Buying a business

kdowling

I'm looking to buy a business which is averaging a net profit of €50,000 over the last few years for €250,000.
I would like to get out a loan for €200,000 and pay €50,000 deposit.

On the €200,000 at 6% interest over 20 years I calculate that I would be
repaying €21,500 a year.
If I use €40,000 of the net profit (leaving €10,000 for cash flow) to pay the loan after income tax is taken off leaves approx €20,000 (higher rate of tax)
which would cover most of the loan.

If I manage to increase the net profit to €60,000 yearly and sell the business
in 5 years time for 5 times the net profit (industry standard) I can sell it for €300,000 at which time I would have €100,000 paid off the loan leaving €150,000 owed. €300,000-€150,000=€150,000 profit
Minus capital gains tax @25% = €112,500 profit

Is all this feasible?
Do banks give out business loans over 20 years?
Am I working out the correct interest repayments?
Is there anything other than capital gains tax on the sale of a business?
Does the sale come under income tax?
Is there any way the loan can be a business loan where some of
the net profit can be used to make the repayments directly
without being subjected to income tax first?

Sorry for all the questions, but any help would be appreciated.

SeanSouth

The business would need to be mighty impressive to fork out 5 X Income.
Take your time and get plenty of good advice.

It depends very much on the business and the situation but be aware lots of businesses are changing hands today for 1 X and 2 X income.

If you need to borrow the money, I think you're safe enough as the banks wont let you do anything silly with their money, me thinks !!

kdowling

Thanks seansouth.
It's a pharmacy and they used to be sold at x8
the adjusted net profit.
Just out of interest, in what sectors are business' changing
hands for x1 and x2 net profit?

Bandara

"I'm looking to buy a business which is averaging a net profit of €50,000 over the last few years for €250,000"



For me this is a very dangerous statement, I personally wouldn't give any weight to what it did over the last 5 years, all I'd care is what it did in the last 6 months to a year. Anything before that is the good old days and won't be back anytime soon so should be discounted from your thinking in my opinion.

How much profit has it made in the past year? Have they accounts up to date for the past year or are you being told that 2009 is the last complete set of accounts?

regards
HT

searay

kdowling wrote: »

Thanks seansouth.
It's a pharmacy and they used to be sold at x8
the adjusted net profit.
Just out of interest, in what sectors are business' changing
hands for x1 and x2 net profit?

Are you a pharmacist?
Have you a particular pharmacy in mind?
There have been huge changes in the sector over the past 4 years as the HSE reduced prices paid for drugs. Do your figures factor that in?

kdowling

searay wrote: »

Are you a pharmacist?
Have you a particular pharmacy in mind?
There have been huge changes in the sector over the past 4 years as the HSE reduced prices paid for drugs. Do your figures factor that in?

yeah i am a pharmacist.
i'm all too aware of the cuts!!
the increase in customers year on year in this pharmacy is counteracting the cuts for the most part.

kdowling

kdowling wrote: »

yeah i am a pharmacist.
i'm all too aware of the cuts!!
the increase in customers year on year in this pharmacy is counteracting the cuts for the most part.

.......so would the net profit be after you pay yourself a decent wage and all accrued expenses?

kdowling

RoverJames wrote: »

.......so would the net profit be after you pay yourself a decent wage and all accrued expenses?

yeah, the net profit i posted initially was after director salary, wages, expenses etc

searay

kdowling wrote: »

yeah i am a pharmacist.
i'm all too aware of the cuts!!
the increase in customers year on year in this pharmacy is counteracting the cuts for the most part.

PM sent.

dynamick

New legislation to make the pharmacy sector more competitive will be introduced by the government by 1 Oct as agreed with the IMF.

Maybe not the right time to buy a pharmacy business right now, perhaps wait until you know what these new measures will be...

antoinolachtnai

It's all about location and real estate really. If the location is too bad you won't make money. If the location is too good you will make money but the chains will come in on top of you.

You need an accountant with good knowledge of the sector. they will be able to value it based on supplier invoices, cash deposits and GMS information.

