BizSale Small Business Blog. Small businesses for sale.

Hospitality industry observers are noticing a growing number of people snapping up bargain pub businesses in the north-east of England.

Stephen Taylor, managing director at specialist pub estate agent, Guy Simmonds, said he believes the noticeable increase in buyer interest from the south of the country stems from the excellent value for money to be found, as well as increasing the desirability of areas including Newcastle and the North Pennines.

“Our applicants, often driven by redundancy from the corporate sector, are looking for a lifestyle business in an attractive and desirable location,” he said. “The north-east matches their aspirations well.”

Fellow property expert Martin Stansmore, associate director of Christie and Co, agreed with Simmonds, highlighting that the shoots of recovery in the market were already on full view.

“So far this year we have seen a 60 per cent increase in the number of agreed deals across our Leeds and Newcastle offices compared to the same period last year,” he said. “Viewings have climbed from 360 to just under 600 as confidence has grown.”

Taylor said there was still caution being exercised, however, as the market emerging from the bank lending crisis appeared to be a dramatically different one, prompting more shrewness and bargaining among potential buyers.

“Gone are the days when overpriced businesses with no accounts or values based on potential will find a buyer,” claimed Taylor. “On the other hand, it’s fair to say quality businesses, priced realistically, will continue to sell to our savvy buyers.”

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One of West Yorkshire's most prominent micro brewers has bought up its first premises, taking ownership of the freehold of a Wakesfield pub from the Scottish and Newcastle Pub Company.

Great Heck Brewing, which was founded in 2008 by Denzil Vallance and Jason Hall, has bought O'Donaghue's pub in the West Yorkshire town for and undisclosed sum. The pub was originally for sale for an asking price of £175,000

Vallance and Hall already have grand designs on the establishment, with their first move being to change the pub's name back to its original of The Bull. They are also planning a full internal refurbishment.

The sale was handled by Christies & Co, at their Leeds office. Nicholas Thomas, of Christies, said the pub had commanded a significant amount of attention – almost entirely from people seeking to maintain the property as a pub.

“O’Donoghue’s attracted a good level of interest with a number of bids submitted," he said.

"Almost all the interest received was for continued public house use with buyers recognising that the present market offers a great opportunity to buy freehold pubs at attractive prices.

The buying of O’Donoghue’s will give the Great Heck Brewing Company a perfect opportunity to showcase its range beers to a wider audience.

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Many of us dream about quitting the rat-race and setting ourselves up with a nice café, B&B or guesthouse business in a beautiful area. Well they don’t get much quainter than this – a luxury B&B, tearoom and restaurant in Ludlow.

When buying a business, it’s important to consider if the business you are buying is a success (is it making a profit? does it have a unique selling point?). The Elizabethan De Grey’s Townhouse is an award winning business that has had a loyal customer base for the past 100 years.

The 200-cover tearoom has won the Tea Guild’s Award of Excellence for the past six years and the nine-room bed and breakfast facilities were opened in 2006 after the owners bought the adjoining premises.

The B&B for sale has a five-star rating from the AA and is rated as a ‘red hotel’ by the Michelin guide.
In addition to all this there is also a restaurant for sale as part of the package, which is situated on the first floor. There is room for development in this department, particularly for evening dining.

Buying a small hotel or B&B is a great way to earn a living as it usually offers the chance to work from home much of the time. It can also offer rewarding experiences in creating a wonderful setting for people’s holidays and business trips.

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If the upsurge in trade experienced by the nation’s coffee bar owners is anything to go by, the UK could soon be experiencing a surge in its economic fortunes.

Starbucks have reported a significant lift in July and August sales compared to the same period last year. This is a welcome turnaround in what has been described as the ‘toughest trading Starbucks has ever experienced’, according to UK chief, Darcy Willson-Rymes.

Starbucks has just announced that it will now only sell Fairtrade coffee at its UK coffee bars, in a single move that will lift the total market for Fairtrade coffee by 18%. Whether this is a PR/marketing move or a truly altruistic tactic is unknown, but a new pricing deal is likely to have been negotiated as the chain says it will not result in a hike in the cost to the cappuccino drinker.

At Bizsale, we have seen a marked increase in the number of coffee bars for sale over the past six months as owners struggle with covering their overheads in the downturn. However, with prices of cafes at rock-bottom lows, now is a perfect time for the cash-rich to pick, choose and negotiate favourable deals with vendors.

