Turnover: A figure generally accepted as being the annual sales total net of VAT.

MARK-UP: The profit as a percentage of the purchase cost price.

MARGIN: Better termed Gross Profit Margin and the mark-up as a percentage of the selling price.

OPERATING NET PROFIT: The profit after paying all essential (common to any operator) expenses but before drawings and (usually) depreciation, Sometimes referred to as 'available net profit', it being the sum available after all essential costs have been covered.

DRAWINGS: Operators/owners remuneration/earnings drawn from the business for personal expenditure.

DEPRECIATION: A non cash item used for accountancy purposes to write off the cost of fixed assets such as machinery, equipment etc. over their useful life.

PROFIT & LOSS ACCOUNT: The official trading history of the business and detailing the profit upon which the operator will pay income tax - hence the temptation not to declare all the sales and to pile as much personal expenses 'onto the business' as the accountant thinks the tax Inspector will allow (Ideally, a potential lender will ask for P & L's for 3 years past).

BALANCE SHEET: A statement of the assets and liabilities but only truly valid on the date determined; e.g. a property value given may be many years out of date. If buying the shares of a company it is usual to buy the whole, both assets & liabilities balanced on the day of the sale.

DEBITORS: Those who are in debt to the business (to whom credit was allowed).

CREDITORS: Those to whom the business is in debt (those having allowed credit).

COLLATERAL: A security held parallel to a sum borrowed and, in effect, insuring the lender against loss.

GUARANTORS: Those supplying the collateral (and praying the business will be as successful as you told them it would be!)

APPORTIONMENT: The price of a business broken down (apportioned) into Property. Goodwill, Fixtures, Fittings & Equipment.

S.A.V: 'Stock at valuation', the total value of the stock held in the business - at cost or worth, bearing in mind age, condition and saleability.

W.N.B: 'Wholesale news bill', the sum paid by a newsagent to his wholesale suppliers, indicating the proportion of news sales in the total weekly takings.

LEASE PREMIUM: A single payment sometimes sought by a Landlord where the premises occupy a particularly attractive 'pitch', so much so that would-be tenants pay a premium to secure the tenancy, usually restricted to prime sites and periods of retail expansion.

F.R.I: 'Fully repairing & insuring', an indication that the terms of the lease will require the tenant to cover the full cost (it will be added to the rent) of maintaining and insuring the property.

I.R.I: 'Internally & shop front insuring', where a business occupies just the ground floor of a building (perhaps there would be flats above). Such a lease might also carry partial responsibility for the roof.

SCHEDULE OF DILAPIDATIONS: A report on the condition of the property when the Leaseholder acquired it, giving the Landlord a measure of how it has been maintained during the period of the tenancy - as required in the terms of the lease.

GROUND RENT: Some leases are based on such a long term, 50 -100 perhaps 999 years, that they are - to all intent and purpose - Freehold - and lending institutions will generally treat as such. The price such leases change hands at are akin to Freehold and the rents are usually a nominal fixed sum.

What type of business?

Before looking ahead we would suggest that perhaps a look back might be worthwhile. As most people buying small businesses are mature persons with work histories behind them they need to, initially perhaps, decide what businesses they would not be best suited to. Although self-confidence is an attribute in any business enterprise it matters more in a shop selling computers - where good communication and Sales skills are essential - than it does in a Chip Shop where the quality of the chips is what brings the customers in the second time.

Having decided what you definitely don't want to do, be assured there is a lot to choose from - and don't be too narrow in your view of what might be the right business for you.

Profitability and price

As it's all - or primarily - about making money it wouldn't be a bad idea to make yourself aware of the profit margins applying in various businesses. The initial indicator is the Gross Profit - the profit as a percentage of the selling price (more of which later). A newsagent will have a gross profit between 18/20%, a cafe 55/60% and that Fish & Chip shop? - well the accounts will (almost without exception) show 55% as to declare less would be to invite an investigation by the Inland Revenue, it is likely, however that most chip shops will have a genuine GP perhaps nearer to 70% - an interesting supposition bringing us to the question of how to determine whether the price being asked is reasonable.

What do the accounts say?

