Raising finance on a business is easier than most people think. Everybody reads in the newspapers that Banks are tightening their belts, but this is not always the case, to quote a recent comment made by a local Bank Manager, "money is readily available to lend to people wishing to purchase the right business". Most people have more money than they think. Just because a potential purchaser doesn't have vast savings does not mean that the idea has to be ruled out. If for example, you have a house worth £60,000, most Banks and Building Societies are willing to lend (subject to status) up to 75% of the value, in this example £45,000 (less any outstanding mortgage).

Additional finance can be obtained from other sources if required, subject of course to status and satisfactory accounting information which is readily available on most businesses for sale. Other ways to release money tied up in your house, is to sell your property and then invest the money into a business with accommodation, which again can be part financed by Banks and Building Societies. The cost of borrowing from Banks and Building Societies can be reasonable and quotations can be easily obtained. Of course, it would be prudent for purchasers to take their own independent advice. The key to being your own boss is only a small step away and as I have explained above, anybody can buy their own business.

Everybody has their own thoughts on what kind of business they could see themselves working in, from post offices, newsagents, fish and chip shops, convenience stores, sandwich bars and cafes, pubs and restaurants. Businesses vary in prices from a few thousand pounds up to the million pounds mark. Businesses vary in many other different ways, not only price, some have accommodation, others are just lock-up. One of the main decisions when buying a business is whether to buy freehold (ie. buying the property) or leasehold (with the property on rent). Some operate from home, others from retail premises, some from commercial units and some are run from a vehicle. Whichever way you choose will more than likely depend on your price range but either way there is plenty of choice and you can look around until you find one that's suitable for you.

Once you have established loosely what type of business you would be interested in and what price range you can afford to go up to, this is when the going gets a little easier. Speak to one of the friendly sales staff at Clifford Lax who will carefully prepare a selection of suitable businesses within your desired price range, area etc. Visit as many businesses as you like - the experience will be valuable to you in making the correct decision for you. Once you have been to look around the businesses you will have a short list of 2 or 3 which will be ideal for your situation and are potential purchases. The next step is to obtain copies of the trading accounts which will show the sales figures and profits etc.

Once your accountant has approved the accounts, a price for the business can be agreed and you can go forward and arrange a completion date. Buying a business is a straight forward process, once you have set out your objectives. Along the way you should get advice from Accountants and Solicitors who will make sure there are no pitfalls. During the coming weeks we will be highlighting different kinds of businesses but in the meantime why not give us a ring to discuss buying a business and we will be delighted to send further information. If you would like to discuss the different kind of businesses and profit margins in further detail, give us a ring on 0113 2390330.

We find that our clients often ask the same type of questions about business sales. They frequently have a very good understanding of how to run their businesses but know less about selling or buying businesses. To add to the difficulty, there are very few sources of good professional advice on valuation and methods of sale. Often the sale of a business represents the culmination of many years work or sometimes a lifetime's work. It is important that the sale be handled well because the difference between a good result and a poor result is often a large amount of money. Given the above remarks, we have prepared this guide in order to assist our clients and potential clients. The guide should enable business owners to gain a reasonable understanding of:

•  The procedures of business valuation
•  Methods of finding a buyer
•  The pros and cons of appointing an agent or conducting your own sale
•  Typical costs and time for the total transaction
•  Problems, pitfalls and issues to be considered

The guide is intended only to assist potential vendors in acquiring a basic understanding of business sales. It is not intended to be a definitive text nor to provide answers to all of the possible questions. The sale of a business is a very time consuming and difficult process and it is therefore not possible to distill all of our knowledge of the pitfalls and problems in a short text such as this.

If you, or your professional advisers, would like to know more about our services, please contact us at Clifford Lax 0113 239 0330 or 0113 2390330.

Size is important ! The market for businesses seems to fall into three size categories and the valuation methods in each category tend to be different.

