| Preparing your business for sale Consider how to structure the sale as early as possible, and take advice from your legal and tax advisers. If your business is run through a limited company, you will need to decide whether to sell the shares of the company or just the assets. A share sale tends to be more complicated since you are selling not only the assets, but the liabilities of the company too. The buyer will, therefore, need to carry out a detailed investigation or 'due diligence' and will usually require extensive warranties and indemnities from the shareholders. An asset sale is usually simpler, but the structure of the sale will often be dictated by tax considerations. Contemplate hiving down the assets into a new, clean company in order to avoid passing on liabilities and make it more attractive to a buyer. Saving tax Ask your accountant or tax adviser to advise how to apportion the sale price between the various assets being sold. For example, if capital allowances have been claimed, there will be a balancing allowance in the year of disposal to reflect depreciation not accounted for. If the price apportioned to fixed assets exceeds their written down value in the seller's books, there may be a balancing charge on the difference, which could increase the seller's tax bill. The disposal of assets, other than trading stock, is chargeable to capital gains. Take advice, therefore, on available reliefs. These include roll-over relief in re-investment in permitted qualifying assets; business asset taper relief and indexation allowance for disposals after 5 April 1998. A seller will usually wish to keep stock values low since the sale price of the stock will be taxed as income. The buyer, on the other hand, will want higher acquisition costs attributed to the stock so he can claim stock relief. It is therefore better to make it clear early on in the negotiation, how you would like the price to be apportioned. If the business is owned by a limited company, a share sale may be the best way of saving tax. Business asset relief for individual shareholders selling shares in a private trading company is very attractive and avoids the tax 'double whammy' – corporation tax on chargeable gains on a disposal plus income tax on distribution of the net proceeds as dividends. VATUsually, it is possible to avoid having to charge VAT on the sale price. If the sale can be treated as the transfer of a going concern (TOGC) no VAT is payable. The seller does not account for VAT but is still not prevented from deducting input taxes on related expenses as a general business overhead. To qualify as a TOGC, the business must be transferred as a going concern, and the assets must be used by the buyer in carrying on the same kind of business as the seller. It is essential that the buyer is registered or becomes liable to be registered if the turnover exceeds the current registration limit immediately before the transfer. It is important to ensure that there is no significant break in the normal trading pattern before or immediately after the transfer. Special care must be taken if one of the assets to be sold is a property. If the seller has elected to waive the exemption to VAT but the buyer has not, the seller must charge VAT on the price. In order to avoid this, the buyer must elect to waive the exemption too and notify HM Revenue and Customs before the ‘time of supply'. This usually means notifying before exchange of contracts. EmployeesThe rights of employees of a business are protected when it is sold as a going concern. This is by virtue of the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE). All employment rights of employees are automatically transferred to the buyer, so that continuity of employment is preserved. So,if an employee has a claim which could have been brought against the seller (eg sex or race discrimination, or harassment) it can be brought against the buyer. If it is not intended to retain the services of all employees, careful consideration should be given to paring down the workforce to achieve a sale. This is easier said than done since it is very difficult in practice to circumvent the effect of TUPE. Some possible ways round the problem are:
Extreme care must be taken if a claim for unfair dismissal is to be avoided. Obtaining early legal advice is recommended. |
Monday, June 11, 2007
SELLING A BUSINESS: Legal Pitfalls
Looking at Franchises
Buying a franchise can be the right initial business for people who have never run their own business before, but like all business purchases it must be approached with caution and a lot of careful thought.
This article will give you a good overview of how to approach choosing a franchise.
It is possible to buy a brand-new franchise from the franchisor, or to buy an established one from an existing franchisee who has decided to sell. This article begins by assuming you are setting up a brand-new franchise outlet, and concludes by dealing with buying an established franchise business.
Let's deal with the theory first, and then tackle how to check out an individual franchise opportunity to see how good it is in reality.
What is a franchise?
A franchise is a licence offered by an existing well-established business (the 'franchisor') to others (the 'franchisees') to operate a similar business using the franchisor's fully developed business model, often trading under its brand-name in a defined exclusive territory. In return, the franchisee agrees to operate the business
systems imposed by the franchisor and pays an initial fee. Thereafter the franchisee pays commission to the franchisor, usually calculated as a percentage of sales. Many well-known names offer franchises including McDonald's, Benetton, Prontaprint, Body Shop and others.