All businesses are required, by law, to produce formal accounts and the job is normally given to one of the 100's of chartered accountants to be round in Yellow Pages, although it is permissible for a proprietor, with the necessary skill, to produce the accounts in-house.

The accounts for most small businesses (sole traders or partnerships) are compiled wholly from detail supplied by the trader, the accountant's job being no more than to collate and present in the prescribed manner - and to be sufficiently aware of relevant tax legislation to minimise the tax payable on the net profit t is therefore worthwhile remembering that the primary objective of the accountant is to minimise tax liability - not demonstrate optimum profitability.

It is possible therefore that the accounts may not show the true worth of the business so the prospective purchaser needs a little guidance to sensibly interpret the "£4,000 p.w. @ 20% G.P." which is often the only financial data given in the sale particulars of a business for sale. The first points to check are: is the £4,000 per week, the vendor says the business is doing, an accounts stated annual figure divided by 52?; is it including or net of VAT? (it appears to be standard practice for Business Agents to quote "takings" i.e. including VAT in press advertising - but sale particulars should state 'net of' or 'including VAT').

Be aware that the agent may be instructed to publicise a figure of weekly sales for annual turnover) that the accounts will not substantiate; the advertisement or the sale particulars detail should give an indication in this regard. Be tuned in to 'agent speak' e.g. "the vendor advises of takings being..." or "the declared takings are" or perhaps "the accounts may not reflect the true value (takings) of the business". It could also be that the takings are actually less - so beware.

You may be convinced that the business is taking more than the accounts suggest, and perhaps the tax man is lenient to a degree, but the bank manager will not be persuaded and the ability of the business to support a loan will be judged only on the figures given in the published accounts.

Only the vendor can convince of the true level of takings, and whilst the prospective purchaser may be convinced of higher-than-accounted sales (a strong incentive to paying a good price), it is not a good enough reason to pay 'over the odds'.

What are you actually buying?

What you will be asked to pay for is the "Goodwill", the Fixtures & Fittings/Equipment and the Property (or in the case of a Leasehold - the "Leasehold Interest"). Little explanation is required with regard to the value of the Fixtures & Fittings - the true value being what it would cost to replace with the same items in the age and condition they are in. The property valve may well determine the amount you can borrow and will depend upon the value the lending source's valuer puts on it. But what about Goodwill - indeed, what is Goodwill!

The simplest definition is to see Goodwill as "the value put on the established trade" be this due to a good reputation of long standing or the fact that the owner has taken a financial risk in setting up the business, or that it is in the ideal trading location (positioning to within a few metres can be critical). It can be a mixture of such elements and can also be a reflection of the popularity of a business in terms of a prospective purchaser's view of their ability to effectively manage it e.g. many feel they can take on a Newsagency and do a good job but one can't imagine anyone without trade experience taking on a Butcher's or a Hairdresser's, so - £ for £ of operating net profit the Goodwill in a Newsagent is valued at significantly more than for 'skill necessitating' businesses. Then there are sub Post 0ffices where the Goodwill is highly rated because the business is seen as captive/secure (which is more or less the case). Do expect to pay a substantial premium for the Goodwill in a sub Post Office.

It must of course, make sense to build Goodwill rather than buy it but that is very much easier said than done, it's all about resources and risk i.e. any bank will take a lot of persuading to back a brand new small business venture and even if there is no need of borrowing there is no guarantee the business will succeed, so Goodwill established is an intrinsic part of any profitable business.

Theoretically, the ideal business is one which has a niche in the market; i.e. it commands the attention of buyers who can afford to purchase its wares at a price that returns a good profit. It is also a business the big operators, supermarkets, department stores, DIY multiples etc. either can't be bothered with at all or don't wish to offer the range of product available from a niche market specialist. There is definitely a case for looking at the business you hadn't thought of, does it have a good level of operating net profit? - and an accounts history to show it is not a 'flash in the pan'? if so then perhaps it's worth serious consideration.

Freehold or leasehold?

When a business is offered 'Freehold' it means it operates from premises owned by the vendor - i.e. the sale price including the property as described.