SMALL BUSINESSES (net profit less than £60k)

This is colloquially known as the owner driver type of business and consists of a large number of owner managed small retail shops, pubs, newsagents, convenience stores etc. The value is nearly always an asset and goodwill valuation. The assets are the stock (at independent valuation) and the plant, equipment, fixtures and fittings at written down value, open market value or replacement cost (whichever is appropriate or negotiable). Freehold property may be included in the sale at open market value, as an empty property or with its particular usage. The book assets and liabilities (e.g. creditors, debts, loans etc.) do not generally form part of the transaction but remain the responsibility of the vendor. Goodwill is valued mainly against profit and is often valued by applying a valuation factor to the pre tax net profits. The pre tax profit used in the calculation may be the profit shown in the accounts or (more likely) the net profit with owner benefits added back. These benefits are items such as salary, pension contributions, and motor car expenses. The Valuation factor applied will often be a well-known factor for that trade. However, the valuation factor will also vary depending, primarily on the future prospects for the business. Is it possible, for example, that the profitability can be improved significantly? Is the industry outlook poor? In these cases the factor may be modified. In addition issues such as the trading name, and licensing rights, copyrights etc. will influence the factor. As a general indication, factors being applied at present are between 1 and 2.

MEDIUM SIZED BUSINESSES (net profit between £60,000 and £300,000)

At higher profit levels, there is generally a formal management structure in place and a business will be viewed more as an investment than as an owner driven business. As a consequence, the valuation methods will tend to be more formal and include attention to the following: The financial and accounting information, in particular whether the expenses are appropriate and whether they can be reduced. Comparison with industry performance levels to find areas for improvement in profit. Preparation of a financial forecast which will probably have cash flow as its bottom line rather than earnings. A required financial rate of return being applied to the cash flow forecast to obtain a value. Liquidation values being taken into account. In these more formal evaluations, the emphasis shifts away from typical values that can be observed in the market for small businesses. The emphasis is more on the level of sustainable income which can be obtained from the investment. Apart from the earnings or cash flow forecast, the key fact determining value is the required term of return. Calculation of a required rate for a particular industry or business can be complex and it is outside the scope of this short guide. The mixture of types of asset (e.g. property, stock, intangibles) should be considered and the level of gearing should be taken into account. As a rule of thumb, it is likely that the required pre-tax return (EBIT) on net assets will be between 15% and 20%. The required return on equity (before tax) is likely to be between 25% and 40%. Returns on equity actually achieved over the long term in UK medium sized businesses are typically between 15% and 20%.

LARGER BUSINESSES (i.e. Net Assets + £3M. Profits above £300,000 p.a)

We find that our clients often ask the same type of questions about business sales. They frequently have a very good understanding of how to run their businesses but know less about selling or buying businesses. To add to the difficulty, there are very few sources of good professional advice on valuation and methods of sale. Often the sale of a business represents the culmination of many years work or sometimes a lifetime's work. It is important that the sale be handled well because the difference between a good result and a poor result is often a large amount of money. Given the above remarks, we have prepared this guide in order to assist our clients and potential clients. The guide should enable business owners to gain a reasonable understanding of:

Apart from the issues which effect the valuation of smaller and medium sized businesses (as above), the issues in valuation of a larger business expand beyond financial matters. Attention is paid to factors such as market position, potential value to another business (see below) and position of the business within an industry and competitive activity. Businesses with a turnover in excess of around £5M are often well known or maybe prominent in a particular industry. The purchase of this type of business is often of interest to a competitor (larger or smaller). Alternatively, another business which is involved in that trade (e.g. customers, suppliers, similar producers etc.) may be interested in acquiring a related business. Issues which become the focus of attention (in addition to the financial forecasts) are, for example: market share, competitive positioning, geographic markets, segmentation product competitive pricing, product development, brand image facilities, how the production facilities would fit with the purchaser. To summarise, a trade purchaser for the larger business is often interested in how the acquisition may fit with a wider business strategy or expansion program. The trade purchaser in this position is likely to place more value on intangibles such as market share, product positioning, reputation and fit with their own business strategy.

VALUE TO ANOTHER BUSINESS

There are often situations where, if two businesses are managed as one, the profitability of the combined business is better than the profits of the individual businesses added together. Typical reasons for this are:

Production Economics:
It may be possible to reduce production costs through longer runs, better machine utilisation or rationalisation of product lines.

Administration Expenses:
Similarly, the total cost of administration may be reduced through economies of scale, reduction in office space or more efficient administration.

Market Economies:
There may be benefits in rationalisation of marketing and distribution costs or in supplying additional products to existing customers of both businesses.

In general, any benefits of this type will accrue to the purchaser and it will be difficult for a vendor to obtain additional value on this basis. However, if vendors are in a strong bargaining position, they may be able to obtain some of the additional value. For example, if there are several potential purchasers with similar objectives then a seller can certainly expect to take some of the benefit. Also, a vendor may be ambivalent about selling but there is a large advantage to a keen buyer. Again, some of the benefit could be asked for by the seller when setting the price.