What are the advantages of buying a franchise?
As a franchisee you are operating under the wing of the franchisor and will usually benefit from:
- Using a fully proven business model.
- Trading as a well-known brand.
- National advertising arranged by the franchisor.
- Comprehensive training.
- Help with initial set-up.
- Ongoing help and support.
Who is suitable to be a franchisee?
Franchisors target people who have a desire to work for themselves but, possibly never having done so before, would feel more comfortable to have a guiding spirit watching over them to reduce the risks.
Although the franchisor is there to train you, provide all the systems, and give you ongoing support, it is down to you whether or not you are successful.
Like all other business ventures, success in a franchise will require a businesslike approach, hard work and commitment. If you are in doubt as to whether you have these qualities, don't go for a franchise just because you think the franchisor can solve all the problems. He can't and he won't.
The other factor to consider with a franchise is this. The success of the franchisor and all the franchisees as a group depends on everyone following the system and maintaining the standards. Therefore, if you become a franchisee you will have to accept that the way you work, what you sell and how you charge will be dictated by the franchisor, with very little discretion for you to make variations. This is totally understandable. Every franchisee would lose out if each McDonald's or Body Shop you went into was different. Indeed, the most successful franchises are
the ones where the franchisor maintains the closest control. After all, their success depends on the customers always knowing exactly what to expect, whichever outlet they happen to visit. However, for the very entrepreneurial franchisee it can become very frustrating not to be able to make changes or diversify without permission, and to be bombarded with directives from head office, so you must be sure that you can work under these conditions before you buy.
Presentation and Marketing of the Business
Any new business will take a year to reach its full potential from a running start, and an established business needs a lot of TLC to effect a smooth changeover. So, before you take the reins, make sure you have budgeted adequately for marketing and promotion as a very real expense in the first twelve months. How you elect to market your business depends very much on what you are selling a commodity or a service. But the basics are still the same: to put your business in the face of all your potential customers and make it stand out from the rest. Ask the vendor You can't ask too many questions before embarking in business. If you're buying an existing business, ask the vendor how he does-his marketing and what return he gets from, say, advertising in the local papers. Ask to see invoices for expenditure on advertising. If it's a shop, then wander round surrounding shops and chat to other shopkeepers and their customers. Get the feel for how they perceive your prospective business - do they even know it's there?! It's amazing how you can walk past a shop, let's say a locksmith, and never notice it because you don't need a new lock. But when suddenly your key breaks in the front door and you need one immediately, do you know where to find one? The local locksmith who has done the presentation of his business the best is likely to be the one you will think of first. Retail businesses If your business is a shop or post office, you are probably going to be in a high street or precinct and depend very much on passing trade and regular customers. So you have to tempt in customers with attractive window dressing, special offers and sell yourself as a friendly, helpful trader whom people trust and enjoy visiting. It is very difficult to make the general public see anything new. You will be amazed how many people will ask where the toys are, despite your having put up a large sign! Or if it's a new line they will say, as they suddenly see the toys on the way to something else in the shop, 'I didn't know you sold toys -1 went all the way to the next town yesterday to buy some.' That was despite a sign outside for the past two months advertising that you now sell them. You will have to be very creative to ensure that people notice what you are doing. At the same time these days, people are used to shopping in nice environments and will quickly be put off from coming in if the shop is looking old-fashioned or tired and in need of a refurbishment. It is very important to keep the shop looking as smart as possible, especially if food is involved. Do spend at least a little money on a coat of paint if it needs it. If the shop has been green for the past 60 years, why not paint it bright blue? It would be a very good way to get it noticed and create interest in the fact that it has new owners. Service businesses If your business does not rely on footfall past your door, you must still make people very aware of your existence. Therefore marketing is an essential tool of absolutely every such business at some level. The vendor of the business will know what has worked well in the past and, just as importantly, what didn't. If there were a magic formula for marketing it would have been patented years ago, but the truth is there isn't one. It is very difficult to know in advance what will work and what will simply fail to produce results. Trial and error is often the only way, so be reluctant to change what the vendor has been successfully doing up to now. We will explore a few ideas you can apply to get your new venture or diversification off to a flying start. Identify your potential customers Who are they? It is absolutely essential to identify the people or other businesses that are going to need your services. For example, if your new business is a contract cleaning business you know your