Cycle Business Update


S

Stuart Tanner

Just a quick update:

I firstly want to thank all who gave comments and opinions regarding my
situation. I am still feeling that it most likely will be that we proceed
next week with a formal offer that I doubt will be turned down. I have tried
to keep my name and the details as anonymous as possible as it is not my
business yet.

However, I must confess that now I have seen the latest figures (today),
that were up until the end of march 2003 I am quite disheartened, the
turnover is much less than I thought, and the profit margin was lower. In
fact it was loosing about 10K that year. I original said this business was
inexpensive, and now I see why. However, as the location is super, the rent
is super, the space is huge and the turnover was once good I feel it is
worth it at the low price, so after checking the last twelve months turnover
via bank statements as Peter suggested and checking the VAT returns I will
proceed with an offer.

Thanks again for all inputs, they were all valued greatly. If we officially
take over the business I will pub up a link to the new website.

Rgds
 
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T

Troy Steadman

Stuart Tanner said:
However, I must confess that now I have seen the latest figures (today),
that were up until the end of march 2003 I am quite disheartened, the
turnover is much less than I thought, and the profit margin was lower. In
fact it was loosing about 10K that year.
Let me know what the turnover *was* and what the profit margin *was* and
we'll put that into the cash flow projection and see whether you *can*
buy this business. Margins can be increased, declines can be reversed,
but under-capitalisation will prove fatal. This is real money you are
gambling here (albeit somebody elses) so you must be realistic.
I original said this business was
inexpensive, and now I see why. However, as the location is super, the rent
is super, the space is huge and the turnover was once good I feel it is
worth it at the low price, so after checking the last twelve months turnover
via bank statements as Peter suggested and checking the VAT returns I will
proceed with an offer.
The bank statements will (probably) only show the CC side of the
business, few businesses are scrupulous about banking *all* their cash,
although from a control point of view that is a good thing. So adding up
the Bank Receipts will give you only part of the equation.

The VAT returns should closely mirror the turnover in a bike shop, but
they may straddle quarter ends. Just take the 4 latest and add the Net
Output boxes together and that will give a figure which is as good as
(even though it may be slightly different to) the accounts.
Thanks again for all inputs, they were all valued greatly. If we officially
take over the business I will pub up a link to the new website.

Rgds





--
 
T

Troy Steadman

...so after checking the last twelve months turnover
via bank statements as Peter suggested and checking the VAT returns I will
proceed with an offer.
The other Cash Flow question you haven't addressed is the arrangement
you will have with your suppliers. If you are going to rebuild the
business you will need to restock, will you pay "up front" or do they
give you 30 days?

If you sell your bikes before you have to pay for them (at the same time
getting the VAT in before you have to hand it over) that could be an
enduring £5-£10k uplift in your finances.





--
 
S

Stuart Tanner

Troy Steadman said:
Let me know what the turnover *was* and what the profit margin *was* and
we'll put that into the cash flow projection and see whether you *can*
buy this business. Margins can be increased, declines can be reversed,
but under-capitalisation will prove fatal. This is real money you are
gambling here (albeit somebody elses) so you must be realistic.
Yes, your completely right, I think I'm prepared to walk away if it is too
bad to salvage, but there again
I have now just two/three more documents to see.
a. bank statement
b. VAT returns
c. Permissions by the council to have retail activity as "main" activity.
The bank statements will (probably) only show the CC side of the
business, few businesses are scrupulous about banking *all* their cash,
although from a control point of view that is a good thing. So adding up
the Bank Receipts will give you only part of the equation.
This is something I wondered about, considering the business does second
hand bikes and bike hire, there
would be plenty of room for cash, not to mention the small repairs etc. I'm
just wondering what percentage to
add on to account for this. I would estimate that with this business it
would have been "the larger side of not putting
money through the bank".
 
S

Stuart Tanner

The other Cash Flow question you haven't addressed is the arrangement
you will have with your suppliers. If you are going to rebuild the
business you will need to restock, will you pay "up front" or do they
give you 30 days?

