Business For Sale - But No Accounts For Examination

[trajan]

Is it realistic for a shop business to make no accounts available for perusal when it is selling the business ?

Okay, the owner may well say that the scale of the custom can be readily gauged from daily human traffic in/out of the shop.
But business accounts offer other information like fuel/heating expenses, labour costs, state of equipment, changes in revenue in recent years, etc.

How realistically should someone take a business for sale proposal in these circumstances ?

 

[cremeegg]

A shop for sale without accounts is strange.

It should be possible to estimate a value based on sq footage and location. However I would apply a serious discount to compensate for whatever issue the vendor does not want to disclose.

I am assuming that it is the property which is being sold. If any legal obligations of the existing business are being transferred, e.g. staff then it would be very unwise to proceed.

 

[Brendan Burgess]

I am assuming that it is the property which is being sold.

Ah, I would have assumed the opposite.

But that would explain why they were not providing the accounts.

It's very difficult to assess a business. If it's a cash business, the accounts might well understate the revenue.

If you are buying a leasehold interest, then be careful about your liabilities.

If it's a limited company, you would need to do detailed due diligence.

Brendan

 

[trajan]

The proposition was shop + property upon which shop operates. The shop property also has a 2-bed apartment upstairs.
No employees would be attached to the sale, i.e. exiting owners are the only employees.
My understanding is that it's a sole proprietorship and thus the proprietor's own overall tax position would be exposed by accounts disclosure.

A letter from an accountant stating the essentials of the business' operating accounts for last 5 years was requested.
But it was also refused.

The shop does have good footfall and is very busy Monday, Friday and Saturday morning.
The turnover could be increased by ~ 50% if new services were offered.
But expenses (esp. elec/gas which are the major ones) are a mystery and, in the present world energy situation, a serious question mark.

It was on the market via certain Irish and UK publications over the last 3-4 years but no serious takers emerged. This is perhaps due to the fact that it's a property + business sale. Those with the money would perhaps buy property or a different type of investment. Those without would have to borrow - and I'd expect a CU/bank manager to insist on 6-8 years of audited accounts.

Looking at ads for similar businesses they usually offer audited accounts and equipment purchase/maintenance records.

 

[Brendan Burgess]

But expenses (esp. elec/gas which are the major ones) are a mystery and, in the present world energy situation, a serious question mark.

But that is the same for anyone starting a business. All you can do is estimate what the costs are. Unless it's a very energy intensive business and you don't know how much energy it uses.

I always advise people who are going into a business which they have not worked in before, to get a job first as an employee of a similar business and learn the business.

Will you continue to trade under the existing trading name?
Although you are a separate legal entity, are there any claims against the existing owners which might damage your reputation?
Did they sell gift vouchers which might be outstanding?

Brendan

 

[noproblem]

If you do decide to go ahead and buy it regardless of accounts, etc. These pointers might help

1) What products provide the bulk of turnover.
2) Are they profitable lines.
3) Are there many losing products being sold.
4) How will stock in hand be estimated.
5) Does the business provide credit to customers.
6) Is it seasonal with regard to most turnover.
7) Who does the books at present.
8) Is it in a high population area with good footfall.
9) Condition of premises and structure.
10) Why is it being sold.

 

[trajan]

@Brendan:

I absolutely agree - from buyer's point of view it's essential as you say; and from sellers' viewpoint it's desirable as they enjoyed a homely, almost Quaker-like, friendliness with many customers and live nearby so would want to maintain this state of relations.
Yet whenever I put this to the owner, he shot it down. All he'd do was "be with and advise" the new owners for 6 weeks after purchase as is.

I'd say the old business name would be better retained until a new owner had established their own credentials in customers' eyes.
On claims against the existing owner, I know of none. He was very aware of stuff like that - odd points of consumer law, business owner liability, etc - and would be unlikely to have left any hostages to a new owner's fortune.
No gift vouchers are ever offered. Just a box of sweets at Xmas time on the counter and an odd freebie service for a helpless pensioner.

@noproblem:

1) Purely services only -- USP is speed of flagship service compared to local rival businesses; most other services either run-of-the-mill or subcontracted to bigger/specialist service providers and a small cut taken from it.
2) Profits per transaction on flagship service is less but this is made up for by higher throughput. Other services have typical margins for that sector. Overall - prior to Ukraine - I'd estimate expenses outside labour and rent to be ~ 25% of which energy as gas/elec is the main one.
3) No loser services. But it's easy to discontinue them or subcontract to a high volume provider anyway.
4) No stock in hand bar small consumables stock for ongoing operations and a small set of essential spare parts for equipment.
5) No credit. No card machine there and all stuff is held till paid for.
6) Not seasonal turnover-wise. But certain services are more in demand at winter end or summer end.
7) The proprietor does the books initially always but I suppose a formal book-keeping + advice is got from a local accountant.
8) Yes. Adjacent to 2 colleges, a share of apartments and family homes. Kind of like Upper Rathmines Road, if you know it. Except flagship service also brings customers from miles around.
9) Shop building is well-maintained.
10) Owners getting too old and wanting more leisurely lifestyle.

Getting back to original question, could the fact that owner's profits go mainly into buying houses have a bearing on the sole tradership structure ?
Can this structure offer advantages w.r.t. the properties bought ?

 

[Brendan Burgess]

Yes, it is better for you to buy a building in your own name rather than through a company.
The fact that it is in the seller's name makes it less complicated for him to sell and for you to buy.

Not sure about the tax consequences of buying a property and business combined. You will need to talk to an accountant about that.

If a lot of the custom is dependent on the individual's reputation and if they come from miles around, it might be a hard act to follow. People may well switch to another supplier.

And make sure he signs a non-compete clause although it would be very difficult to enforce.

Brendan

 

[Ravima]

In the past, anecdotally, there was talk of three sets of accounts, one for the proprietor, one for revenue and one for the purchaser!

 

[Brendan Burgess]

What about the one for the bank?

 

[trajan]

In the past, anecdotally, there was talk of three sets of accounts, one for the proprietor, one for revenue and one for the purchaser!

What about the one for the bank?

Absolutely appalled, gentlemen.
No doubt the accountant preparing these alternate statements of facts would be most handsomely rewarded if a business sale were successfully negotiated.

One of the things the proprietor considered lately was the extraction-sale of the business from the property.
In this way, the owner would sell the business name + goodwill, all viable equipment/spares and consumables and then put a sign outside the building redirecting customers to the new location of the shop around the corner for a few months after purchase.

This method of business sale would sharply reduce the amount of capital outlay by the buyer as they would only have to lease a shop elsewhere and install the existing equipment. It also makes it easier for the seller to redevelop the old shop building into 2 x 2-bed apartments and get good steady income from these. Planning permission for this contingency has been granted.

In a sense I can appreciate the human benefits from this approach: whoever might take over the business as a going concern operating from its existing location would be continually going back to the current owner (who lives close-by) over one problem or another. This would be a pain in the neck for someone retiring - although you'd get far more for a business (esp. goodwill) in its existing location.