customers are going to be other commercial businesses and they are not passing trade. You have to find them at a time when they need a new cleaning contract. If you elect to run a dating agency you have to find ways of tempting single people to trust you to find them their perfect partner - an altogether more delicate and personal approach is required. The approaches in these two examples clearly need to be quite different. The cleaning company needs to target marketing in a way that emphasises what makes a cleaning company attractive to potential clients. It will need to consider what are the most frequent complaints that clients have about their cleaners, and concentrate the marketing towards convincing prospects that they will not have these problems in the future if they change over. The dating agency, on the other hand, will need to think about all the natural fears that people will have in using such a service, and allay them. Even if you are taking over a successful business where the marketing seems to have been good, consider the special issues that apply to your new business and chink about whether the marketing could be beneficially tweaked in some ways. Advertising Many entrepreneurs begin by placing advertisements in their local or national papers and wonder why it doesn't work very well. They may get the odd call or customer, but may have spent hundreds of pounds for a return of very little. When you look through your newspaper, what catches your eye in an advert? Is it size, colour, content or the fact that it has Special Offer plastered all over it? Or if you are honest, do you barely glance at the display adverts and go on to read the news items? Advertising is an essential income for any newspaper and they will try to sell you space, promising the earth as soon as they spot you are new in the neighbourhood. Representatives come and visit offering special rates if you buy so many column centimetres a week for several weeks and you can be tempted into spending your entire budget. If you want to try a few adverts, take the initiative. Call the paper and ask for late space - that is anything they have left shortly before their deadline. They will usually offer you a 50 per cent discount straightaway. Don't take it! Offer them a really low amount and often a compromise can be reached at perhaps 30 per cent of the original cost. Always try to get your advert on a right-hand page. If you imagine reading a paper on your lap, it is always easier to read the right-hand page and the nearer the front of the paper the better. You can waste a lot of money on advertising. Advertising in most minor publications will not work. Opportunities like advertising on the surrounds of local maps, or business cards in dispensers in DIY chains, simply do not work. It is very easy for the salesman to quote how many thousands of people visit the DIY store or use the maps, but the fact is that nobody will notice your advertisement or business card. At the same time, bear in mind that advertising tends to work better the more it is repeated. People will often not react until they have seen your advertisement two or three times. Therefore, if you do decide to try an advertisement in the local paper do not expect miracles in the first week, and give it at least a three- or four-week trial before you decide if it is worthwhile. You may find you can get a better deal from the publication by booking a run. Sell the benefits, not the features There is little point in putting any advertisement anywhere unless it contains a useful message. This applies to posters, handbills and fliers, as well as advertisements in publications. You must sell the BENEFITS of your product not the features. Look at any professional advert and you will see it promotes what the product can do for you. The fact that it is bright green, smells nice or attracts mice is irrelevant. The important points would be that it made acne vanish, took six inches off your hips instantly or provided a life-saving service. Use the words 'you' and 'your1 frequently in the advert thus: Your local computer shop, here when you need us. Put yourself in our hands - then relax. Perhaps the most famous by-line was coined by L'Oreal which they use for all their products and it says so much: Internet These days it is not expensive to have a simple website designed and hosted, and it is almost a marketing 'must*. By referring to a website in your advertisements you can direct people to the site where you can provide far more information than you ever could in an advertisement. Increasingly people are communicating by e-mail because it is so quick and flexible. If your business is called 'Rent-a-villa' it looks so much more professional if your e-mail address is sdes@rent-a-villa.com rather than smith2348@yahoo.com. You can register your own domain to enable you to do this, as well as have www.rent-a-villa.co.uk as your website for less than £100 per year. This would be money very well spent for most service businesses. Networking Particularly if your new business is a business-to-business service you will find it very worthwhile joining the local business clubs such as The Chamber of Commerce and the Business Breakfast Club. Word of mouth is by far the best, and cheapest, form of marketing. |
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VAT - an Overview
Value Added Tax is a very wide subject which, in its detailed implementation, affects different businesses in different ways. It is not, therefore, possible to present a complete guide here and you should take expert advice, 
Once you have sorted out how it applies to your business, and you have organised a system of record keeping to deal with it, VAT should not be a problem to administer. All the leading accounting software handles VAT accounting records automatically, and there are many helpful sources of advice to make sure you do it correctly right from the start.