If you sell your bikes before you have to pay for them (at the same time
getting the VAT in before you have to hand it over) that could be an
enduring £5-£10k uplift in your finances.
I assume that as the turnover will be less then we would not wish to be VAT
registered. Regarding the payment, we have adequate funds, it was just me
that did not have the correct amount, the family investor/partner is having
enough capital to properly stock the business.
I assume that it is *better* to avoid being vat registered at all costs. Eg.
although a business cannot claim it back then I presume that of course it
does not have to charge it either, meaning increased profitability..
 
J

Jonathan Bryce

Stuart said:
This is something I wondered about, considering the business does second
hand bikes and bike hire, there
would be plenty of room for cash, not to mention the small repairs etc.
I'm just wondering what percentage to
add on to account for this. I would estimate that with this business it
would have been "the larger side of not putting
money through the bank".
I wouldn't allow any extra for that. If they have been planning to sell the
business, it is in their interests to show as high a profit as possible, so
all sales will be included.

This will also be the case if they are making losses, or looking for bank
support on the strength of their accounts.
 
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S

Stuart Tanner

Jonathan Bryce said:
Stuart Tanner wrote:
I wouldn't allow any extra for that. If they have been planning to sell the
business, it is in their interests to show as high a profit as possible, so
all sales will be included.

This will also be the case if they are making losses, or looking for bank
support on the strength of their accounts.
At least I'm not under any illusions. If I can just get them to show bank
statements and last twelve months vat returns then I don't think
their seems to be anything else documentary wise I can ask for. The rest is
dependant upon the potential to increase business and make it profitable or
at least
in this case "not running at a loss".
 
S

Stuart Tanner

Jonathan Bryce said:
Stuart Tanner wrote:
This will also be the case if they are making losses, or looking for bank
support on the strength of their accounts.
It just seems that so far I've gone from believing it is a turnover of £180K
which is clearly advertised on the estate agents blurb, it states
approximately 3K turnover per week in 2001. Why on earth they did not give
the most recent turnover til 2003 I don't know. It creates an impression
that they are trying to mislead you. Now I'm absolutely sure the last twelve
months won't be 75K which was the year up until April 2003. It seems clear
to me that their is business but its not currently profitable. Making it
more difficult to decide what its worth (excluding stock)
 
T

Troy Steadman

Stuart Tanner said:
It just seems that so far I've gone from believing it is a turnover of £180K
which is clearly advertised on the estate agents blurb, it states
approximately 3K turnover per week in 2001. Why on earth they did not give
the most recent turnover til 2003 I don't know. It creates an impression
that they are trying to mislead you.
Oh yeah so it does, but I suppose they would say they weren't aware of
the true figures because the accounts hadn't been done (aka
"professional integrity").
Now I'm absolutely sure the last twelve
months won't be 75K which was the year up until April 2003.
I have put £75k net into the Cash Flow Forecast:

http://www.cashflowtest.150m.com/

Look at the Profit and Loss Account at the bottom and you can see at
that level of turnover with a margin of 40% you don't even begin to
cover your overheads (which don't include any "Drawings" for you, just
the figures marked in pale blue). You haven't said what the margin was
on that £75k, presumably it was *worse* than 40%.
It seems clear
to me that their is business but its not currently profitable. Making it
more difficult to decide what its worth (excluding stock)
At this level of decline deregistration must be a real possibility (£56k
*gross* for any consecutive 12 months) which will be a help, but you'll
have to reregister as soon as turnover improves.

Then there is the 3 year lease...if by some miracle you *did* turn this
business around it can simply be taken from you in 3 years...

What exactly are you buying here?




--
 
A

Alan Terry

Stuart Tanner said:
I am still feeling that it most likely will be that we proceed
next week with a formal offer that I doubt will be turned down.
If your first offer is accepted, it was too high!!!

If there are no other bidders around I would be trying to offer an
amount that would be refused, then start negotiating.

[The classic 'rule' is actually to get the other party to suggest
prices, then react to them].
 
