Advice Please
 

We are complete novices and never owned a business before but we have found a business property in Spain which we love and wish to buy the lease. The sellers want 75,000 Euros and paid 28,000 for it 6 years ago. What would be a suitable offer from us that you think would be credible?

We don't want to lose this opportunity so offering a ridiculously low amount would endanger our chances but we want to pay a sensible price. Is there a precedent for this kind of bartering?

Thanks
Sue

Re: Advice Please
 

Hi Sue

You are really asking a question that is impossible for anyone here to answer accurately. All I can say is that there is "a crisis" in Spain at the moment allegedly and businesses are closing everywhere. Unemployment is high. Compared to how things were 6 years ago it is not good.

Dont know what kind of premises it is either, how long the lease is for, or where it's situated

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Also, are the premises currently owned by Spanish or British? In my experience (at least in the domestic housing market) the Brits are prepared to listen to offers, the Spanish are not. The Spanish would prefer to wait until they get what they perceive it to be worth and won't sell for less.

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Current owners are British and feel that business has improved sufficiently to warrant the price increase.

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I think you need to tread very carefully.
Very few business properties have increased their value at all in the last six years.
However you are being asked to pay an almost threefold increase, which at first sight seems somewhat excessive to say the very least, even with the increased business and good will, which may or may not necessarily continue.
It's also possible that the seller may know something that you don't, regarding future prospects in this particular location.
As previously mentioned no one on here is in a position to advise you exactly without knowing the finer details., so as they say, let the buyer beware.

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So what they are saying is that despite the crisis, the business has improved so much that it is worth three times what they paid for it 6 years ago when things were good. If that is true, then it is indeed a goldmine.

My advice would be to look at the books very, very carefully. Has the PROFIT, PROFIT, PROFIT, I repeat, PROFIT tripled since then?

IMO, it matters not if the turnover has tripled, if the profit hasn't.

There's a figure for buyng a franchise, I think, something about it being only worth 3x the year's profit, or whatever. So, do the sums. It matters not what you want or think if the money isn't going to be coming in. Also, down here in Andalucia, businesses are saying it's still getting worse, so were I in your shoes I'd need to budget for that.

Better you lose this chance to someone reckless than you over pay and end up with an albatross round the neck.

Lotsa luck.

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OK, well as people say, tread carefully.
What kind of business is it?

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I would do what the Spanish would do, & absolutely no offence to my host countrymen.

Have a good look at the current offering, get an accountant to look at the books, look at the business day, night etc. Work out why the sellers are selling.

If it is a sound proposition, set up something similar next door!

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Mmm.... that one doesn't sit well with my conscience but thanks.

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So .... whats the business?

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Maybe not but Spain's unemploment is c 20% & rising. If the business really is worth 75k & most are not worth a penny, then if yours is a success it won't be long before someone does it to you.

For a couple of hundred euros a good accountant will advise you.

Even the spanish families I know who have been running their businesses for years are moaning business is tough. I can't see it improving for a year or 2.

Is this thread going to morph into the bar one with the couple from the UK who got loads of advice & tried to charge 2e a coffee in the mountains.

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I doubt it, as the OP doesnt seem to want to tell us what line the business is in! :)

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OK, so don't do that, but by god make sure you follow the rest of his advice to the letter.

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If it is such a goer, why is the current owner selling it? The reason could of course be genuine.

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Working blind as we have no information, you need to be carefull that is the first thing.

Take the books with a pinch of salt as the seller can have different sets of accounts to be used as and when needed.

One set showing smallish profits for the taxman, and another showing a big profit to show the potential buyers.

Ask to see the VAT returns, see how much is being paid each quarter, the bigger the amount that is being paid in vat is usually a guide to the difference between the take and the expenses.

For any business to be worth that amount of money I would say (without knowing the details) that they shoudl be paying a couple of grand a quarter, if not more for VAT.

If there are any staff, look to see if they are on contract, if they are working full time with a Mickey Mouse contract of a couple of hours BEWARE.

That is a sure sign that they dont make enough to legalise the business fully and if you have an inspection and have to comply fully with the employment laws as regards employees, you will be in trouble.

Also check that the records of employees past and present, any business can claim to be making big bucks, but if the staff have been reduced in numbers over a few years, then it is not a good sign.

It means that they have been adjusting the staffing to the work coming in, which would show there is a downward turn in production or whatever.

Check staff turnover, the longer the staff have been there, shows stability.

If they claim that the business is better than 6 years ago, there should be an increse in the number employed, or they should be able to show heavy investment in machinery that has increased production and profitability. If that cannot be demonstrated. BEWARE.

Check to see that the SS payments have been paid up to date for staff.

If it is a bar or catering place, why not sit and take note of the customers at different times of the day and night, try to work out an average spend for each one, if possible.
Ask the woners if you couod work for a weeks trial with them so they can show you the ropes, then you will know every aspect of the business before you buy, if they refuse, BEWARE.

Look at the electricy and gas bills, a small spend on those usually means small profits.

WHATEVER YOU DECIDE, THE BEST OF LUCK TO YOU

cheers.