Prospective business buyers, particularly first timers, often deny themselves the opportunity of acquiring a good business because they feel they really should own the property. This is an understandable attitude given the emphasis put on the so-called Property Owning Democracy in recent years where it is thought wrong/wasteful to rent/lease. This is perhaps a supportable viewpoint as regards housing one's family, but in considering the 'housing' of a business, a preoccupation with owning the property can be counter-productive, and even dangerous if, as many have found to their cost in the late 80's, one has placed more faith in the 'bricks' than on the business!

There are too many, instances where business buyers have placed too much emphasis on the bricks & mortar and not enough on the capability of the business to pay for them and - after running expenses & loan repayments - leave enough to support a standard of living it is reasonable for them to expect.

It is vital to consider what the business can afford to support in terms of living accommodation if one is determined to live over the shop. There are vital questions you should be asking yourself: e.g. "is it really necessary to buy the building to get at the business I want?" and "do I really want to live over the shop, why don't I keep my house and use it as security to buy the business and (if applicable) let the living accommodation?" To address sensibly these questions it is necessary to have some knowledge of Leaseholding; but before considering this here are a few points to bear in mind.

The better the trading position the more expensive the 'bricks' will be. So expensive, that perhaps you should consider doing what most of the high street retail multiples do i.e. rent/lease the premises.

The rent you might charge for any living accommodation over the shop could pay a significant pat of the rent overall, making the profit projections a little more attractive.

Here are a few points which should dispel some fears related to taking on a lease.

1. You only buy it once! Seeing businesses advertised for sale 'Leasehold' and then noting that the Lease has, say, 10 years of the current term remaining may prompt the conclusion that the Leasehold has to be purchased again when the current term ends and you wish to continue as the tenant. This is not so.
2. The Landlord cannot simply tell you to leave at the end of the term. Tenants do have the protection of law - namely, the Landlord & Tenant Act, wherein are laid out the circumstances under which a Landlord may seek 'reversion' of the property; these are:
   1. You are a bad tenant i.e. you don't comply with the basic terms of the Lease; e.g. you have been consistently in arrears with the rent, or have failed to maintain the property as set out.
   2. The Landlord wishes to reoccupy the premises for his own personal use or that of a member of his immediate family.
   3. The premises are, perhaps, part of a parade which is to be totally redeveloped and you are the only tenant who has not agreed terms for reversion.

There may be other (exceptional) grounds for reversion, which is why you will need to take the advice of a solicitor before getting in too deep, but even in the exceptional instances where a Landlord does seek reversion he has to do so in compliance within The Act, there is compensation [ (a) excepted ] - and it takes time.

In most instances therefore the Landlord is only too keen to grant a new term as his income depends on someone (preferably the existing tenant) taking on the new term, the last thing a Landlord wants is to have the premises standing empty, even for a short time, as then it costs, rather than earns, money.

If a new Lease is offered there may be a prospect of negotiation regarding the number of years the Lease will run (before the next renewal) and, of course, the rent. As regards the term; simply put one might say that generally the Landlord would prefer the term to be as long as possible, let's say 25 years, because this commits the tenant to paying a rent over that period of (if he decides to move out) of finding a suitable replacement tenant to whom the lease can be 're-assigned', (this element is the basic difference between Leasing and Renting i.e. the commitment of each party to the Lease is more long term - to mutual benefit - as opposed to simply renting where an agreed notice of intention to terminate may be all that is required to sever the connection).

Commercial rents are normally paid 3 months in advance and are subject to review (in line with market conditions prevailing) at 3 or 5 yearly intervals throughout the term.

Knowing that the Landlord will, more likely than not, have no option other than to grant a new term when that current expires, the prospective tenant may be more pre occupied with securing a loan. The proposed lender will, however, also be interested in the number of years the term has to run as, for obvious reasons, no lender would wish to lend over a longer period than the occupancy of the premises from which it operated was assured. Where the term of the existing lease has less years (to renewal) than the number over which you had hoped to borrow then you will not find a lender. In such circumstances the Landlord will generally agree to giant an extension or even a new lease, whereupon, you might find yourself borrowing over 6 years of a 10 year, or 10 of a 15 year term. The Landlord may, of course, seek a benefit for being so cooperative by attempting to negotiate other elements to his greater advantage. Then it is up to you, with the guidance of a solicitor, to decide whether or not to accept. You would have to pay the costs in establishing a new Lease or, in the normal transfer of ownership of a business, the Landlord's solicitor's costs in re-assigning the existing Lease to you.