S

Stuart Tanner

If your first offer is accepted, it was too high!!!>
Then the best price would be to have a price in mind you want to pay and
then offer lower, but not ridiculously
low so as to seem not to be serious. Therein lies the crux.
If there are no other bidders around I would be trying to offer an
amount that would be refused, then start negotiating.>
They have certainly just recently reduced it to the present figure of under
£15K, I don't think they would have done that
if their had been any interested buyers, and there is certainly nobody else
directly interested at present.
[The classic 'rule' is actually to get the other party to suggest
prices, then react to them].
Although in this case their is an existing price, but it doesn't mean that
they would necessarily stick to it. I'm not sure how to go about getting
them to suggest a price. One way would be to casually ask "what kind of
price would you consider".

Thanks Alan, after reading Troys excellent spread sheet I feel like bidding
for as low as possible.
 
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M

Martin

Stuart Tanner said:
If your first offer is accepted, it was too high!!!>
Then the best price would be to have a price in mind you want to pay and
then offer lower, but not ridiculously
low so as to seem not to be serious. Therein lies the crux.
If there are no other bidders around I would be trying to offer an
amount that would be refused, then start negotiating.>
They have certainly just recently reduced it to the present figure of under
£15K, I don't think they would have done that
if their had been any interested buyers, and there is certainly nobody else
directly interested at present.
[The classic 'rule' is actually to get the other party to suggest
prices, then react to them].
Although in this case their is an existing price, but it doesn't mean that
they would necessarily stick to it. I'm not sure how to go about getting
them to suggest a price.
Try ........
"As you know from all the info I've been requesting and analysing, I'm
really interested. However, as you know, the business has been going down
hill for some time and, like a super-tanker, will continue to do so for a
while. In addition, I'm taking "premises lease" liability off your hands,
and significant potential redundancy liabilities. The stock isn't actually
worth its book value - so much of it is dead and slow. Like your other
potential purchasers, I'll need to plough loads of cash in to the business
and still stomach a loss for the first year or two. And I can't even use
your tax losses! So that we can move forward smoothly, tell me what sort
of figure you're looking at as an absolute minimum - then I'll know if we're
within sight of each other."

Whatever figure is mentioned, produce a very sharp intake of breath. And
make sure you already have other reasons ready for why it's too much.

Throughout your discussions, don't be afraid of long silences. The first
one to speak (usually) loses.

Even if you get close to a figure, timing of payments, relating part of the
agreed figure to later profits etc etc remain up for grabs.

Good luck. And ALWAYS be prepared to walk away.
 
P

Peter Saxton

Thanks Alan, after reading Troys excellent spread sheet I feel like bidding
for as low as possible.
I'd suggest you should ask them how much they want to pay for you to
take it off their hands!
 
S

Stuart Tanner

Peter Saxton said:
I'd suggest you should ask them how much they want to pay for you to
take it off their hands! --

(e-mail address removed)
Where does the boundary exist between a worthwhile good deal for a buisness
that can be a gold mine become a business that is going to
suck up your money and cause hearache and stress? I appreciate and truly
realise there is a modicum of risk, surely this is the nuts and bolts of the
equation
what is the true value of a business based on its potential profitability.

The price is truly reflecting the scenario I feel. I don't see why their is
any reason not to mention the price, I have not ever mention the location or
the name of the business and it is public knowledge so this information is
already in the public domain. The asking price has just been reduced to £10K
for a business that was once turning over 185K and has got certified
accounts to proove it. Therefore I don't see any reason why it can't be
build back up, combined with the excellent location and incredibly low rent.
In fact I saw a bike shop for sale run by a one man band for £35K.

http://telegraph.businessesforsale.com/telegraph/advert149282.aspx

I think one needs alot of confidence and one needs to be prepared to muck in
and get ones hands dirty. My biggest delima is that I don't have the
necessary experience to "do the bike repairs" myself. Although it might be
easy I don't know. Perhaps the difference between repairing bikes myself and
hiring someone is going to be the difference between making a profit (albeit
a small one) and making a loss (albeit a small one). This is most likely
what the scenario is going to produce.
 