The bank will not lend you the money over 20 years on basis of this business alone.

The interest would be tax deductible. You would need to speak to the accountant about financing.

How many years are even left on the lease?

The profit figures you are talking about seem weak enough. But it depends on salary levels. How much would it be bringing in in fees from the GMS?

Why would you need money for cash flow? You are a cash business. Talk to the accountant about your plans.

in a few years I think the business will be worth what Boots et al are prepared to pay for the lease, which is probably nothing. Unless you have a very special sort of business or a very small local business with almost no staff, it will be tough to survive standalone let alone sell it.

It is not my specific area so don't rely on above but I would be very careful.

jackiebaron

antoinolachtnai wrote: »

It's all about location and real estate really. If the location is too bad you won't make money. If the location is too good you will make money but the chains will come in on top of you.

You need an accountant with good knowledge of the sector. they will be able to value it based on supplier invoices, cash deposits and GMS information.

The bank will not lend you the money over 20 years on basis of this business alone.

The interest would be tax deductible. You would need to speak to the accountant about financing.

How many years are even left on the lease?

The profit figures you are talking about seem weak enough. But it depends on salary levels. How much would it be bringing in in fees from the GMS?

Why would you need money for cash flow? You are a cash business. Talk to the accountant about your plans.

in a few years I think the business will be worth what Boots et al are prepared to pay for the lease, which is probably nothing. Unless you have a very special sort of business or a very small local business with almost no staff, it will be tough to survive standalone let alone sell it.

It is not my specific area so don't rely on above but I would be very careful.

Anto, you seem to know a thing or two about this caper. Can you explain a few things to me as I'm bloody clueless. I was looking at this website:

http://www.businessesforsale.com/search/Nightclubs-for-sale

And some of these businesses seem exciting and lucrative but I'm not clueless enough to think that money grows on trees or if a joint was a goldmine then a guy would be selling it "to spend more time with his family".

Take a look at some of those clubs, etc. There's one there and the asking price is 10K.....surely that's a misprint. Also, what's "cash flow" and what exactly is "sales revenue" the only thing that really interests me is cost and annual profit. Obviously these things like "turnover" (whatever that means) are important....I just don't really know what they mean and HOW important they are.

antoinolachtnai

Honestly, you need to go and learn what all these terms mean. There is no shortcut. These are the basic things you need to know.

Otherwise you will get in trouble for sure. I would suggest you do a course like the ACCA DipFM (at DBS for example) if you can make the time at all.

You can run a business without this knowledge but it is harder.

Shelflife

As antoinolachtnai said only the interest is tax deductable so assuming 50k profit less interest of 12k =38k tax is effectivley 50% esp if you have taken a salary as well so thats 19k.

from a cashflow point of view you generate net 50k less repayments 21.5k less tax 19k gives you net cash flow of 9.5k

you also need to remember that interest rates will be going up soon as well.

being honest the banks are giving out shag all money at the moment so you are up against it from the start. good luck though.

TheCostumeShop.ie: Ronan

Definitely not enough information above to make any assessment. Things like how much did the previous owner take in wage would have massive consequences. It could be 100k or it could be minimum wage and they live off profits drawn down.

Also I'd be very worried about the sector in general if Tesco Extra decides to copy the Walmart approach with instore pharmacy's and use their excessive buying power to change the whole game.


Is all this feasible? Probably not, but that doesnt mean a deal cant be done. Few buyers means you have a keen seller. You could offer to pay them back over years (seller finance).

Do banks give out business loans over 20 years? No, Very unlikely you will get a loan without huge collateral.

Am I working out the correct interest repayments? At a glance I don't think so

Is there anything other than capital gains tax on the sale of a business? Lawyers and accountant fee's, huge due diligence needed and to close down the old business and restart with new ltd company structure.

Does the sale come under income tax? Sale of business is just CGT

Is there any way the loan can be a business loan where some of
the net profit can be used to make the repayments directly
without being subjected to income tax first? Yes you don't pay income tax on your expenses only on income. You pay corporate tax on profits after interest also.