Certainly, those smart enough to develop small, profitable chains of cafes will find that even now there are buyers willing to pay multiples unheard of for single outlets. That multiple can only go up.

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Here are the advantages and disadvantages of the typical finance providers. This guide will help you to decide which options will suit you best when preparing to buy a business.
There are three types of finance for business buyers to choose from: loans, share capital and grants.

What follows is a summary of the core types of finance providers that business buyers use.

Banks – appropriate for small business buyers who do not expect their business to grow quickly.

Banks are cautious in their lending so you need to have prepared a convincing and thorough business plan. A finance broker can help you with this.

Advantages
* Familiarity and easy access.
* Flexibility: you can personalise a loan where your first few payments are smaller than later payments.
* You won’t have to give up a share of your business.
* Long established and regulated rigorously by the Financial Services Authority (FSA).
* Debt finance provided by banks is much more accessible to small businesses unlikely to grow rapidly, or at all.
* Internet banking means you can keep an eye on your accounts 24 hours a day.
* Customer service – one-to-one advice and assistance at your bank from a dedicated relationship manager. Most banks also offer telephone banking, sometimes even 24-hours a day.

Disadvantages
* You may need additional guarantees, which can affect your credit rating.
* People that need the money the most are often turned down.
* You will owe the bank interest as well as the money you originally borrow.

Government loan – appropriate for business buyers with no assets

The Government set up the Small Firms Loan Guarantee Scheme, which is administrated by the Small Business Service (SBS), in order to assist entrepreneurs with no assets to use as security for a loan. The loan can be repaid over a period of between two and 10 years.

Advantage – Perfect for when you don’t have any assets to use as security.

Disadvantage – There is an additional fee of 2%, which is to be paid yearly to the Government.

Venture Capital Funds – appropriate for business ventures declined by banks due to high degree of risk

Venture capital funds (VCs) are generous if they think they will get big returns in a short space of time. They only offer share capital; so offer finance in return for a share in your business.

Advantages – A source of large amounts of capital.
No repayments to consider.

Disadvantages – Required to sacrifice a large part of your company.
Will not be viable for the majority of small and medium businesses.

Business Angels – appropriate for new business buyers with few contacts that are prepared to give back high returns.

Business angels, who are wealthy individuals, also expect high returns and will take on high levels of risk. Unlike VCs, they invest at levels, between £10k and £250k that are aligned with small businesses’ needs.

They are likely to have experience in running businesses and good local knowledge because they usually focus their investment in a particular region. Therefore they are good candidates for great mentors for an inexperienced entrepreneur with few contacts.

Advantages
* Happy to invest levels of capital suitable for small businesses.
* You can often secure investment relatively quickly.
* Can offer advise due to their first-hand experience of running a business.
* Often have good local knowledge.

Disadvantages
* Expect high levels of return on their investment, so not suitable for businesses expecting low levels of growth.
* Infrequent investors.

I will post more summaries of finance providers next week, as there are quite a few!

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Seeking the right company to purchase is a very competitive process. Often, money is the most critical weapon a business buyer has to differentiate themselves from all the other business buyers, who have found the same business that is on the market.

When you find a business that ticks all the right boxes but initially exceeds your budget, you will have to be creative and resourceful before you can commit to buying.

Here are some ideas of how you can get the necessary funds for your business purchase:

The buyer’s personal funds:

1. Cash savings
2. A private loan from a friend or family member
3. Advances from personal credit cards
4. Obtain a bank loan secured with high value personal assets, such as your home or car(s)

Other funding sources:

1. Bank loan to the business
2. Asset loan to the business
3. Loan from current supplier(s)
4. Finance or sell off all existing excess stock owned by the company
5. Sell high value assets and lease them back or finance them
6. Sell high value equipment outright and time share or borrow other like equipment
7. Sell the car park land or your business’ allocated spaces
8. Sell or sublet the part of the building (if owned) and get advance payments

Negotiate outstanding business purchase balance arrangements:

1. Defer the initial payment for as long as you can
2. Assume more or other liabilities not originally in the purchase contract
3. Let the seller retain all receivables
4. Negotiate extended payment terms with your new suppliers

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Following on from last week, here are the last stages to buying a business, based in part on James Halloran’s book “The McGraw-Hill 36-Hour Course on Entrepreneurship”.

