June 19, 2025 • 41 mins
In this episode of Business Buying Strategies, Johan Gory, managing director of OnPoint Accounting, offers an in-depth masterclass on financial due diligence.
Johan explains the importance of involving a due diligence expert, common pitfalls that cause buyers to overpay, and techniques such as the 'source of funds' trick to uncover the real financial health of a business.
He also discusses the relevance of goodwill, the challenges and opportunities in buying distressed businesses, and the role of director's loans in business valuation. This episode is a must-listen for anyone serious about buying a business without risking their own cash.
Key moments
00:00 Introduction to Business Buying Strategies
01:29 Meet Johan Gory: Expert in Financial Due Diligence
05:16 The Importance of Financial Due Diligence
08:36 Understanding Financial Terminology and Add-Backs
13:53 Opportunities and Challenges in Buying Distressed Businesses
17:25 Networking for Business Opportunities
22:04 Understanding Director's Loans
23:54 Negotiation Strategies with Director's Loans
26:07 Evaluating Business Owner's Compensation
29:48 The Importance of Cash Flow in Due Diligence
30:57 The Secret Weapon: Source of Funds Report
38:49 Commercial Due Diligence: Beyond the Numbers
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:29):
Hello and welcome to Business BuyingStrategies, the UK's number one podcast
for people interested in buying abusiness in the smartest possible way
without risking any of your own cash.
Now for this week, you're going tohear a no nonsense masterclass from due
diligence expert Johan, someone who'spersonally overseeing dozens of deals
from start to finish, including his own.
(00:50):
Now, if you've ever wondered whenyou should involve your accountant,
what financial due diligencereally uncovers or how to avoid
paying too much for a business?
This episode is a must listen.
Johan doesn't sugarcoat anything.
He explains exactly why so manybuyers overpay, how hidden debts
and dodgy add-backs trip you up.
(01:11):
And how to use clever tools likehis source of funds trick to
find out what's really going oninside a business's bank account.
So grab a pen, take notes, andenjoy this deep dive into the
reality of financial due diligence.
Let's get started.
Okay.
So my name's Johan Gory.
I am the managing directorof OnPoint Accounting.
(01:34):
, I am a CFO slash fd depending onwhatever terminology the marketing
guys are using on the day forseveral small and larger businesses.
So I'm looking after clients that aredoing a couple of million pounds a year
through to about 30 million turnover.
One of them I've been working with hasgone from 4 million pounds a year to
(01:55):
25 million in about 11 months throughacquisitions and growth and strategy.
One of those businesses I soldjust on Wednesday, just gone.
It was a software company that Ifounded working in the industry.
I can't tell you the numbers 'causethere's a, it is private equity,
so there's a lot of legal stuff.
(02:16):
But what I can tell you is we got adouble figure multiplier of our annual
revenue and it was an eight figure sum.
So, and that was founded two years ago.
.. So we're here today to talk about financial due diligence, which is
my accounting firm's main focus.
(02:36):
So we've got 750 clients across the ukranging from your local window cleaner,
who goes around, gets everything paidin cash, and now tells us a fraction
of it right through to 25 millionpound kind of turnover businesses.
And we do so from your selfassessment right through to your
(02:56):
financial due diligence, yourfinance director services, et cetera.
Everyone's got their own specialties.
We've got a great team of 25 people.
I spend my time leading that team andripping acquisitions apart and telling
you why you're ever paying normally.
. So acquisitions wise, I'm oftenasked, where does it start?
(03:19):
When should you get in touch with us?
So we do four key areas, right?
You've got an acquisition.
An opportunity.
Someone's responded to your letter,they've not got a clue what their
business is worth, or someone'stold them what their business is
worth and they're in cookie land.
We do a business valuation report.
(03:40):
You send us the last coupleof years worth of accounts.
We look at it, we do industry marketresearch, and we come back to you and
go look, based on what other businessesin this industry are selling for at the
moment, upcoming, get legislation changes,et cetera, this is what we think the
business is worth using their accounts.
You can then go, look, my expert hasjust told me this is what it's worth.
(04:03):
You get a sexy little PDF soyou can send that onto them.
Or when they're like, Hmm, I think thebusiness is worth 10 million pounds.
Sorry, which you've got turn ofeight, 800,000 pounds, right?
Okay.
Then you can go, look, I've had anindependent person value your business.
Here's their report.
Is there room for talk orare you completely off your
(04:25):
head from the beach party?
Through to then, right?
We've got an opportunity here.
We're happy with thevaluation of the business.
We're happy with what they're asking for.
How do we structure that deal?
There's always opportunity just 'causethe valuation report says one thing.
There's always opportunityto overpay or pay more.
If we can get a better structure, I willbuy your 1 million pound profit business
(04:47):
a year for 10 million pounds, but Iwant 15 years to pay you back for it.
'cause I've got enough profitover 15 years to pay myself some
and to pay for the business.
So it's not about is theprice right or wrong?
It's about is the structure, right?
And then we go through the wholefinancial due diligence part, which
we're gonna speak to about today,right through to completion accounts.
(05:11):
And then I can introduce you to therest of my team who will do your
pay or your bookkeeping, et cetera.
.So before we get into financial due diligence and what, what
it does, let's talk about whathappens if you don't do it.
Anyone brought a business andnot done financial due diligence?
I won't judge you all going well.
No.
