Should I buy a business or start from scratch

I have an opportunity to buy my current employers business, but should I go it alone?

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Recently had my annual review with my employer and they sprung something unexpected on me. They are looking to retire and would like to offer  me the practise.

It is a small practise, less than 25 people, and I know this is a good opportunity. I would have to take out a significant loan (talking between £700k and £1m) in order to buy the business and the thought of that level of debt frightens the  sh1t out of me. My boss doesn't understand why that is frightening, and recons I could repay the loan within 5-7 years from the business profits, I haven't seen the detailed accounts, so I don't know the level of profitability.

I have a young family and obviously I don't want to put financial pressure on us, and also I don't know if I want the extra stress and commitment to stop me spending time with my children while they are young.

I have been in the practise for best part of 10 years, started as a trainee clerk and progressed to manager, although I don't oversea any staff, the boss does all that. I have worked in a position in another unconnected job where I managed a team but not anything major.

I have for a while been considering starting my own business with my wife. She is a stay at home mum at the moment, and unlikely to return to full time employment due to medical reason. She has bookkeeping experience and some minor accounts prep experience. I wouldn't quit my current job, just try and pick some clients up over time until it is viable for me to quit.

Just wondering if anybody else has been at similar cross roads, or from people who have taken the plunge at their own business, or any advice in general.

Replies (17)

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By gilderda
16th Aug 2017 10:48

First question has to be whether you want that level of responsibility and pressure at this point. Everything else is secondary to that. There's no business opportunity so good that it overrides messing up your family life.

If you do, then do the same due diligence you would advise a client to do if they were buying a business from an unconnected third party. This is your home and future you're potentially putting at risk, so don't go into it with a single question left unanswered.

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By bernard michael
16th Aug 2017 11:10

I haven't seen the detailed accounts, so I don't know the level of profitability.

So the figures you quote are based on the asking price. You might find that when you see the accounts a much lower figure is justified. It's worth asking to see the last 3 years accounts to see what sort of price is a realistic figure and then review your situation again

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By User deleted
16th Aug 2017 11:15

Following on from gildera, I'd advise drawing up a list, with three headings; good, bad and ugly.

It follows that all the positives go into the good column, all the negatives, into the bad and, anything truly awful into the downright ugly column. Whichever column has the most entries, is the one to lean towards.

Discuss with trusted friends and family.

This could be a life changing event, one way or the other and, in five years time, you shouldn't be even thinking "what if". The biggest responsibility is making the correct decision, for you and your family, now.

Much will depend on your personal character and, no matter what, if the risks outweigh the potential benefits, you'll have to walk away. We're all different, with myriad constituent parts and, that will always be the way.

I wish you well.

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Red Leader
By Red Leader
16th Aug 2017 11:29

Don't turn it down just yet!
Explore it further with them.
As others have said, the financial commitment may be less if the agreed price comes down after you've seen the a/cs.
Also there may be a way to "bite it and see" - buy say 25% of the clients to start with to get a real feel for it all.

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By ireallyshouldknowthisbut
16th Aug 2017 11:46

There is never a "right time" to step up into an ownership role. You will always feel out of your depth for a while.

You know the firm and how its run, so you know how good it is. If you are the top talent then it could be a great opportunity. Invariably this will come when you have a family, as these things don't tend to come in tour 20's or your 50's.

If however you are the 3rd person to be asked and cant manage your way out of a paperbag and the whole firm ends up like Iraq with Saddam no longer the leader, then maybe not such a good plan.

Dont forget there should be a 3 year earn out, not just cash upfront.

Also consider if there is a another "young gun on the up" in the firm who you work well with, is talented and might want in with you as a junior partner. 25 people is a reasonable sized firm.

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paddle steamer
By DJKL
16th Aug 2017 11:51

I would be slightly curious why , if current owner was thinking of an exit and thinking of you re said exit, they did not plan better and say make you a non equity partner or director before now, to mould you into position before any future transfer?

I have no idea if £700k -£1m is just for the practice or if that covers other assets (property etc) but if the practice that is a fairly chunky firm.

Also, would you be happy paying that sort of money up front, it surely would be more appropriate for stage payments based on client retention etc?

I would proceed with caution.

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Jennifer Adams
By Jennifer Adams
16th Aug 2017 11:57

This is, as you say a lot of money and a lot of debt. However... there are many benefits apart from being your own boss. You know the staff and the type of work for example.
May I make a suggestion... this is too big a project to go alone why dont you gave Nicola at Draper Hinks a call - she wont charge for initial consultation. She doesnt just negotiate for accountants that have approached her for advice on selling but will hold you hand through everything. I've used her a couple of times for advice and found her invaluable (and no.. I dont work for her!)

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By rhino83
16th Aug 2017 14:29

Thank you everyone for their comments. Just to clarify a few things.

I think the price is pretty much set as he claims to have had an offer for the client. Granted this is a Ltd co so he would then need a way of getting the money out so he would probably prefer to sell the shares.
The current property is owned by him personally so he is basically looking for £700k for the business and £300k for the property.

He is not looking for an immediate out, he talked about selling 50% now and another 50% in 5 year if I wanted.
I don't know if that would be a good idea though, I know he has had several business partners in the past, most before my time and they have not been able to work with him. If I was to go ahead I would want him to sell it all to avoid future issues.

The main concern for me, is right now we are doing ok financially, but for years we haven't been, I made a bold move years ago to train in accountancy which meant a major pay cut. My wife then had to stop working due to health reasons which left us with major financial issue.

We survived on credit cards for year, just for daily expenses such as food and fuel. The debt is now just about gone which is also another reason I'm not so keen.

He has come to me as the company is a chartered firm and I'm the only other chartered qualified in the firm. His father started the business during the 50's and passed it to him so it has some sentimental attachment which is another reason he wants to keep the firm together and to keep its chartered status.