It is not uncommon, particularly when new businesses are being established, for the Landlord to offer (or the prospective Tenant to negotiate) a 'break? term whereby, at the end of the first year of a 5 year term, say, the tenant might walk away without having to find a replacement. Such 'breaks' can also be at the end of the first 5 years of, say, a 15 year term; most advantageous in a situation where a business has perhaps been so successful it has outgrown the original premises but was constrained in moving/developing further by the commitment of having to re-assign the existing lease.

Borrowing limits

lf you are thinking of buying a business it is important that you are realistic in setting your financial limits. This means knowing how much you can borrow and whether you will be able to meet the repayments; this section gives basic information and examples.

Freehold

You can normally borrow up to 70% of the purchase price or occasionally 75%, but with two main conditions:

1. The loan must not exceed the bricks-and-mortar value; the total purchase price being made up of three parts: property/bricks and mortar, fixtures and fittings, and goodwill.
2. There must be sufficient net profit available, after paying the fixed costs, to meet the loan repayments and see enough left over for family living expenses.

Leasehold

You can normally borrow up to 50 - 60% of the purchase price if the business has living accommodation. If it is a lock-up the limit may be lower, depending on your financial status.

Again there are two main conditions:

1. There must be sufficient operating net profit available to meet repayments and allow for a comfortable standard of living.
2. It is essential to bear in mind that it is not possible to borrow unsecured when purchasing a leasehold business i.e, the purchaser may have 50% of the purchase price but to borrow the other 50% the loan has to be 'secured' by a tangible asset of at least equivalent value. This security may be a freehold property which is not fully mortgaged or a surety by an individual prepared to act as your guarantor. A potential lender will also take account of any additional income available to support the loan e.g. if, say, a wife wanted to buy a teashop to run with her mother the husband's salary could be taken into account. Endowment insurance policies and other such investments can be acceptable sources of loan security.

Valuations:

Requirements vary between lenders, but all loans are normally subject to the lender's assessment of business viability. An independent business survey/valuation may be demanded and/or a bricks-and-mortar valuation in respect of a freehold purchase.

Repayments

Freehold Businesses:

Loans are most commonly over 15 years and interest rates 3-5% above the prevailing Bank of England base rate.

Leasehold Businesses:

Loans are usually over 5, 7, 10 or 15 years and the interest rates are normally 3 or 3.5%, but can be as much as 5 or (exceptionally) 7% above base rate. The loan period can be varied and is negotiable, the interest rate charged will vary depending on the type of business, your financial status and the lending source criteria current at the time of loan application. It is always wise to shop around, starting with your own bank and perhaps the vendors bank - they should know how sound a business it is. You might then speak to the selling agent who will be able to advise of the likely best alternative source.

To Work 0ut Repayments:

The table given is for guidance only. It shows the monthly repayment per £1,000 borrowed over a particular term. The figures are based on even spread repayments covering capital and interest.

How much do I need to borrow?

A simple enough calculation, but one where mistakes are often made. You must remember to allow for stock and miscellaneous costs such as legal fees. Add these to the agreed purchase price and deduct your available capital - and if this is coming from a property sale remember to allow for mortgage repayment plus estate agent's and legal fees.

Can I afford it?

Work out your borrowing requirements and then work out the likely repayments. Next work out the Operating/Available Net Profit of the business based on the sales and expenses detailed in the profit and loss account. From the gross profit deduct the essential running costs./overheads as they would apply to any owner, adding any exceptional costs shown in the accounts back in to the net profit, e.g. the accounts of a corner shop owner might show the telephone costs to be very high (when he 'phones his family he could be talking to the other side of the world) or perhaps the accounts presented show exceptional repairs and renewals in the year considered such as spending on a new shop front, making it necessary to use an average figure. Well constructed business sale particulars should give a reasoned assessment or 0perating Net Profit (net profit available after meeting costs common to any operator).