(05:33):
I, I had to do a bit offactory researching in six.
In the last six months, I've had15 people come to me with business
opportunities of acquisition andI've said we can structure it like
this, we can structure it like that.
But I have concerns.
Or they've gone, yeah, I'mjust, I don't think I'm gonna
need financial due diligence.
(05:53):
I'm just gonna do it myself.
I'm confident every single one isalready insolvent or up to their
eyeballs in personal guaranteesand can't afford to go insolvent.
So every single one of those thatdidn't have financial due diligence
has or is about to fail as a business.
(06:16):
Financial due diligence will cost yousomewhere between 4, 5, 6, 7,000 pounds.
Most of those people now regret that'cause they've now spent 10 to 15,000
pounds a loan on the insolvencyperson to liquidate the business.
Not to mention all the moneythey've lost and all the money
(06:36):
they owe out in finance and stuff.
So it's a worthwhile investment and ifyou don't do it, you will regret it.
Okay?
You don't buy a house and not getthe house survey done, do you?
You buy the house and you want to knowthat you are buying a sound house.
It's not gonna fall down when youclose the door as you move in.
(06:59):
So that's the negative.
Let's move on to the positive.
So, financial duediligence, what's it about?
Financial due diligence is about checkingwhat you are being presented with is true.
And factual
accounts are just a story.
(07:19):
You just need to knowhow to read that story.
You know, when you sit down inEnglish at SCO and they read a poem
out and they, what does this mean?
What's the hiddenmeaning behind this poem?
Where was that?
They're going bloody words.
Alright.
We might be able to tell you the contextof it's a love poem or whatever, but
actually these experts can delve inand go, oh, this is the hidden message.
(07:44):
That's all we are doing with accounts.
And the person that writes theaccounts is telling a story.
Normally, it's a story of woe to the HMRCto avoid some tax, sorry, tax efficiency.
But when you tell youraccountant, I'm looking to sell.
(08:05):
All of a sudden it's a story of success.
We are really profitable.
Yes, I'm gonna suffer a bitattacks for a couple of years,
but I'm gonna get even more money'cause I'm telling a good story.
So our job is to translate that story toyou and go, that's bs Or they're trying
(08:26):
to pull this wall over your eyes, butultimately the accounts are just a story
you need to understand how to read.
And that's what we are here for.
So in the accounts, you're gonna comeacross all this terminology and you're
gonna come across things like add-backs.
Oh, well I put my companycar through the business.
(08:49):
Is that right?
Okay.
Oh, can I keep the company car please?
When I sell the business to you?
Yeah, you can buy thecar from the company.
More important question.
Have you uh, been usingthat car for personal use?
I'm, I'm assuming you have if you'reneeding to buy the car from the company.
So you've still got a caronce you've sold the company.
Wow.
You know, I mean, yeah, sometimes.
(09:11):
Have you, uh, have you declaredthat on your benefits and kind?
Is that on your P 11 Ds?
On your p slips?
Well, you know, so Yeah.
Yeah, I know.
HMIC are gonna find out at some pointand come looking for that money.
So I'm gonna take a chunk of what youare asking for to cover me in case
they turn around and want their money.
(09:32):
Alright, another good one.
Goodwill Accountantslove a bit of Goodwill.
Does anyone know actually what Goodwillis or what it should be used for?
Nope.
So Goodwill, it will turn uponthe balance sheet normally
in the hundreds of thousands.
Goodwill is a absolutelylegitimate asset of a business.
(09:53):
It's when you buy anotherbusiness for more than it's worth.
So if you look at all the assets and minusall the liabilities, and that business is
worth 500,000 pounds on paper, but you pay700,000 pounds to bring in that business,
that's 200,000 pounds of goodwill.
(10:15):
Okay?
So whenever you see Goodwillon a set of accounts, go oh.
Oh hell, you've got Goodwill.
Oh, fantastic.
So you know all about buyingand selling businesses.
Tell me about it.
What?
What business did you buy?
Oh, well no, no, that's just myaccountant making the balance sheet
look good because most of the timesI see goodwill, it's to actually stop
(10:41):
the balance sheet being insolvent.
And as soon as you take it out, theyare in the red, they're insolvent and
shouldn't even be trading anymore.
But 'cause the accountants put somegoodwill in there in the wrong way
under a term that it shouldn't be, allof a sudden the business looks okay.
(11:03):
It doesn't look like you've takentoo much money outta the business.
It is still solvent, which meansyou can still take dividends.
'cause the moment it's not solvent, youcan't take dividends as a business owner.
So Goodwill is always a fun one.
Another question I get quite a lot offrom the buyer is, so is that, is that
(11:24):
a legit, legitimate business expense?
it's a gray area.
You give me a business case as towhether it's a business expense or not.
And I, I'll rule on, it'svery much like going to court.
So if you turn around to me andgo, I'm buying a helicopter.
Okay, well it's the business case.
(11:44):
Alright.
'cause if it's just to get tothe F1 and back then probably not
a legitimate business expense.
Oh, well actually I've worked it out.
I've got seven offices across the UKand I lose X amount of hours every
week traveling to different offices.
So I've decided if I buy a helicopter,I can save all of this time in
(12:07):
traveling to all the different offices.
That is a legitimate business expense.
If you had to have an emergency landingat the F1, then accidents happen.
But what I'm saying is there is alwayspotentially a legitimate business expense.