What goods and services are subject to VAT?
All goods and services are potentially subject to VAT, but for VAT calculation purposes there are four categories:
• Standard rated.
• Reduced rate.
• Zero rated.
• Exempt.
Accounting for VAT. The extra record keeping
Once you are registered you will need to keep VAT records. But this is not normally a big task once you have a system set up and, as already stated, computer accounts programs do the maths for you.
Even if the accounting for VAT frightens you, calculate the savings to be made on expenses, and consider whether it may be beneficial to employ a bookkeeper for a few hours a week.
Taking over from die previous owner
If the existing owner is already VAT registered, you can: either apply to take over his registration or you can apply for a new registration in your name. It is always advisable to start a new registration in case there is any 'baggage' with the old one.
If the business is registered voluntarily, and you have concluded that you prefer not to register, there is no need to do so. The only difference is that as you are not registered the vendor will have to charge you VAT for any goods he sells to you that are subject to VAT. This would include VAT on any stock and assets you are taking over, as well as the price for the goodwill, and which could add substantially to the amount you will need to pay over at completion. It might pay to register for VAT for at least a while to be able to avoid such VAT being added to the business purchase costs, but you should take your accountant's advice on this.
Paying for Stock and Debtors
Paying for stock
Stock is changing on a day-by-day basis, so it is normally paid for separately on the day of takeover when it is normal to bring in an independent firm of stocktakers to do a full stock take and calculate value.
Stocktakers
Stocktakers have their special systems for doing this job very fast, so unless it is the type of business that does not carry much in the way of stock don't try to do it yourself.
Sometimes the vendor and purchaser each appoint his own firm, and the two firms get together to agree a figure between them. However, in many cases this is an unnecessary duplication of expense and it is often easiest to use the firm that the vendor has used in the past to act for both sides. You can then split the cost.
Provided they are a reputable firm, and most are, this is not as risky as it sounds. Firstly, having undertaken stock checks in the past at this particular business they are very familiar with it, and can reach an accurate figure much quicker than a new firm would probably do. Secondly, they are at least as keen to impress you, the buyer, as they are to please the seller, because he is leaving and they will be hoping to retain the business after you take over. In any event, as a reputable firm, they would not certify a stock figure they were not happy with in any circumstances.
What to exclude
You need to agree with the vendor what stock you are prepared to take over and pay for. Just because it's on the shelf doesn't mean you have to pay for it.
If in discussions with the vendor it has become clear that certain lines or products have not been a success, tell him you don't intend to pay for that stock, or at least negotiate a reduced price so that you can afford to put it on sale at an irresistible sale price.
With most retail businesses you should put a limit on the age of stock that you will buy. In the case of food, it obviously has to be fresh. In the case of toys, maybe 90 days is reasonable. In the case of greetings cards, you would not want to pay for the leftovers of last year's Christmas, Mother's Day or other seasons. You will need to consider what is reasonable for the particular type of business you are buying.
Invoices
If the stock consists of items that could be faulty and need to be returned, make sure that you have details of suppliers, and preferably copies of the previous owner's account numbers and invoices.
Settling up
The completion of the purchase of the business is settled between the solicitors.
However, because of the last-minute nature, stock is usually paid for by way of cheque handed over directly to the vendor on the day.
Paying for debtors
The simple rule here is don't. What if you pay the vendor and then the debtor defaults?
The vendor should give you a list of outstanding debtors as at completion and should write to the debtors to notify them that all debts up to the completion date are payable to him, and any subsequent invoices to you. Obviously you can send on any cheques you receive for him.
If the vendor has factored the debtors, then the issue will not arise in quite this way, as the debtors will pay the amounts to the factoring company who will then account to the vendor.