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Thanks to you all for your responses. The business that we're trying to buy is a language school in Madrid. No heavy machinery, not reliant on tourists.

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[it's not a place in a western suburb beginning with the letter 'S' is it? If so please PM me, as I may be able to give you some background info]

It's funny. I'm normally on here pointing out that not EVERYTHING has gone bust in the last few years. Indeed the numbers of tourists has actually increased this year, including big cities like Madrid. Plus, exports in things like
furniture, defence&weapons, railway technology, automotive components, aerospace technology and components, machinery&equipment, renewable energy tech&components, construction materials, wine, have done well this year. Additionally Madrid is probably the biggest market for teachers of English in Spain (definitely in Business English) as so many international businesses (as well as the Spanish companies) have head offices there.

However. Like most businesses, you have to know what you're doing. If you don't have relevant experience in the TEFL/TESOL game, my advice would be to keep well away. In fact I've known people with a lot of experience who've struggled with the competition when they tried to set up a business. There's a huge difference between taking money for imparting English lessons, and getting individuals or companies to fork out serious money. It's a question of serious marketing and sales skills in the Spanish market - can be far different to the way the UK market works. It can also be difficult to know how to get the better kind of teacher working for you. In summary, I really don't think it's the kind of business that a novice could succeed in, no matter how good the existing good-will custom is. As I say, it's just my opinion, so good luck with whatever you choose to do. If you do choose to go ahead, don't be afraid to ask for advice here - there are several posters here who either work or have worked in this field. But my advice (and I could be wrong) is to avoid this tempting offer.

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I can believe that business has improved by that much, as i know how big the teaching English game is in Madrid. However past results do not mean the good times will continue. As soon as the big clients hear about a change of ownership, you could lose half your clientele overnight, particularly if it's perceived that the quality of your teachers has fallen.

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Having done a few courses, and registered with a few sites, I keep getting cut price offers from language schools in my e-mail. And they are big companies, it sounds to me more like they are very keen to sign people up.:confused:

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I know a of a lot of business for sale, where the owners are doing OK, they both work in the business and both earn quite a good wage.

But if they were to sell the business on the new owners would be almost certainly doomed to failure if one of the following happened:

If only 1 of the new owners worked instead of the couple (because wages would still have to paid to an outsider to do the work.

If they need to finance the purchase price with borrowed money, as the repayments would be an extra expense that the previous owners did not have.

This can happen when the business being puchased is a profitable one for the present owners, but due to the newcomers having bigger outgoings (which is most cases) they are unable to make it pay.

The same can be said with sellers who own the property freehold and then sell the business on a lease, where the original owners made a profit, the new ones often do not factor in the increased expenditure needed to make up the amount charged in rent, and after trading for a while the shortfall becomes evident.

I have never worked in the Lang school business, but surely a good indicator (to start with) of the profitability would be to concerntrate on the staffing levels and the type of contracts they have.

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My OH works in the language industry in Spain, so I can give you some feedback.

Whether you buy the business or not should be quite a simple decision really based on:
1. your experience in the language industry, and
2. the growth in number of student weeks the school has experienced over the past 5 years

Additionally you must be fluent in Spanish and English to make it work, plus hopefully some other languages, if for example, you are teaching Spanish to foreigners as you will need to target the German market for example

If you havent run a language school before or at least worked in the industry for many years I'd say forget it. It is a competitive market in Spain, both for teaching English for Spaniards and teaching Spanish for foreigners and you will need the expertise.

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A few years a big company went but, it might have been home English, or Wall street something like that.

All classes were stopped, after only a few months, but the registered pupils had to carry on paying because the contract they had signed for the year, was actually a "finance agreement"

The acadamy had been paid all the money by the bank or finance company concerned up front, and so they were still owed the money.

If I remember rightly this was the one of the reasons whey the acadmy was set up, to get the money off the finance company, knowing that if they failed, they had nothing to lose.

They had branches all over the country, and made quite a killing, .eaving the "pupils" to carry the can.

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What CricketMan said. A lot of schools teaching Spanish in Madrid struggle, as foreign learners of Spanish either head to the coast or choose scenic cities like Granada or Salamanca. It means there are great prices to be found if you want to take a course in Madrid (for one example see the link), but not such good news for the language schools themselves.

http://www.williams-school.com/horarios+precios.html

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the language school in my local town (there's a few but only 1 I know about) does ok only because they have council contracts for kids clubs. I think as an outsider you wouldn't have a chance of being awarded one of these unless you are the Mayors brother etc.

Funny really, I keep asking my bank mgr where all these repos are - his nose grows as he says there aren't any!!! What he means of course is that there aren't any for you.

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Lots of food for thought from you all, thanks very much. The school we're interested in has been around for nearly 20 years and in my salad days I was a TEFL teacher so do have some rusty experience of working in the industry in Madrid.
Anyone brave enough to volunteer a figure we should offer to open proceedings? My husband thinks 50,000 should be our opening figure but I feel that would be seen as insulting and we'd be seen as unrealistic potential buyers.