I have got a client who has brought amotor home, put you through the business
(12:32):
because they came to me and said, I'mgonna buy a 200,000 pound motor home.
It's like, oh God, you've been watchingthe news and the SMP, you get caught.
No, I. They send people every singleweek to different locations across
Scotland to build garden rooms.
(12:52):
They've worked out with my help.
They're spending half a millionpounds in accommodation.
They spend 200,000 pounds this year on amotor home that holds up to four people
and they deploy them in teams of four.
Then they would only have tospend 3000 pounds a year in motor
(13:12):
home birthing campsite fees.
Oh, well that's justbusiness sense, isn't it?
Like that's no different than mearguing, talking to a different
supplier 'cause their food isslightly cheaper for my restaurant.
It's a genuine business case.
when you send out all your letters,you're gonna get a lot of things go.
Is that a business expense?
(13:33):
Like can you justify that?
And they, what?
They should be able to come round toyou and instantly say is that, yeah,
so here's the facts and the figuresby spending this money on this, this
is the time, the money, et cetera.
I'm saving as a business.
If they can't do that, no.
They're just putting it throughthe business for tax efficiencies.
(13:53):
Distressed businesses, anyone in theroom looking at buying distressed
businesses . Distressed businesses foryour first acquisition is a challenge
because you really need to knowwhat you're doing with a business.
If you've got years of businessmanagement behind you and a track
(14:15):
record of going in and turning aroundbusinesses and making 'em profitable,
you've got a fighting chance./
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It's packed with 16 reports,checklists, cheat sheets,
and more to help you succeed.
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(14:38):
Claim your toolkitnow@dealmakerspodcast.co uk.
/Before I go any more into it though, dowe all know what a distressed business is?
Yeah.
Yeah.
So business cash flow might be a bittight, technically might not be solvent,
certainly never gonna be able to borrowmoney against it until you sort it all
out living kind of paycheck to paycheck.
(15:02):
Really hoping that invoice thatyou've just sent out today gets paid
tomorrow and not in 20 days likeyou've told them on the credit terms.
'cause you need to payanother bill yourself.
Distressed businessesare huge opportunities.
Okay?
I brought a business, it'sour second acquisition.
Brought it for a pound upto its eyeballs in debt.
(15:26):
The person came to me and said,look, yeah, I'm an amazing
bookkeeper and an accountant.
Turns out I'm pretty crapat running a business.
You'll be amazed how manyaccountants and bookkeepers
are crap at running a business.
But they said, look I'mup to my eyeballs in debt.
It's all personally guaranteed.
Like I say, I up to yourI 50,000 pounds, okay?
(15:47):
Which for many of us inthis room isn't an issue.
Like that's manageable.
But for her personally, twoyoung children going through a
divorce, it wasn't manageable.
She needed consistent, reliable income.
So she was gonna go and get a job.
So she said, look, can Ijust give you my clients?
And , look, you look after my clients.
(16:08):
If I refer 'em to you, said, look,I've known this lady for a while.
Said, look, I'll do you one better.
I'll buy the business for apound and I'll give you a job.
'cause in my head I'm thinking, Christ,my accountants just put their notice in.
I need a new staff member.
She's really good.
Two birds, one stone.
(16:28):
So we brought that business.
That was four years ago.
I'm still servicing the debt, but we havemade a lot of money out the back of that
business from cross-selling and upsellingall our of the services to those clients.
So it can be a success.
It depends what your goal is.
My goal was I need a new staff member.
(16:49):
Got one.
Nice and easy.
In the accounting world and in a lot ofservice industries, the main driver for
us to buy businesses isn't turnover.
It's not new clients.
'cause the drop off rate of clientof those clients is phenomenal.
It's actually, I want that team of people.
(17:10):
I want those employees to save mehaving to recruit for more employees.
So if that's your goal and you don'tmind having a bit of a distressed
business, great way to do it.
But overall, distressedbusinesses can be a challenge.
If you want a distressed business,two key people to having your network,
(17:31):
one is your accountant and bookkeeper.
Just say to 'em, oh, howare your client's doing?
Anyone looking to sell up and get out.
My client has just tripled hisbusiness overnight, not from a
broker, not from letters, but fromactually just saying to me, Johan, if
you ever come across any businessesin this sector that are profitable
(17:52):
and run well and they're looking toget out, can you just let me know?
That's not hard, is it Your accountant?
Bookkeeper is at the heartof a network of businesses.
I've got 750 businesses in my firm.
That's 750 different introductionsI could potentially make there.
(18:14):
'cause at some point, we all exit ourbusiness as a individual in society.
Two certainties after, onceyou're born, tax death, don't
matter what you do, you're gonnasuffer both you a business owner.
You've got a third certainty in lifeexiting of your business, whether that is
(18:38):
willing, planned and organized, whetherit is rapid 'cause of a life changing
moment, whether it's because you've beenhit by a bus or whether you are retiring,
you will exit your business at some point.
So I've got 750 people looking toexit their business at some point.
(19:01):
Sounds like a group of peopleyou probably all want to meet.
So your accountants andbookkeepers have the same network.
Next person you want to get onreally well with is the person.
No one ever wants to talk to yourlocal insolvency practitioner.
Okay?
Liquidators, I guarantee youthey'll be one at every B and i and
(19:23):
business networking meeting going.