From this - the most important figure for a potential business buyer to determine - must be deducted the loan repayments calculated before the family income can be determined. Do note that in some shops (particularly in those retailing food and household goods) the family will, to a degree, live off the business.

Example

Mr. & Mrs. Smith want to buy a freehold convenience store with living accommodation at £130,000.
They are selling their own house and will have capital available of £70,000 after fees.
Their borrowing requirement is:

With £75,000 being less than 70% of the £130,000 and likely to be less than the bricks- and-mortar value (against which the loan will be secured), the loan should be possible subject to repayment ability, i.e. if the shop makes enough profit to comfortably pay off the loan and leave enough over to sustain an acceptable lifestyle.

If we assume a base rate of, say, 7% and a 15 year loan at 3% over base i.e. an interest rate of 10%, referring to the table we see that monthly repayments before any tax relief will be:

75 x £10.69 - £801.75pcm or £9,621pa
(Let's call this £10,000 in round figures)

The accounts for the shop show a turnover (net of VAT) of £220,000 p.a. with a gross profit of £40,000 p.a. It is established that the basic running costs (after reconstituting/analysing to compensate for current owner specific and exceptional costs) are £10,000 p.a. before paying £5,000 in staff wages to part time assistants, so the available/operating net profit is £25,000. After deducting the £10,000 loan repayments the Smiths will be left with £15,000 for living expenses. Such a business would represent a comfortable living as, to a degree, many of the day on day living expenses will be met out of / by the business.

Independent, specialist valuations (e.g. Pindar) can support business proposals where formal accounting data is unavailable, and will be considered by lending sources. Although it is a fact that many small business operators do get seriously behind with their provision of formal accounts they are not permitted to be late with VAT returns. The 'outputs' figure on the VAT return is the declared net of VAT quarterly sales figure which (x 4) will give assurance re current and past sales performance per VAT year. Be realistic in deciding what you can afford and don't be discouraged if it doesn't seem as if the business can support the loan you need; difficult cases can become possible with expert handling, especially if you have plans to improve the business - or the accounts do not give a true indication of the true profits of the business.

The business plan

Do try and do your sums before approaching a lender, and put together a Business Plan. This might seem a daunting task, but it need be no more than a simple month-on-month projection of sales, hopefully showing some expected improvement due to your new lines introduced (or unprofitable lines deleted!), or perhaps a face-lift for the shop - or whatever. This will be aligned with the projected costs of running the business under your ownership. It might, for instance, show that in the first year you will dispense with an element or the hired help and put the saving into development. The objective (essential to you and not simply to impress the bank) is to show that you are serious about this business, that you have carefully. thought it through, intend to be successful and have a basic plan showing how you see this success being achieved.

You will need an accountant, and you could well find a company that will give you some basic business plan assistance free of charge in return for you giving them your business when you are established - but don't forget to ask how much it will cost. The cost will vary from one company to another and will be based on time taken i.e. the better/tidier your book keeping the lesser the fee. Are you to prepare your own VAT and income tax returns or have the accountant do them for you? Taking into account all these variables, annual costs for this essential service can vary (for sole trader/partnership business such as the example given) from £400 to £1,000 per financial year.

Lending sources

There are many sources of business finance, including major banks - some more attuned to the needs of small businesses than others - and specialist brokers who can often find a source which will back a business the banks have turned down Brokers do charge a basic nominal fee but their commission is paid by the lending source.

All possible lenders will require specific detail regarding yourself (and your partner) with respect to personal, job history and financial standing.

Considering buying a sub-post office?

Strictly speaking, one cannot "buy" a sub post office, rather one is "appointed to the position", the situation prevailing is that Post Office Counters Ltd. (P.O.C.L.) give an undertaking that they will appoint a new manager to operate at the existing premises. In return for this security of location, P.O.C. now charge a "Franchise Exchange Fee" in respect of businesses with remuneration exceeding a certain level. The formula is complex, taking into account the volume and scope of the services offered by the office in question but applicants should expect offices with remuneration exceeding £10,000 to most likely be subject to the franchise fee which is currently 25% of the first year's remuneration - by deduction at source.

