From: "a0000000000" 
Newsgroups: uk.business.accountancy uk.finance
Subject: Re: Funding Business Purchase
Date: Sat, 8 Nov 2003 09:22:42 +0000 (UTC)


"cbjroms"  wrote in message
news:FIJqb.55$tP4.46@newsfep3-gui.server.ntli.net...
> I need to find about £250,000 (£150,000 tangible assets, £20,000 stock,
> £80,000 goodwill) to buy a business that I have identified. My assessment
is
> that I will need access to an additional £100,000 for working capital.
>
> The business returns approximately £70,000 pa before interest and tax but
I
> see the scope to increase this in the medium term by at least 20%.
>
> I have access to £160,000 in cash (but I want to keep at least £30,000 of
> this free for emergencies), have the scope to add a further £90,000 to my
> mortgage and have a share portfolio valued at around £125,000.
>
> I would be grateful for any advice as to the most efficient way to
proceed.
> Should I be trying to get an interest free loan from the vendor (eg
£125,000
> in cash and the remainder spread over, say, 5 years) or liquidate my share
> portfolio?
>
> Thanks in anticipation.
>
> Chris (Hampshire - UK)
>
>

There are loads of issues with this and a good corporate financier/lawyer
will be able to help.  The most important points are:

1.  Any bank is likely to ask for either a personal guarantee or extensive
due diligence on the business being bought, or both.  A personal guarantee
is more likely the less experienced you are because you will not know how to
play the financing game.  Banks will also want controls and checks in
place - you may not want them interferring in the business.

2.  You should look at tax and personal liability because it sounds like you
have some personal wealth you do not want to risk (i.e. your home) and some
structures are more tax efficient than others.  THIS IS IMPORTANT.  GET SOME
PROFESSIONAL HELP.  Especially as you are thinking of extending you mortgage
as you will need to try to get this deductable against profits.

3. If you are not financially aware and compentent, employ an independent
accountant (i.e. not the owner's accountant) who is experienced in due
diligence to go through and check the numbers.  This will probably be £10k+
but better than losing £250k.  Given you made this post, you are not because
if you were you would know these answers, so get some help.

4.  An interest free loan is a wonderful idea and you should ask for it
anyway.  Nothing better than free money.  As is any deferral of payment for
the business.  Can be linked to point 2, i.e. if the business failed no more
money available to pay vendor.

5.  Liquidating share portfolio is a personal choice.  The returns on the
proposed investment are higher but there is no diversification.  If you have
to borrow the money from a bank then these are likely to be pledged in some
form so there may be little difference to selling them.  There is a tax
issue as any gains from the business are subject to a much lower rate of
CGT.  See 2 again.  Also, no shares means no distraction and all your focus
will be on the new business which may be good.

6. Goodwill at about 1x EBIT is not substantial in my experience and you
should not be overly concerned.  However, make sure that the vendor cannot
start up the same business again within a few years and take all his
customers back again.  GET PROPER ADVICE on how to do this as some schemes
may not be enforceable and therefore useless.

The list could go on....