Some are really, reallyfriendly, some are less friendly.
The good ones, the proactive onestake an approach to liquidation.
Insolvency of how canI save this business?
They see themselves as doctors agood practitioner, uh, insolvency
(19:43):
practitioners today will try and so savethe business first before they liquidate.
So my guy always comes to me and says,Johan, I've got this business going.
This is roughly the valuation.
Do you know anybody?
He offered me a, uh, women's lyrebusiness for five grand the other week,
(20:05):
decided the wife might not agree withme dealing with that, so I left it.
But my insolvency practitionerfriend is the busiest he's ever been.
It's not covered in the media 'cause we'renot having a global crash or anything,
but he's busier now than he was in 2008.
Businesses aren't recovering, theyaren't doing great after COVID.
(20:29):
It's a, it's not anall or nothing anymore.
Like it's not everyone's suffering.
So it's not in the news, but thereis a huge category of businesses who
are really struggling and there'sa huge category of businesses
that are doing exceptionally well.
There's less of a middle ground.
There's a lot of reasons behind it.
HMRC are getting really tough withcollecting debts, bounce back loans,
(20:53):
still being paid back, et cetera.
They're still struggling.
They can't borrow money, et cetera.
So if you're looking for distressedbusinesses, talk to your accountant
or bookkeeper for any kind ofbusiness, regardless of quality.
If you want a distressed business oreven potentially a good business, but
they don't get 'em as often, go toyour insolvent insolvency practitioner.
(21:16):
'cause a genuine, uh, tax efficientway to close your business when
you've been running it for 20 yearsis to liquidate it and retire.
That doesn't mean bankruptcy, it justmeans you're shutting down the business.
You're settling all the matters,and the excess cash gets paid
out under the dispose, uh,business asset disposal scheme.
(21:37):
So that's 14% instead of yourcapital gains tax return.
Okay?
So sometimes you insolvencypractitioner will get a good business
and they, they're just old andthey want to retire Make sense?
Yeah.
Other thing to look out for on accounts.
Director's loans
directors are, and shareholdersare terrible for understanding
(22:00):
that I'm gonna pay you a millionpounds for your business.
Oh, fantastic.
However you owe this business due tothe director's loan that you've been
taking out for years and not payingback properly on your tax return.
Looking at this, you owe this businesshalf a million pounds, which when
you've been running your businessfor 20 years, it's quite achievable.
(22:22):
So actually you're only gonna gethalf a million pounds paid out.
Now that's a great tool for you guys'cause you can go, look, I'm gonna pay
you half a million pounds on day one.
How does that sound?
Oh, fantastic.
Already spending that money.
But it's just writingoff your director's loan.
(22:42):
So you've, you're gonna exit yourbusiness and you're not gonna suffer
half a million being declared onyour tax return that's gonna suffer,
pay all your different income taxes.
Okay, so I'm doing you a favor.
'cause if you don't do this,you're gonna pay a lot of tax.
Whereas if we declare it as part ofthe sale of the business, you're only
(23:04):
paying the co uh, capital gains onthe business asset disposal relief.
Okay.
The problem is they startgetting a bit upset.
Well, what do you mean I've not got, I'mmissing half a million pounds of my money.
So, well you've technically had itand spent it for the last 20 years.
Well, my accountant didn't tell me that.
Why would they?
(23:25):
No, it's not an issue until youdecide to sell the business.
Have you told your accountant you'relooking at selling the business?
Oh, no, no.
I've, I've just had thisletter from you in the post.
I'm just looking at it now.
It's like, yeah, so you've notplanned for it so your accountant's
not told you something 'causeyou've not had to plan for it yet.
But whilst it can be almost a dealbreaker, I've seen people walk away
(23:48):
going, I'm not gonna sell my businessif I've got to write that loan off.
It is there though, for you to be ableto negotiate and get that no money down
deal across the line, but it has tobe paid back to the business somehow.
So they either declare it throughtheir tax return and that writes
it off and it's declared as pay YEor whatever it's declared as, or
(24:15):
it gets declared as capital gains.
And I'm doing you a favor here.
I'm helping you save some tax.
By giving you this as part of the deal.
It's the same as money in the bank.
Anyone had a conversationwith a business owner?
Well, they think the money in theirlimited company bank belongs to them.
Yeah.
It's a tough sell, isn't it?
Right?
(24:36):
It's really tough to educate themgoing, look, that money belongs to the
business, got nothing to do with you.
You just run the business, but thatmoney belongs to your business.
Same principle with diuh, director's loans.
You've already had the money,you just don't realize it.
But if they want to take themoney outta the business bank
(24:56):
account, you have the power.
You can decide in structuring it, do Ibe nice and go look, we'll build it into
the offer so you can declare it as acapital, uh, capital gains tax relief.
So it's a lot more tax efficient.
Or do you go, I need that moneyif you're gonna take it out.
(25:18):
I'm not gonna do you any favors here.
I'm gonna make sure you suffer the tax.
At which point they go, you know what?
I'll leave it.
It's fine, don't worry.
So directors loans accounts,very powerful negotiation tool.
So always, it's one of my firstthings I go to when someone sends
me a set of accounts, where is,where's the director's loan account?
(25:42):
Uh, that's my first step.
How much can I write off thebusiness valuation overnight?
And then I look at the cash in the bankand go, oh God, there's 400 K in the bank.