If you decide to use factoring as a part of your finance you may find it advantageous to use the current factoring house, since they will already have set up limits for the existing clients of the business. It is highly likely that the vendor will put this to you, possibly being helpful, but possibly also thinking that if you take over the factoring agreements he will collect his money and be off the hook as far as any possible comeback is concerned.
However, the factoring house will consider any deal with you as a brand-new arrangement, so if you agree that you will take over the factoring from the vendor they will make a new advance to you, and you will pay him. There seems no point in doing that. What do you gain? If a debtor defaults, you will suffer whatever clawback may be claimed by the factoring house, whilst the vendor, who has made the profit on the original sale, gets off free and clear. It is much better to agree that the vendor gets the money when, and only when, the debtor pays. As the new owner you have no possible advantage in it being any other way.
In any event, before continuing the arrangement with the present factoring house, you will need to look at alternatives to ensure that the vendor had a good deal. The fact that the factoring house had limits already set up is not a very persuasive argument because a new factoring house, given the client list, could organise limits very quickly.
Arranging Business Contracts
Unless the transaction is very small you will need to appoint a solicitor to act for you, in very much the same way as for buying a house.
Very small transactions
With very small transactions a solicitor's fees could add a disproportional amount to the cost of acquiring the business. Very occasionally, in these circumstances, the business transfer agent will agree to act as an independent facilitator for the parties. The sale price would need to be small, up to an absolute maximum of $10,000, and the transaction very simple - possibly something like a low-key cleaning service or mail order business operated from home. There would need to be no property purchase or lease involved, or indeed any major assets at all, and the terms between buyer and seller would have to be very straightforward.
If you think your transaction falls into this category, and you do not feel able to do it all yourself, it may be worth asking the business transfer agent if he is willing to undertake this for you before approaching a solicitor.
Appointing a solicitor
Solicitors are like many other professionals - there are horses for courses. A firm that is excellent for divorces or wills may have no experience with business transactions, and it is therefore important to ensure that the firm you appoint has the necessary expertise.
Although ultimately you are always protected by the Law Society against losses suffered due to the negligence or dishonesty of a solicitor, buying a business can be legally quite complex, so you need more than just that comfort. A good solicitor will ask all the right questions of the other side, will give you the best protection in the contract with the vendor (which will often be more complex than the standard one for buying a house) and will be able to give you good advice throughout the progress of the transaction. If he is commercially aware, he will be able to advise you on any detailed negotiation points with the vendor that arise during this stage - for example, what is included in the contract with respect to acquisition of stock. Therefore you need to ensure that you appoint a solicitor who has the right experience. If you do not know such a firm yourself, ask friends or relatives who own businesses, or ask the business transfer agent for a recommendation.
Make sure that the solicitor is aware of any valuation report or survey that you or your lender have had commissioned, and that he gets copies so that he can ensure that any recommendations for further reports or enquiries are carried out.
Contractual terms
You will need to discuss with the solicitor the conditions that you have agreed with the vendor so that he can include them in the legal contract.
Raising debt finance
There are many ways of arranging business finance apart from going along to your local high street bank. For anybody who is not particularly financially aware, some good advice is going to be needed. However, bear these two very important overriding considerations in mind from the start:
• Financial institutions lend money because they are confident in the ability of the people running the business.
• Financial institutions these days are fiercely competitive for good business.
Notice the emphasis on good. The important point to make is this. Banks and other financiers are very keen to attract good business, and will be very competitive in their efforts to do so. But, if the business is less than top-rate, they will either turn it down or charge much higher rates. You have to bear in mind that one bad loan wipes out the profit from ten good ones. So what does this mean to you?
It means that you need to convince the financiers you approach that, whilst you may be new to running a business, you are clearly someone who has thought it all through very carefully. You are someone who knows what he is doing, understands the fundamentals of the business being acquired, and is, therefore, probably going to be a success in the longer term.
This cannot be done by handing over the whole thing to an advisor to arrange. Yes he has good contacts, yes using them is a good idea, but you are not going to get the best deal unless you involve yourself in the presentation of the case. You need to check all the information that he is presenting, and be available to answer any questions that may be raised by potential lenders.
