one coming in," he adds to Business Daily. Such a situation can be counteracted if workers are psychologically prepared for impending change, he suggests.

On the subject of proper valuations, he concludes that it's not just tangible assets like furniture, fixtures and IT equipment that should be accounted for, but also "intangibles" such as goodwill, whose calculation keeps changing. In accounting speak, that refers to what is paid for a business above its book value (in case you were wondering), and is usually on a "willing buyer-willing seller basis".

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I had some correspondence this week from a chap who owns a debt collection agency and is looking to buy small businesses in order to expand.

Having found something he liked up in Scotland, he asked for advice in valuing the business as he had no idea whether the price being asked was too much, or a good deal.

The information he provided on the business is as follows:

Turnover is: £70000
Outgoings from this: £40000
Net Profit: £30000

He understood the business and he said that it had a good client list and sales are “mostly repeat business”.

The point I made to this man is that most people think that valuing a business is a simple task and that a value can be arrived at simply by adding a couple of numbers together.

Unfortunately it is not that simple.

In this case, the most important point to explore was defining what the ‘outgoings’ are. Here, the prospective buyer got it completely wrong in his assumptions. On further inspection it transpired that outgoings did not include the cost of the owner’s time.

So, let’s assume this was a full-time job for the owner and he drew a salary of £30k. Seems reasonable. What happens to the figures now? Suddenly, the equation becomes:

Turnover is: £70000
Outgoings from this: £70000
Net Profit: £0

Does not seem such a good deal after all, does it? The question must be asked why the prospective buyer would want to risk £40K (that was what the vendor wanted) in order to land a job paying an average salary. Let’s say that the buyer puts his own manager in at 30K. How is he to make this acquisition pay? How long before it provides a return on his investment?

Our advice in this case was to offer the vendor a much-reduced amount up-front, followed by a number of deferred payments over time depending on revenues achieved.

We will talk more about the very useful tactic of deferring payments later.

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