He's gonna think that belongs to him.
So both are very, very good negotiationtools, but both can be quite challenging
as well to get across the line.
(26:04):
All make sense?
Yeah.
So we've talked about goodwill, we'vetalked about distress businesses.
We've talked about add backs,like well as a director paying
themselves a proper salary, likeincluding dividends, et cetera.
This is prolific in the accounting space.
(26:24):
The amount of accounting firms Ispeak to almost monthly, where they
go looking to sell my business.
Oh, okay.
That's fine.
This have a look at the accounts.
How much money are youpaying yourself now?
There's no, no real profit here.
Well, I, I take my 12 and ahalf thousand, is that called?
Okay.
I take about 20,000 poundsa year in dividends.
Hang on a minute.
(26:45):
So I've got to replace you asthe owner of this business.
I. To run and look after all yourclients and your team, I'm gonna
have to put a manager in place.
You are currently paying yourself 32 anda half thousand pounds a year salary.
Yeah.
Right Through dividends and salary.
Is that right?
Okay.
For me to replace you, it'sgonna cost me 50 grand a year.
(27:07):
'cause that is what an a qualifiedaccountant costs on an annual salary
before pensions, before nationalinsurance, before everything else.
And all of a sudden they go, oh.
Now in a lot of businesses you'll find thebusiness owners are overpaying themselves.
So that's fine.
There's an add back to be hadthere because it's not gonna
cost you as much to replace them.
(27:29):
But always double check what arethey paying themselves And like we
were told this morning go on Indeed.
And have a look at what's it gonnacost you to replace that role.
Then if they turn around and go, oh,wife's on the books, she's our bookkeeper.
Is that right?
How much you paying herabout 15,000 pounds?
(27:51):
It's like, okay, she part-time.
No.
Well, you know, you know what it's like?
She just, she comes in eachday with me and she does the
bookkeeping Is that right?
So if we, um, if you and the wife areoff, do I need to replace your wife?
Well, you know, you couldget a bookkeeper out.
Say what else does she do?
(28:11):
Oh, not a lot is like Right.
Hang on.
So speak to the wife.
What, so what do you doon a day-to-day basis?
What do you go up to?
Well, I normally answer the phones.
Chase some credit su some creditors havea chat, do get some orders put in, deal
with some emails, an answer the postmake the coffees when people come in.
It's so, so I'm already gonna have toreplace you with a receptionist at least
(28:37):
25, 30 grand for a receptionist a year.
She's paid 15.
That's not an ad back is it?
That's in your favor.
So when they go, here's my list of adbacks, it's something, hang on, hang on.
Like company car.
Yeah, I want to add back the company car.
I said, well actually that'snot a good add back as big
(28:58):
add back as you think it is.
Alright, you are payingsilly money for a Mercedes.
But if I put a manager in this place, I.
I may have to provide a companycar which you haven't got anymore.
So I'm gonna have to replace thatcompany car with another one.
Which means the add backs are notas powerful as they think it is.
(29:20):
So always get 'em to give youa list of add backs and really
research that like plan ahead.
Like do I need to replace that role?
Because especially if it's family related,they're probably underpaying them.
So actually it's in yourfavor for that add back.
'cause then you can go, well I'lladd that 15 K back, but that means
I'm adding in 30 K on my side'cause I've got to replace them.
(29:43):
And now you're starting tochip away at that ebitda.
So bear in mind with accounts isit's a snapshot in time, and if the
accountant's clever, they'll makesure you are reporting your annual
accounts at a good time of the year.
So for example, we had a, someonecome to us and said, oh, gonna
(30:06):
buy a kitchen fitting business.
So, okay, cool.
Looks at the accounts.
These look good.
A hundred k sat in the bank in June.
Said, okay, not too manydebtors, not too many creditors.
This is all looking really good.
I, as of the 30th of June, sojumped onto a call with them and
(30:29):
said, look, what's your seasonalitylike, oh no, we're busy all year.
Sold off.
No one gets a kitcheninstalled in December.
You might run late and thennot have one for the Christmas
lunch like you are seasonal.
No, no, we're busy all year.
Is that right?
So you are telling me you've got peopleout for four weeks in December and four
(30:49):
weeks in January installing kitchens?
Well, yeah, we're busy all year.
Okay.
Then I deployed my secret weapon.
So my secret weapon is what iscalled a source of funds report,
traditionally used by conveyingsolicitors for when you buy a house.
(31:09):
When you buy a house, you get an emailsaying you need to fill out this form.
Tell us where you're getting allyour money from to buy the house.
And you have to declare it all.
And then they want bankstatements to back that story up.
The modern conveyancing solicitorswill use a source of funds tool like we
(31:30):
do where I send your seller an email.
In that email is a link.
They click that link, you go, itasks, right, who do you bank with?
Oh, RBS click RBS.
Great.
Log in for me.
It logs them in.
They log in.
It captures two years oftransactional data, puts it into a
(31:51):
report and sends it direct to me.
Okay, now remember that bit.
That's important.
I. I've instantly got two yearsworth of data of your bank account.
Read only like once.
Once I've got the day, once thereport's compiled and sent to
me, it disconnects from the bank.
Completely safe.
I can't get in there and do anything.
(32:12):
I can't see anything apart fromthis PDF report and CSV file.