Some express the view of the 'price' being high but if one considers that P.O.C.L. (in giving the security of tenure now enjoyed) surrendered control, to a degree, of its network and has to maintain a significant establishment of qualified staff & inspectors to train and monitor the newly appointed - and then may find the business is sold again perhaps 2 years hence - then the level of the charge is better understood.

You will have noticed the word remuneration and not salary is the correct term - the latter being a misnomer as the sub P.O. manager is self employed and is, in effect, an agent for P.O.C.L, not an employee. The remuneration might be more correctly described as Gross Profit (with which it is linked in the accounts of P.O.'s which sell goods as well as P.O. services).

It must also be accepted that it is the norm for those selling sub P.O. businesses to equate remuneration with Goodwill - as they more likely that not bought (to a greater or lesser degree) on that basis. Designating remuneration as Gross Profit makes sense as it has to cover virtually all the expenses of running the business - not just the operator's salary. It is not unusual to see Goodwill equated with 2 x annual remuneration or thereabouts and there is a degree of logic in this assumption as P.O.C.L. can pay a maximum of 26 months remuneration as a "discretionary allowance" if they have to/wish to shut down sub P.O.

Do note that when the remuneration goes above £ 35,000 it becomes increasingly difficult to operate efficiently without having to pay staff salaries out of the Post Office "salary". Those running sub P.O.'s will of course have the facility to charge an element of living costs to the business and, happily, P.O.C.L. pick up the phone bill and make a substantial contribution to the cost of holiday relief staff.

The appointment of Sub-Post Masters/Mistresses is subject to interview and applicants are expected to be articulate, numerate and adequately funded. The situation can vary somewhat Region to Region but there can be an insistence that applicants will only be granted an interview if the have exchanged contracts subject to contract as regards purchasing (or otherwise securing) the Office premises.

This might seem unreasonable until one appreciates that P.O.C.L. cannot appoint someone to run an element of its business unless it is assured the appointed person will have premises from which to operate! Consider a situation where the sale of the premises was all agreed but contracts not exchanged i.e. no legal commitment made to complete the sale. Our applicant might have emerged happily from a successful interview only to an unscrupulous vendor deciding that he might extract a higher price from someone who now has a job but has yet to secure somewhere to do it! - a highly unlikely occurrence presumably but who knows.

Some applicants have expressed misgivings having seen sub P.O.'s being established in supermarkets. It is our view that the catchment of Offices having paid the Franchise Fee is contractually secure but P.O.C.L. will expand in this way where possible is because such outlets for their business are 'customer orientated' i.e. their, much longer in total, opening hours are arranged for the convenience of customers, whereas, some currently running sub P.O.'s may, however, have come into the business for the very reason that their minimum hours still allow half day (Wed & Sat) and Sunday closing - and why not. However P.O.C.L. must make the most of all it's potential areas of operation as, contrary to common belief, it has no monopoly. Over 95% of Post Office transactions represent work done on behalf of others e.g. it handles the counter services for Royal Mail (a totally separate organisation), makes Social Security payments on behalf of Government etc. and like most agents (including Business Agents!) if the service is poor the client will go elsewhere so the message must be that P.O.C.L. are looking for applicants who look as if they will make the most of the opportunity presented.

It may well be, of course, that one is considering a business where the Post Office remuneration is below £ 10,000 p.a. and is linked with a general store or newsagent - each element supporting the other and, generally, providing a stable living - and in such instance - no Franchise Fee payable to 'get at it'.

Sub P.O.'s designated 'Community Offices' are deemed to have little prospect of expanding services and in such circumstances P.O.C.L. base the remuneration on a very limited number of hours of P.O. opening within a shop that makes very little out of it but keeps it on as a service to customers.

This short paper is intended to give those contemplating acquiring a sub P.O. a better understanding of what is involved and should not be seen as definitive (P.O.C.L. approved) document. If it doesn't answer specific questions arising, or prompts additional questions, do ask - if we don't have the answer we will get it or 'point you in the right direction'.