S

Stuart Tanner

Martin said:
Try ........
"As you know from all the info I've been requesting and analysing, I'm
really interested. However, as you know, the business has been going down
hill for some time and, like a super-tanker, will continue to do so for a
while.
That image is now firmly in my mind! Thanks for the descriptive graphical
illustration:)

In addition, I'm taking "premises lease" liability off your hands,
and significant potential redundancy liabilities. The stock isn't actually
worth its book value - so much of it is dead and slow.

Like your other potential purchasers, I'll need to plough loads of cash in
to the business
and still stomach a loss for the first year or two. And I can't even use
your tax losses! So that we can move forward smoothly, tell me what sort
of figure you're looking at as an absolute minimum - then I'll know if we're
within sight of each other."
It does have a very strong ring to it whilst remaining realistic and down to
earth.
Whatever figure is mentioned, produce a very sharp intake of breath. And
make sure you already have other reasons ready for why it's too much.>
Throughout your discussions, don't be afraid of long silences. The first
one to speak (usually) loses.
Seems you've definitely been in these situations before. I wish I had your
experience and confidence.
Even if you get close to a figure, timing of payments, relating part of the
agreed figure to later profits etc etc remain up for grabs.

Good luck. And ALWAYS be prepared to walk away.
Thanks Martin for the sound advice especially the last bit.
 
P

Peter Saxton

I think you have to look at the critical factor and see what risk
there is. You may get the expenses wrong but as long as you are
realistic you wont be far out. The turnover is the main faxctor as
usual. You can say that turnover is a certain figure now and how much
do you have to increase it by. If you know you have to double it to
break even then you have a good idea of the task facing you. Remember
that you have to make a profit of at least what you could earn from
working as something else. The other problem is the three year lease -
what can be done about the length of the lease? Decide on this after
you have decided how easy it will be to make a adequate profit.
 
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S

Stuart Tanner

Peter Saxton said:
I think you have to look at the critical factor and see what risk
there is. You may get the expenses wrong but as long as you are
realistic you wont be far out. The turnover is the main faxctor as
usual. You can say that turnover is a certain figure now and how much
do you have to increase it by. If you know you have to double it to
break even then you have a good idea of the task facing you. Remember
that you have to make a profit of at least what you could earn from
working as something else. The other problem is the three year lease -
what can be done about the length of the lease? Decide on this after
you have decided how easy it will be to make a adequate profit. --

(e-mail address removed)
Thanks Peter, you can't imagine how much these inputs have helped keep me
objective. Although I feel a bit pessimistic after seeing
Troys calculations I feel a sense of realism and don't feel I'm having any
unrealistic expectations. As an accountant I should think
you see people have alot of dreams and hopes and you must see peoples
failure as well as successes which must give you a good eye for the pitfalls
as well as the opportunities.
 
A

Alan Terry

Have you done spreadsheet calculations to show how the future would look
to the SELLER?

- If he carries on trading?

- If he just closes down?

- If he sells?
 
T

Troy Steadman

Alan Terry said:
Have you done spreadsheet calculations to show how the future would look
to the SELLER?
Don't need to do we?
- If he carries on trading?


At circa £50k the business must be losing money hand over fist,
the vultures are circling and the end is not far off.
- If he just closes down?


Redundancy payments and 3 years rent, but should be able to relet the
empty shop. This is when Stuart should make his move, re-employ the
(presumably useless) staff for a month or two to show him how to
assemble bikes, then go it alone.
- If he sells?


Only hope, find someone mug enough...


--
 
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A

Alan Terry

Don't need to do we?

"Need to" - no, but you should want to:

Assuming you are going to be in a negotiating position it pays to
understand the other party's position.

If he had access to your spreadsheet figures he would have valuable
information about your negotiating position.

The reverse must also apply.

Obviously you won't have 'his' actual figures, but if you estimate them
you will better understand his position.
 

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