I get
all of a sudden this kitchen fittingbusiness isn't looking quite so good
because it's like, you know, youknow, you said you're not, you're not
seasonal and you're busy all year.
Yeah, yeah.
So you've got a hundred K in thebank in June, but for the last
(32:32):
two years, by December you are50,000 pounds in an overdraft.
You didn't tell my client that, did you?
Oh, well, you know, that's just, that'spart of the industry, so, no, but my
client has got to find 50,000 pounds tocover that overdraft and then more money
to pay you your deferred consideration.
(32:54):
So we're putting morestress on the business.
Funnily enough, deal got scrapped'cause it wasn't quite as good as
that snapshot in the accounts made.
Its look like.
But if I hadn't done that secret weaponof mine, which most other accountants
don't do, you would've only foundout once you moved in, I'm sorry,
(33:17):
I've, I've got to find a 50,000 poundoverdraft and I'm a new business owner
and they've just closed the one theold business owner had 'cause they've
got a change of ownership term on it.
All of a sudden you'vegot a real big problem.
Starting to see theimportance of cash flow.
If your accountant says, oh, don'tworry about using these snazzy tools.
(33:39):
We'll get some PDF bank statements.
Anyone remember CarilionBig building company.
Government backed went bust, didn't it?
Would you like to know why
on the account was a bank account
with a photoshopped bank statement?
(34:03):
No one at this big four auditing companyhad the common sense to go better.
Just go and check that that bankstatement's genuine and true and
right to the bank and ask, get themto clarify the balance on that date.
Soon as that came to light afew years later, Ian goes bust
with chat GPT, my best friend.
(34:25):
And all the AI imagegenerations that we can do,
it's really easy for some someone tocreate a fake bank statement and to
put a line in the accounts to say,I've got this bank state, I've got
this bank account with all this money.
So if someone says to you,just send your PDFs, no.
(34:45):
If you remember back to my secretweapon, they click that link, they
log in, the report comes direct to me.
No one can interfere and corrupt the data.
'cause it comes directly to me.
It doesn't go via them.
They don't see the data I'm getting,I just get the report so I know
it's good, honest, and true.
(35:06):
An accountant can tell astory with a set of accounts.
The bank account never lies.
There is a slight caveat if they don'ttell us about every bank account,
but they normally have the bankaccounts listed on their accounts.
So I can go 1, 2, 3, 1, 2, 3.
Fine.
(35:26):
When you are doing financial duediligence, do not care about the accounts.
They're the last thing to worry about.
Cash flow.
The accounts aren't gonna paythe deferred consideration.
The accounts aren't gonna pay you.
Your deal maker fee, your bank balance is.
So if that bank balance dips into anoverdraft every flipping week, you've
(35:50):
got to say, oh, am I happy with that?
Will I get the lendingto be able to cover that?
'cause overdrafts arean absolute nightmare.
They're expensive.
Even if to have the facility is expensive,
they always have a change of ownership.
So the moment you take over, thebank gets notified and goes, oh,
(36:12):
well we'll just turn that off.
We were happy to lendto the previous person.
We're not necessarilyhappy to lend to you.
And on top of that, every time thebanks go, oh, markets are a bit iffy.
We're a bit exposed here.
We'll, uh, we're going and tidy up some ofour liabilities in the form of overdrafts.
(36:34):
Literally, my client who's ranhis business for 20 years, had an
overdraft facility for 15 years.
His bank sent him a letter saying due tothe changing climate in your industry,
we're closing your overdraft facility nextweek and you need to pay it immediately.
Funnily enough, didn't have25,000 pounds just to pay an
(36:55):
overdraft facility off that.
They have the power to close thatfacility and not tell you why.
So when you're doing your financialdue diligence and there's an overdraft,
assume you're not gonna get it.
Go and talk to Martin aboutother funding options for it.
But you're better off with invoicefinancing than an overdraft.
(37:18):
So ultimately accounts are important'cause they tell a story, but it tells
the story that the accountant andthe business owner want you to see.
So that is why we alwaysdefault to the bank.
'cause that is factual.
The amount of people that have told me, ohyeah, don't have any lending, it's fine.
(37:39):
I do this secret weapon.
That's a, that's a lenderrepayment going through there.
'cause not only does it give me two yearsworth of transactions, puts it into a
nice graph with all the ups and downsand spikes in cash in and cash out tells
me exactly how much an average month thebusiness needs to survive in cash terms.
(38:01):
Also then goes, here are your10 biggest outgoing suppliers.
Here are your 10 biggestincoming payments.
Here are all the repeating in payments.
I'm going down HMRC.
Yeah, that's fine.
Close brothers.
Invoice finance for you.
Hang on a minute.
You says you've not got any lending.
(38:21):
Oh, well we didn't in the accounts, butwe've now taken out an invoice facility.
Why?
Well, things are a bit tight.
Oh, well you weren't sayingthat to my client last week.
So.
Not only do we get all this greatdata from the bank, but it reveals
all of the warts in the system.
(38:43):
Everyone convinced that bank datais more important than accounts
for financial due diligence?
Wonderful.
Also, before you even cometo us, do yourself a bit of
commercial due diligence.
Okay?
Have a look at their website.
How old is that looking?
Check out their social media.
(39:03):
Just Google the business name.
'cause if they're in the media,you'll soon know about it.
Legal due diligence and financialdue diligence are the ones
that we always talk about.