6. Once you are satisfied with your assessment of the business, you will need to go through financial and legal particulars with the following people:

• An accountant to interpret financial information you have gathered from the business owner/seller.

• The mortgage holder or landlord in order to find out about the transfer of the property to a new owner. If the property is leasehold, the date of expiry needs to be discussed and if possible renegotiated to the intentions of the new owner. An on-site review of the facility will need to be conducted at this point to assure it is in good condition.

7. Request permission from the seller to allow you to spend some more time at the operation observing and surveying customer satisfaction. This will give you a better indication of the present quality of service and the efficiency of current procedures.

8. Decide on your offer for the business. The accepted approaches for valuing a business include book value and the capitalization-of-earnings approach. Before you make your offer to the seller, find out what financing arrangements are available to you through a bank or the seller.
Formalise the offer in writing and then present it to the seller. Negotiation will usually take place at this point. You may be required to explain the offer and the benefits to the seller of accepting the offer. Do not pin all your hopes on this one business in case any obstacles present themselves, significant enough to force you to abandon the purchase.

9. If an agreement is reached it is then time to begin a due diligence process on the business you intend to buy, with your accountant and solicitor. It is particularly important to find out if there are any debts attached to the property. Also make sure that all assets are examined to check that what is represented is true.

10. Finally, the buyer should be present when a final inventory count of assets is taken before signing a sales contract.

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In this two-part blog, the first part to be posted today and the next the following week, are ten steps to assist you when buying a business, based in part from James Halloran’s book “The McGraw-Hill 36-Hour Course on Entrepreneurship”. Here are the first five tips:

1. The business that you are interested in buying must align with your personal and financial objectives. Before looking for a business to buy, create a “target business profile”, have specific criteria for what you want in a business to buy. For example, how much are you prepared to invest, what level of risk are you willing to take on, what is your minimum expected return, and how much time can you dedicate to learning and managing the business.

2. Aim to identify business opportunities with the potential to grow and which offer an attractive return on investment. It may be tempting to buy the first business that fits your needs, however it is important to always consider an attractive business objectively.

3. In an initial meeting with the business vendors or brokers they should be able to provide you with brief financial reports, history, price, and reason for sale. This will give you a good overview of the business, and give you an indication of any financial adjustments that needs to be made if you go ahead with the sale process.

4. If you are happy with your initial judgement of the business and believe it to be sound, request additional appointments in order to gain more information which will allow you to consider the business from other angles

5. Visit the property from which the business is currently run, this will give you the crucial opportunity to judge how well it has been managed and maintained. If it is a service business you are looking to purchase for example, it would be beneficial to talk with the employees and perhaps customers if the opportunity arises. A prepared checklist of information needed could include:

• The complete financial accounts of the business’s operations, to include all income tax returns and state sales tax forms for the past three years and a list of all assets to be transferred to the new owner.

• Records of any legal action past or pending against the business.

• A copy of the business lease or mortgage.

• A contact list of all major suppliers to the business with the name of person/s who have been dealing with the company.

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Here are some pointers of questions to ask the seller when looking into buying a particular business.

• The first and most crucial question to ask is why is the seller selling? The immediate response (watch the body language) to such a direct question will be quite revealing.
• Has the seller offered to give you a handover period after the sale to help with the transition, and have you discussed payment for their services during the handover?
• Make sure you request to look over the certified financial statements of income, cash flow and balance sheets for the last three years. If you plan to borrow from a bank to purchase the business, the bank will want to see them.
• Ask to see the company’s (and not the owner’s personal) tax returns for the past three years. The bank will need this information as well.
• Request a copy of all documents of all outstanding creditors like accounts payable, property and equipment leases. Again the bank will require this.
• See if you can pick up anything about the quality of customer relations at the business? Is there good rapport between the business and customers?
• Have you gathered anything about the relationship between the business and its suppliers?
• Find out about the conditions of the working environment. Are there any hazardous situations or is this a well-kept workplace? Once you have handed over it will be your responsibility to make sure it is a safe place to work for the employees.
• Lastly, find out about the conditions of existing fixed assets, for example, office equipment, machinery and vehicles. Does the existing staff (if any) demonstrate good maintenance and cleanliness of company property?

Finally for a comprehensive list of over 1000 questions to ask a business seller refer to our page at http://www.business-sale.com/nresourcediligence.html

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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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