Money Week – 3 October 2003
Investment Strategy
How to buy a small business
Fed up with their lack of control over their own destiny, more and more employees are leaving big corporations to buy up – and be boss of – small firms. But before you follow suit, you’ll need to do your homework. Here’s how.
Find the right business
You need to find a business that suits your skills, says Clare Gascoigne in Moneywise. Buying one in an area in which you have no experience is “not recommended”. Once you’ve established what you’re interested in, start looking. There are hundreds of companies for sale listed in many of the national broadsheets, as well as in specialist magazines and websites (try www.businessesforsale.com). But don’t just look at businesses already up for sale, says Rachel Bridge in The Sunday Times; you don’t want to end up competing with other buyers in an auction. Instead, why not draw up a “pecking order” of businesses you would like to buy and approach them first.
Research, research, research
“At the end of the day, the parameters for buying an existing business are the same as when starting one from scratch”, says Lesley-Anne McKenna of Smallbusiness.co.uk, a Lloyds TSB-sponsored website. In other words, carry out extensive market research and check out the competition. And certainly “don’t rely on what the seller tells you”, says Rachel Bridge. Instead, “do your own research by talking to the firm’s customers and suppliers, walking around the area where the business is, and even chatting to regulars in the local pub”. As Peter Henington, M&A partner at BDO Stoy Hayward, says, buyers should “try to understand” what the position of the company is in its marketplace, what its market share is, whether the industry is growing or declining and whether there are barriers to entry around it”.
Consider a franchise
Buying a franchise is less risky than setting up on your own
The main advantage of buying a franchise is that franchises get a proven system, an established name and access to seed capital as well as training. Alick Jones, head of franchising at Lloyds TSB, tells the Sunday Express. But he warns that, while they may often lower risk, they also tend to return less. According to the British Franchise Association, around a quarter of franchises earn less than £50,000 a year, though another 25% make annual profits of over £500,000. Another point to consider is that you don’t quite get the pleasure of being your own boss. The franchisor is entitled to visit your business at any time to examine your records and you will have to pay him a percentage of your turnover.
Pay the right price
“When you are negotiating to buy a business, the price you should have in mind is zero. Let them justify why it is worth anything at all,” David Abingdon of the Quantum Organisation tells Rachel Bridge. Find out why the present owner wants to sell. “Look for signs, listen to the micro signals and look at the body language of the seller and notice the speed at which they try to move the sale forward.” A degree of scepticism about the seller’s motives is needed. “You have to be convinced that the value of the business is not tied up in that individual’s participation in the business.” And it’s not just the seller you have to think about. What about the key staff? They will need to be both engaged in the sale process and then retrained, as well as perhaps given an equity stake in the company. Compare prices for similar businesses too, says Lesley-Anne McKenna, and measure the purchase price against the returns you expect.
The business plan
A comprehensive business plan is vital if you need someone else’s money to get started, says Clare Gascoigne. The plan should start with a one-page “pitch” of your business idea, followed by a brief summary that can be sent separately to interested parties, then finally the plan itself, which should be about 20-30 pages. This should include all the market research already carried out, as well as any financial forecasts and management objectives. “The plan should convey the excitement you feel, and allow the reader to grasp the essentials of the business quickly.” But beware of a “one size fits all” approach, says Colin Mason in the FT. A bank is more interested in the financial information in the plan as its main concern as the ability of the business to repay the loan. Venture capitalists take a stake and so are more interested in growth potential. Finally, “business angels” will focus on market and financial issues too, but also tend to emphasise entrepreneurship.
Find the money
Potential buyers’ first port of call is often their bank. That can be a “mistake”, says Gascoigne. After an introductory period of “free banking”, a small business owner can find themselves stung for even the most basic of transactions. Kay Linnell of accountants, Morley and Scott, recommends comparing three or four banks’ packages, and for further clarification, the Independent Banking Advisory Service will go through banking contracts for you. Also consider venture capitalists or business angels (see www.hotbed.co.uk, for example). Government schemes (such as the Small Firms Loan Guarantee Scheme), the National Lottery and schemes such as the Prince’s Trust or Shell LiveWIRE also pay out billions of pounds in grant money each year, says Gascoigne.
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