It has certainly given me something to think about, and as I said it is a great opportunity I may never get again and I want to be happy which ever choice I make and not be left with regrets of "what if".

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Replying to rhino83:
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By User deleted
16th Aug 2017 14:40

I'd suggest that Jennifer has experience in these matters and, she might be open to you contacting her via the private message arrangement?

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By ireallyshouldknowthisbut
16th Aug 2017 16:16

It sounds quite promising, in that you know where the bodies are buried and he isnt seeking the cash right now.

On the building, firms can move buildings. Just be his tenant and sign a (say) 5 year lease over the period of the buy out. This saves you a lot of borrowing and risk.

The big question however is if the turnover if £700k (assumed from the price) how much do you actually make? 25 heads sound like you dont make much at all unless they are all very low paid part timers. I would expect to do that with half the heads FTE.

Also consider taking on "the best bits" ie a profitable segment and a core team of talent and him selling off the chaff to the third party. You can keep the family name for his ego & sentimentality vs getting swallowed up by a larger firm.

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By Moonbeam
16th Aug 2017 16:56

Are you being asked to pay for work that won't be there due to MTD in 2 years from now?

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By marks
17th Aug 2017 00:14

It's a difficult one and ultimately will come down to your own personal decision.

Personally in something like this I would look at the figures and go with a gut feel as to whether it is worth it or not. I tend to find if you have anything niggling doubt about something then it tends not to be the right thing to do.

The major plus is you work at the firm, know how it works and know the staff and what they are like.

As mentioned above if £700k is the GRF on the basis looking for 1:1 then bottom line profit cant be much if there are 25 employees.

Our GRF is currently about £230k with 3 full time employees excluding me (one of which is a trainee). I would be looking to earn £700k with somewhere between 7 and 10 fee earning employees.

I would expect pre tax profits on £700k GRF to be somewhere between £200k - £250k. Which is a nice return and makes it reasonable to repay the debt in say 7 - 10 years.

Also depends on what the opportunities are to grow the business and add value added services to clients, what the age profile of the clients are (old clients are not necessarily a bad thing as they need help with succession planning, IHT planning, exit planning),what services are currently offered to clients, how cloud based current clients are, when and how fees are reviewed, if the practice is fully systemised so runs like clockwork meaning no constant firefighting, how clients pay (do they pay monthly DD in advance and are on fixed fees or are fees based on time based billing and due 30 days after invoice.)

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By andy.partridge
17th Aug 2017 10:15

There are better ways, I think, to take advantage of this situation, bearing in mind you are uncomfortable with that level of personal debt.

Here's an idea. Form newco and newco buys the shares of oldco, but oldco continues to function as normal. Newco pays for shares over pre-agreed period of time from future dividends received from oldco. The whole or substantial part of the purchase could be funded this way.

Of course if the oldco shareholders want their money 'now' there is a problem, but if they want an undisturbed succession this is possibly a way to go.

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Stepurhan
By stepurhan
17th Aug 2017 10:20

Be very wary.

He is offering you a price, which he says is set in stone, but has not offered you any real justification for that price. (beyond an alleged buyer at that price). He is also casually talking about paying off a large loan in a short period as if it was a minor detail. Ignore the sentimental "really wants to pass it on to you" angle.

If you are interested, tell him so but make it clear you are going to look at it as if you were an external buyer. Ask him for the detailed accounts for at least 3 years. Ask for a detailed list of what he would expect to be included for the price. Check what the cost of finance would be for you (and if you can get it. It's a non-starter if you can't raise the cash). Do a full cash-flow forecast and see if you can finance the loan whilst still paying your own bills.

If he's not willing to give you all the information he would give an external buyer promptly, turn it down. Anyone who would use your past relationship to encourage you not to do due diligence is likely not doing you a favour.

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Caroline
By accountantccole
17th Aug 2017 11:00

It sounds like a really big jump from where you are now to running a business with that many employees. If it is being phased in over a period then you might be OK and get the experience at a higher level and get a real feel for profits and level of work involved.
I have to confess this is part of the reason I "jumped ship" from my old firm and set up on my own, rather than waiting for the older partners to retire leaving a high personal financial commitment and responsibility for that many people was scary. I walked away, buying my section and haven't looked back. Even buying part of the business involved personal mortgages and loans.
Good luck and take advice if you can find it.

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By Charlie Carne
18th Aug 2017 10:25

rhino83 wrote:

I haven't seen the detailed accounts, so I don't know the level of profitability.....
...progressed to manager, although I don't oversea any staff, the boss does all that. I have worked in a position in another unconnected job where I managed a team but not anything major.

You certainly have a great opportunity here, as others have said. However, you need to take great care, as you seem to be very inexperienced. Why have you not seen detailed accounts yet? What is the current owner hiding? You're a manager, but don't manage any staff - so how do you know if you are suited to managing a team of accountants or even whether your current colleagues would take well to you suddenly being their absolute boss, when you've not even been their manager to date?

As your boss is "not looking for an immediate out", I'd suggest that he promotes you to number two now (whether also making you a junior partner would be a matter for negotiation) and that you start to manage your own portfolio of clients within the firm. You will then learn whether you are suited to management, whether your colleagues will happily work for you and whether the stress is something with which you are comfortable.

Good luck with this; embrace the opportunity, but take care and do not commit to large payments until you have thoroughly assessed the long-term security of the practice and your own abilities.

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By DavidCane
19th Aug 2017 13:27

If the accounts show (i) a good and regular net income and a strong balance sheet, then consider making an offer or a counter offer to the vendor's offer. Before doing so, consider joining forces with a fellow practitioner to share the financial and organisational responsibility. Kind Regards David Cane ([email protected])

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