. But commercial due diligence iswhat you need to be doing as well
as to see the bigger picture.
So I don't look, and the lawyerdoesn't always look to see, have they
(39:26):
got a bad reputation in the press?
, Have they been through employmenttribunals very publicly and stuff.
Has there been a coupleof deaths in the factory?
Do people keep walking outminus one arm on a Friday like.
You are building a picture.
The financial due diligence makespart a big part of that picture.
(39:46):
The legal due diligence makesa big part of that picture.
But you need to put the surround,the frame around that picture
with the commercial due diligence,which you can really easily
do just by doing it in Google
.Anything can be a red flag.
So everything we do in financialdue diligence is about risk.
(40:07):
We are highlighting thingsthat are potentially risky.
This half of the room may go I'm happywith that level of risk of that issue you
found we're gonna continue doing the deal.
This half the room might turn aroundand go, I'm not touching that.
Like, risk can be mitigatedwith spas and legals and stuff.
But yeah first of all, it's not a redflag until they can't answer the question.
(40:30):
That's great.
It's like when you ask for managementaccounts, it takes 'em six weeks.
That just 'cause they haven'tgot management accounts
today isn't a red flag.
The fact it takes 'em six weeksto get it to you is a red flag.
'cause it's, they've obviously gotabsolutely terrible financial record
Hello and welcome to Business BuyingStrategies, the UK's number one podcast
for people interested in buying abusiness in the smartest possible way
without risking any of your own cash.
Now for this week, you're going tohear a no nonsense masterclass from due
diligence expert Johan, someone who'spersonally overseeing dozens of deals
from start to finish, including his own.
(00:50):
Now, if you've ever wondered whenyou should involve your accountant,
what financial due diligencereally uncovers or how to avoid
paying too much for a business?
This episode is a must listen.
Johan doesn't sugarcoat anything.
He explains exactly why so manybuyers overpay, how hidden debts
and dodgy add-backs trip you up.
(01:11):
And how to use clever tools likehis source of funds trick to
find out what's really going oninside a business's bank account.
So grab a pen, take notes, andenjoy this deep dive into the
reality of financial due diligence.
Let's get started.
Okay.
So my name's Johan Gory.
I am the managing directorof OnPoint Accounting.
(01:34):
, I am a CFO slash fd depending onwhatever terminology the marketing
guys are using on the day forseveral small and larger businesses.
So I'm looking after clients that aredoing a couple of million pounds a year
through to about 30 million turnover.
One of them I've been working with hasgone from 4 million pounds a year to
(01:55):
25 million in about 11 months throughacquisitions and growth and strategy.
One of those businesses I soldjust on Wednesday, just gone.
It was a software company that Ifounded working in the industry.
I can't tell you the numbers 'causethere's a, it is private equity,
so there's a lot of legal stuff.
(02:16):
But what I can tell you is we got adouble figure multiplier of our annual
revenue and it was an eight figure sum.
So, and that was founded two years ago.
.. So we're here today to talk about financial due diligence, which is
my accounting firm's main focus.
(02:36):
So we've got 750 clients across the ukranging from your local window cleaner,
who goes around, gets everything paidin cash, and now tells us a fraction
of it right through to 25 millionpound kind of turnover businesses.
And we do so from your selfassessment right through to your
(02:56):
financial due diligence, yourfinance director services, et cetera.
Everyone's got their own specialties.
We've got a great team of 25 people.
I spend my time leading that team andripping acquisitions apart and telling
you why you're ever paying normally.
. So acquisitions wise, I'm oftenasked, where does it start?
(03:19):
When should you get in touch with us?
So we do four key areas, right?
You've got an acquisition.
An opportunity.
Someone's responded to your letter,they've not got a clue what their
business is worth, or someone'stold them what their business is
worth and they're in cookie land.
We do a business valuation report.
(03:40):
You send us the last coupleof years worth of accounts.
We look at it, we do industry marketresearch, and we come back to you and
go look, based on what other businessesin this industry are selling for at the
moment, upcoming, get legislation changes,et cetera, this is what we think the
business is worth using their accounts.
You can then go, look, my expert hasjust told me this is what it's worth.
(04:03):
You get a sexy little PDF soyou can send that onto them.
Or when they're like, Hmm, I think thebusiness is worth 10 million pounds.
Sorry, which you've got turn ofeight, 800,000 pounds, right?
Okay.
Then you can go, look, I've had anindependent person value your business.
Here's their report.
Is there room for talk orare you completely off your
(04:25):
head from the beach party?
Through to then, right?
We've got an opportunity here.
We're happy with thevaluation of the business.
We're happy with what they're asking for.
How do we structure that deal?
There's always opportunity just 'causethe valuation report says one thing.
There's always opportunityto overpay or pay more.
If we can get a better structure, I willbuy your 1 million pound profit business
(04:47):
a year for 10 million pounds, but Iwant 15 years to pay you back for it.
'cause I've got enough profitover 15 years to pay myself some
and to pay for the business.
So it's not about is theprice right or wrong?
It's about is the structure, right?
And then we go through the wholefinancial due diligence part, which
we're gonna speak to about today,right through to completion accounts.
(05:11):
And then I can introduce you to therest of my team who will do your
pay or your bookkeeping, et cetera.
.So before we get into financial due diligence and what, what
it does, let's talk about whathappens if you don't do it.
Anyone brought a business andnot done financial due diligence?