Using advisors
For the purpose of this subject we will look at two groups of advisor: brokers and financial/business advisors.
Brokers
Brokers make their living by maintaining good contacts with the hundreds of institutions that provide all the different types of business finance.
They keep registers of the types of finance and the standard terms that the different institutions are prepared to offer, such as:
• Which types of finance they provide.
• Minimum and maximum amounts they offer.
• Which types of businesses they lend to.
• Their lending criteria such as maximum debt to equity ratio, minimum security requirements, valuation requirements; etc.
• Interest rates and length of loan term.
There is no doubt that being able to tap into this data can save you a lot of legwork - indeed you couldn't really do it thoroughly yourself. However, brokers generally do have their limitations:
• Many charge substantial non-refundable up-front fees. Although some institutions pay an introduction fee to brokers, a large number do not. In any event, since so many deals fail to go through, the brokers need to get paid for their time whether they are successful or not.
• Many of them have good contacts but little presentation skills. You generally cannot depend on a broker to prepare a professional presentation for you. They often need the proposition to be prepared for them so they can identify the institutions that are most likely to help and submit it to them. They are rarely able to prepare cash flows and business plans for you.
• Some institutions do not like dealing with brokers. Most notable in this respect are the high streets banks. Although they acknowledge that brokers are a good source of new business, the banks purely regard them as introducers, and do not pay commissions. Whilst they will deal in general terms with the broker at the very beginning, they do so only to establish that, on first look, it appears to be a case worthy of consideration. Once they have established their interest, they will want to see you at an early stage. They know that the brokers do not vet you in any way and they will want your answers to their questions, not the brokers.
If you can get a recommendation, from a friend or from your accountant, then so much the better. If you are buying the business through a business transfer agent, his agency will probably have a finance department or, if not, will have a working relationship with an independent broker.
Unless brokers have been recommended to you, checking them out is not so easy. The first key question, of course, is what they are going to charge you. For the reasons already stated, you will find that most will want to charge an initial fee, whatever the outcome, and probably then a pro-rata fee based on the amount successfully raised once an offer of financing is received. But how do you decide if and when to punt an up-front fee? Mainly you will have to go on instinct as to who seems the most professional, but why not ask them to provide the names of a couple of recent clients that you can speak with?
Financial/Business advisors
Under this heading I include independent advisors who are able to offer business advice, such as developing a business plan, advising on the best way to finance the business, and assisting you to prepare the presentation for the lenders.
Often these advisors are part of a firm of accountants, or they may be individuals such as former bankers who have the necessary experience. If you need an introduction, you could do no better than to speak to your local Business Link.
If, when you have read through the following sections on financing a couple of times, you find it a bit mind-boggling, you should definitely seek the assistance of an advisor before approaching any institutions, because first impressions are all important.
Business transfer agents
All of the leading business transfer agents offer a financing service and will have a department familiar with leading lenders in the same way as the brokers referred to above. If you are buying your business through a business transfer agent, this is probably the best place to start. The institutions tend to have more respect for such departments because obviously they are specialists and, through the parent organisation, have a good knowledge of the business being purchased.
Going direct
If you have the confidence, and there is every reason you should have if you follow the steps in this article, approach the local banks directly, and any other institutions for that matter.
However, before doing so, prepare yourself by going through the different types of financing available. Ask for a preliminary meeting with the business banker. At that meeting tell him that you are proposing to make an application for finance, and ask him for all the necessary forms to be completed. He will no doubt, ask some general questions and give you some good pointers as to what information he will be expecting to receive, as well as an indication in general terms of what he is likely to be able to offer you if your proposal is favourable.
However, make it obvious that you regard this as a preliminary meeting and that you will be asking for a further meeting after you have prepared a full presentation.
Preparing the presentation
Even if you are using a business advisor, work on the presentation with him by feeding him with as much of the information described below as you can.
These are the general headings that your presentation should cover. The level of emphasis on each will vary in individual cases:
• Details of the new owners.
• Description of the business.
• The management and staffing.
• The financing plan.
• Cash flow projections.
• Historical accounts.
Details of the new owners
This should include a brief history of your career to date and details of your financial circumstances.