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i suspect you've just made a lot of posters laugh out aloud. My advice would be to offer a low price, and hope it gets rejected._ Then you can wait for the person who does buy, to fail, and then buy at a cut price! If this doesn't happen, look elsewhere in Madrid for a badly run school you can purchase. I really fear there is too much risk of losing customers in this scenario.

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So StevieDelux, how about volunteering a figure, a realistic one that would give us a negotiating credibility?

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Given that you have supplied so few details, IMHO nobody could give you a valid answer. There is so much to consider, it would be impossible, at best it would be a wild guesstimate. Sounds like you are determined to go ahead though, although a rusty TEFL hardly sounds like adequate experience to me. What does it matter if they consider £50k insulting, have they got other likely buyers queueing up to offer them the money? You have nothing to lose starting at a low figure, you can go up but not down.

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I am going to be a bit mean here, but hopefully it will give you a reality check.

What a company is worth depends completely on its ability to generate fututre profits. What the future profits may be you can predict by looking at its past profits (and turnover), seeing how the company was run (i.e. well/badly) and then predicting market growth by studying the current market and predicting what may happen to that market over the next 5 to 10 years.

To this, you need to factor in what you personally can add to the business in order to improve it.

Do not give anyone any money for a business unless you understand the concept I have just explained. You will be just throwing money down the drain and giving yourselves heartache.

Throwing figures around in the air like you are dooing shows to me that you dont know much about business or about the language industry. This is what you should be focussing on. Spend 6 months increasing your knowledge, then think again.

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The language school currently gets 60% of its business from companies in the city with the remainder being students who visit the school. There is also a 2 week summer school where students are taken to London. This generates around 8,000 Euros profit. The current owner believes that there is potential for expansion of student numbers in the school and assures me that the contracts with the companies are binding and likely to last.

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OK, thats a start. Now request the company books for the past 5 years. Or if they wont give that, at least the end of year tax returns. That will tell you about turnover, costs, profit and growth.

Now the most crucial thing is your knowledge of the industry, do you know what it takes to maintain these contacts and search for new contacts among the businesses in Madrid? If not, it is essential someone in the business does know this. Is someone employed as the marketing director for example? Do you have close contacts with the Madrid business associations? I can keep going....

In the language industry, your knowledge of the market/sector is everything and will ultimately decide whether the business will be a success or failure.

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You ask some very good questions Cricketman, and I assumed that the previous customers would stay with the company. I take it that this is not always the case.

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I'm afraid I've seen companies change their requirements overnight. In both directions! In fact I think it's very rare for business English class numbers to stay level over the course of a few months, still less a year! Sorry, but although there is money to be made in this field, I smell something not quite right with the seller's story.

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Client churn is a problem in any business. You should assume that you may lose between a third and half of business each year. And in many cases you cant do much about that e.g. budget cuts on language skills so the company dont have to make redundancies is a common thing at the moment. So you will need to replace all the clients you lose, just to stand still.

From my knowledge of the industry, about 50% of the course fee for a language course is spent on marketing and agents' commission. So this should tell you about the amount of work and knowledge needed in order to find clients.

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You will also need written undertakings from the sellers about not approaching your customers (as they have all the details) and about not starting a competing business in the same area

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Cooking calls but I thank you all for your help and please if you have any more then do leave a message. I will return after the washing up!

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I'd only add that as an ex businessman who was involved in the purchase of another company, we had teams of accountants and solicitors looking over the whole company before we went ahead, and also drawing up necessary legal agreements. You have to be sure. It's a lot of money you are dealing with, and you shouldn't let your heart rule your head. Once satisfied, you should also be making your offer through your legal representation and making sure therefore everything is identified and recorded

I ran businesses in the Uk for many years. It wasn't easy ... always many challenges. In Spain you are also dealing with unknown systems and Spanish bureaucracy. Don't under estimate the challenge in front of you

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From what I know the users of language schools are quite fickle, any change of ownership or teaching methods can give an excuse for contracts to be broken, citing changes in the school as the reason for breaking the contract.

As Cman said, promotion needs to be done on an ongoing basis as nobody attends language classes for all of their life, some drop out and others reach the level of proficiency they wanted, eoither way a fee is lost and must be replaced just to keep the status quo.

So when making your offer, bear in mind that a full order book does not mean that the customers will be loyal to the new owners.

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Only you can decide on how much you want to pay, and at the moment it is a buyers market, because AFAIK the banks are quite tight at the moment on lending to small bussiness for working capital, let alone to people who want to buy a bussiness.

So I would expect that most likely it would go to a cash buyer, and the people with the readies are very aware of the risks at the moment.

Taking into consideration the economic climate, and remembering that the rent that the sellers paid and comparing it to the increased rent that the new buyer would have to pay, could make or break the business.

What you are actually buying, is the hope that the present clients will still use your services , and the obligation to pay rent on a premises for X number of years.
So let your offer reflect this.

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Do you live in Spain already? What are your current jobs/ experience? I have also worked in the language business, mainly business English (including residential), and you will be in for a lot of work dealing with staff, local bureaucracy, early mornings, late nights. And how is your level of Spanish? Most students don't speak much English yet!