BREAK-UP VALUE

The assets of a business often consist of several component parts - freehold or leasehold property, stock, plant and equipment, trade name or customer list and other intangibles. One of the important questions to consider when valuing a business is whether the business needs all of the assets. Maybe some of the assets could be sold individually or put to different uses. For example, a business may be occupying a potentially valuable site which could be put to a different use (e.g. residential development). In this case, the business (i.e. plant, machinery, trade name etc.) could be transferred to a different site and the land sold off. There are many examples where spectacular gains have been made by getting planning permission for development and selling the business separately. The 'break up' approach to maximising value is not confined to separating the property. There are also cases where a business may have excess stock or unused plant and machinery. In these cases, separate sale of excess assets should be considered. As part of preparing a business for sale (which may take place over a couple of years) owners ought to be considering: Which are the profitable activities? How the assets could be rationalised. How the more profitable activities could be expanded

SUMMARY OF VALUATION

To reiterate the first point on valuation, there is no single correct price for a business. There are a number of standard approaches to valuation which will provide a range of values. However, every business is different. In order to get the best value for a business, different aspects and potential values should be considered. This is particularly the case for medium sized and large businesses. Looking at different options and alternatives is perhaps less important for smaller businesses where standard approaches to valuation are more relevant.

If there is one particular skill which a vendor (or more probably the broker) needs when selling a business it is the art of negotiation. If the vendor is negotiating the sale himself, it may be useful to do some homework on negotiation. Most good bookshops will have a few books on the subject. Typical standard pieces of advice are:

•  Set clear objectives for yourself
•  Understanding the other side's point of view
•  How to handle negotiating tactics and psychology
•  Look for win - win results
•  Force a conclusion if necessary

The problem in negotiating a business sale is less to do with understanding the theory but applying it in practice. Vendors often have an emotional attachment to their business and will tend to overvalue it. Buyers will see a lot of risk and uncertainty and will not want to overpay. Bringing the two parties together and getting a mutually acceptable result (a win - win) requires a lot of skill and business experience. Being a good negotiator, who can maximise the value of the business and finalise a deal, is probably the single most important skill of a business broker.

Typical commissions charged are between 2% and 5% of the total consideration. Although commission charges are generally tailored to each individual business and can vary considerably.

CONFIDENTIALITY AGREEMENTS

Before any important, commercially sensitive information is released, it is important to have a confidentiality agreement signed by the prospective purchasers. If properly drawn up, this will prevent the purchasers from divulging any confidential information.

Once a sale has been agreed, it is useful to prepare draft heads of terms. Buyers will then often want to undertake 'due diligence' work. This will be done in order to verify all claims that have been made and ascertain whether there are any hidden details, which can affect the value of the business. After completion of the 'due diligence' stage, contracts of sale can be drawn up. The terms of the contract tend to be fairly standard and will be well known to a solicitors specialising in commercial law. Typical fees for the legal work for a business transfer range from £500 rising to £5,000 for larger transactions.

One legal issue that deserves special mention is agreement to restrict the future business activity of the vendor. In most transfers, there will be some restriction on the vendors, which prevents them from setting up a similar business within a given area. These agreements have to be reasonable since they may contravene UK and EU laws on competition.

TAXATION

Capital Gains Tax affects nearly all business sales. Any gain may be taxed at the top rate of income tax which is 40%. This can make a big hole in the proceeds of a sale. There are a number of reliefs that may be available including retirement, rollover and reinvestment relief. This guide is not concerned with tax specifically but two useful pieces of advice are:

•  Take advice from a tax expert
•  Plan your exit carefully

When considering the sale of a business (particularly medium and larger business), it is advisable to work out a realistic plan. A good play may extend over two or three years and take into account:

•  The present value and market conditions
•  Potential for value improvement
•  Timing of the proposed sale
•  Time needed to find a buyer
•  Contingency plans (what if there are no buyers?)

When planning the sale of a business, it is important to have a realistic commercial valuation undertaken. If the value falls below expectations and/or requirements, then a value improvement program should be considered. A typical program would involve:

•  Assessing the business against industry performance levels in order to identify potential for improvement.
•  Implementing a cost reduction program (where necessary).
•  Implementing a sales improvement plan (if appropriate). This would focus on either increasing sales or increasing margins.
•  Executing a business expansion plan.