Do not worry if you have never run a business before. The lenders accept that we all have to start somewhere, and are mostly looking at how professionally you are approaching this venture.
Do not exaggerate. If your house may just fetch $175,000 on a lucky day, but is more realistically worth$160,000, put it in at $160,000. If it's important, the manager will check it, and there is nothing that looks worse to a banker than finding statements in a presentation that mislead. It will make him sceptical about the accuracy of the other information you have included.
Description of the business
A general overview of the key elements of the business including,
as applicable:
• General description of the location.
• Type of clientele/customers.
• Turnover and profits to date.
• Price paid.
• The competition, if any.
• Future plans.
• Why you consider this to be a particularly good purchase.
The management and staffing
• General information on staff being taken over, such as experience, length of service, etc.
• Who will manage the business day-to-day?
• What will the owner's involvement be?
• What controls are in place over cash and stock?
The financing plan
• Total investment required.
• The amount of equity being invested.
• Debt finance sought - what types and how much of each.
Cash flow forecast
If you are buying a business with a cash trade evenly spread over the year, the cash flow forecast is less important and relatively easy to prepare. Indeed, provided you have ample finance to make the initial purchase of the business and stock, you will probably never need more finance unless you propose to diversify at some stage, or some totally unforeseeable circumstance arises. In such cases a cash flow forecast at this stage has little value and may not be requested.
However, in other cases, cash flow can vary considerably on a week-to-week or month-to-month basis, and it is important to identify the maximum likely funding requirement to ensure that it is covered. This is the purpose of the cash flow forecast. Undoubtedly it is the hardest bit of the presentation to prepare, particularly if you are acquiring a business that is seasonal. If you have no accounting experience, you will probably need professional help with this. If you have a little accounting knowledge, the leading banks do have free computer programs to take you through it step by step.
The cash flow forecast is essentially a chronological table of cash movements in and out of the business on a weekly or monthly basis. It is not the same as sales and purchases in the same period. If you purchase stock on the first of January and sell it on the second, your cash position will depend on the terms. If you pay cash for the stock, and sell it for cash you are out of pocket for one day. If you buy the stock on thirty days credit and sell it for cash the next day, you will be cash neutral for a day and then in pocket for twenty-nine days until you pay the supplier. That will give you the money to fund other transactions. If you buy the stock on thirty days' credit, and sell it on sixty days' credit you will be cash neutral for thirty days, no cash having changed hands, and then out of pocket for the next thirty days, after you pay the supplier, until the customer pays you. In each case you should eventually finish up cash positive by the profit margin, but, as you can see, in the meantime the amount of cash you need to have available varies. When you prepare the cash flow forecast, the appropriate payment terms are included, as are different sales and purchase volumes at different times of the year, and thus it will take all the variations into account.
The cash flow projection should also include the cost of buying the business at the outset and the cost of any additional capital items that will need to be purchased during the year. It should also include anticipated general expenses such as rent and utilities as and when they fall due. As a result, it shows a prediction of how much maximum overall funding is likely to be needed at any given time over the period it covers.
The presentation should not only contain the cash flow figures themselves, but also the assumptions you have used in preparing them, such as rate of sales growth, price increases in sales and expenses, suppliers' payment terms, payment terms offered to customers, etc.
Whilst all the leading banks have forms for manually preparing cash flow forecasts, the forecast is best prepared on a computer spreadsheet program such as Microsoft Excel, Microsoft Works or Lotus 123, and this is how all professional advisors would do it. Once set up, these programs automatically do all the mathematical calculations for you, making it easy to change assumptions and see what the effects are. For example, you could increase sales prices by 10 per cent and, without having to redo all the calculations manually, see the knock-on effects on profitability and cash flow and hence financing requirements. You can give a copy on disk to the bank and they can do their own 'what if experiments like this.
Historical accounts
You will need to attach the historical accounting information received from the vendors. You should include the accounts for the last three years, along with the management figures covering the period since the date of the latest annual accounts.
The lender will look at these figures in detail to assess the ability of the business to cover the cost of the finance being sought. It is a good idea to write a summary of your findings and adjustments when you reviewed the accounts for the purpose of your valuation (as per the sections on reviewing the accounts in.