Acquiring a business directly from the owner is just one method of making a start in the world of self-employment or of expanding your current enterprise. In addition, many buyers will find the enterprise they want to make an offer on via a sale advisor (also called a vendor advisor). This is due to the fact that a high proportion of vendors who sell a business in the UK each year choose to place their company on the market in this way.
For the majority of business sellers, an advisor does not simply help them with the contractual and legal side of a sale. They assist with all aspects of marketing the business, as well. Therefore, if you are currently looking for businesses that are on the market, it is likely that you will have come across ones that available only through a sales advisor.
Don’t be put off! Good sales advice is there to help realise a mutually satisfactory sale agreement. After all, if both parties cannot meet in the middle, then the sale will not proceed. Think of a sale advisor as a brokering the deal. An advisor should help to put together a deal from each of your initial negotiating positions. In other words, you should welcome them rather than viewed as something that is an obstacle between you and the seller.
Having said that, not all sales advice firms are as professional as they ought to be. What potential pitfalls should you look out for and, conversely, what are the positives to keep an eye open for?
When you make any form of enquiry about a business that is up for sale, you should never, we repeat never, have to pay anything to access information about the company.
So-called ‘pre-sale deposits’ are a definite red flag and are likely to be nothing more than scams. Genuine businesses that are on the market may wish to vet you as a potential buyer before handing over potentially sensitive details, but this is quite normal. Never pay for the privilege of looking over the books, technical data sheets or patents.
At Unloq, we have heard from one potential buyer who placed a non-refundable ‘deposit’ of £5,000 to receive financials. All that it delivered was a basic spreadsheet with some cursory numbers on. It must be said that this is not the normal for the industry which is generally professional but it serves as a warning.
In the end, we need to remember that the sales advisor is trying to market the business to you and not the other way around.
In some cases, a sales advisor will try to make the financials look better than they actually are. Be very specific with your questions about the figures shown to you. You need to ensure that you are seeing the most up-to-date data that includes, for example, any potential bad debt which has yet to be recovered.
You should also be especially careful with regards to the add-backs associated with EBITDA. Another area that catches some buyers out who are not in the know are hidden finances, such as ‘directors costs’ which include things such as ongoing legal liabilities, for example.
Take time to focus on how a business has reached its valuation. Often, the vendor has not plucked the figure from thin air – although this can happen by less scrupulous advisors!
Generally speaking, sale advisors will come to a valuation based on the future potential that is expected from the business. This potential value, and the accompanying projections that have formed it, can suffer from a degree of inflation for many reasons.
For example, there may be a business plan which says market share will grow unrealistically, or that expansion into new, overseas markets is possible when, perhaps, it is not. Don’t think of this as an attempt to deliberately pull the wool over your eyes. It is usually nothing more than an over-ambitious business owner with a rosy view of the future.
Drill down into the reasoning for the valuation to see if they stand up to scrutiny. This is just as important as looking into other parts, such as turnover and assets.
Sale advisors and, in many cases, the vendor will declare that the business is not owner run. This means that the business is not reliant on the proprietor to operate on a day-to-day basis. The advantage of this is that all of the client and supplier relationships that belong to the business ought to remain in situ after the sale. However, when it comes to acquiring a business, this is rarely the full story.
You ought to explore what the current owner specifically does within their role. Some will have built up personal relationships with certain suppliers and customer accounts which may not work in the same way – or operate at all – in the post-sale environment. Others will have a light touch on everyday operations. You need to ask yourself what the impact of new ownership will actually be. This may not be forthcoming from the advisor.
An advisor worth his or her salt will want to maximise the sale potential for the business owner. However, you should not allow a sale advisor to push your offer up when acquiring a business.
Know what your budget is and stick to it without being tempted to exceed it. Otherwise you may over commit yourself or need to refinance the whole deal.
When you enter into negotiations, the greatest negotiation tactic you have is the option to walk away. To sell a business takes time and the seller may not have anyone else lined up. Remember that they are looking for a big payday sometimes under time pressures so you hold some strong negotiating cards.
If you are looking for some help in dealing with advisors, then call 01962 609 000 or send us an email and we’ll help you as far as we can.
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