I won't judge you all going well.
No.
(05:33):
I, I had to do a bit offactory researching in six.
In the last six months, I've had15 people come to me with business
opportunities of acquisition andI've said we can structure it like
this, we can structure it like that.
But I have concerns.
Or they've gone, yeah, I'mjust, I don't think I'm gonna
need financial due diligence.
(05:53):
I'm just gonna do it myself.
I'm confident every single one isalready insolvent or up to their
eyeballs in personal guaranteesand can't afford to go insolvent.
So every single one of those thatdidn't have financial due diligence
has or is about to fail as a business.
(06:16):
Financial due diligence will cost yousomewhere between 4, 5, 6, 7,000 pounds.
Most of those people now regret that'cause they've now spent 10 to 15,000
pounds a loan on the insolvencyperson to liquidate the business.
Not to mention all the moneythey've lost and all the money
(06:36):
they owe out in finance and stuff.
So it's a worthwhile investment and ifyou don't do it, you will regret it.
Okay?
You don't buy a house and not getthe house survey done, do you?
You buy the house and you want to knowthat you are buying a sound house.
It's not gonna fall down when youclose the door as you move in.
(06:59):
So that's the negative.
Let's move on to the positive.
So, financial duediligence, what's it about?
Financial due diligence is about checkingwhat you are being presented with is true.
And factual
accounts are just a story.
(07:19):
You just need to knowhow to read that story.
You know, when you sit down inEnglish at SCO and they read a poem
out and they, what does this mean?
What's the hiddenmeaning behind this poem?
Where was that?
They're going bloody words.
Alright.
We might be able to tell you the contextof it's a love poem or whatever, but
actually these experts can delve inand go, oh, this is the hidden message.
(07:44):
That's all we are doing with accounts.
And the person that writes theaccounts is telling a story.
Normally, it's a story of woe to the HMRCto avoid some tax, sorry, tax efficiency.
But when you tell youraccountant, I'm looking to sell.
(08:05):
All of a sudden it's a story of success.
We are really profitable.
Yes, I'm gonna suffer a bitattacks for a couple of years,
but I'm gonna get even more money'cause I'm telling a good story.
So our job is to translate that story toyou and go, that's bs Or they're trying
(08:26):
to pull this wall over your eyes, butultimately the accounts are just a story
you need to understand how to read.
And that's what we are here for.
So in the accounts, you're gonna comeacross all this terminology and you're
gonna come across things like add-backs.
Oh, well I put my companycar through the business.
(08:49):
Is that right?
Okay.
Oh, can I keep the company car please?
When I sell the business to you?
Yeah, you can buy thecar from the company.
More important question.
Have you uh, been usingthat car for personal use?
I'm, I'm assuming you have if you'reneeding to buy the car from the company.
So you've still got a caronce you've sold the company.
Wow.
You know, I mean, yeah, sometimes.
(09:11):
Have you, uh, have you declaredthat on your benefits and kind?
Is that on your P 11 Ds?
On your p slips?
Well, you know, so Yeah.
Yeah, I know.
HMIC are gonna find out at some pointand come looking for that money.
So I'm gonna take a chunk of what youare asking for to cover me in case
they turn around and want their money.
(09:32):
Alright, another good one.
Goodwill Accountantslove a bit of Goodwill.
Does anyone know actually what Goodwillis or what it should be used for?
Nope.
So Goodwill, it will turn uponthe balance sheet normally
in the hundreds of thousands.
Goodwill is a absolutelylegitimate asset of a business.
(09:53):
It's when you buy anotherbusiness for more than it's worth.
So if you look at all the assets and minusall the liabilities, and that business is
worth 500,000 pounds on paper, but you pay700,000 pounds to bring in that business,
that's 200,000 pounds of goodwill.
(10:15):
Okay?
So whenever you see Goodwillon a set of accounts, go oh.
Oh hell, you've got Goodwill.
Oh, fantastic.
So you know all about buyingand selling businesses.
Tell me about it.
What?
What business did you buy?
Oh, well no, no, that's just myaccountant making the balance sheet
look good because most of the timesI see goodwill, it's to actually stop
(10:41):
the balance sheet being insolvent.
And as soon as you take it out, theyare in the red, they're insolvent and
shouldn't even be trading anymore.
But 'cause the accountants put somegoodwill in there in the wrong way
under a term that it shouldn't be, allof a sudden the business looks okay.
(11:03):
It doesn't look like you've takentoo much money outta the business.
It is still solvent, which meansyou can still take dividends.
'cause the moment it's not solvent, youcan't take dividends as a business owner.
So Goodwill is always a fun one.
Another question I get quite a lot offrom the buyer is, so is that, is that
(11:24):
a legit, legitimate business expense?
it's a gray area.
You give me a business case as towhether it's a business expense or not.
And I, I'll rule on, it'svery much like going to court.
So if you turn around to me andgo, I'm buying a helicopter.
Okay, well it's the business case.
(11:44):
Alright.
'cause if it's just to get tothe F1 and back then probably not
a legitimate business expense.
Oh, well actually I've worked it out.
I've got seven offices across the UKand I lose X amount of hours every
week traveling to different offices.
So I've decided if I buy a helicopter,I can save all of this time in
(12:07):
traveling to all the different offices.
That is a legitimate business expense.
If you had to have an emergency landingat the F1, then accidents happen.
But what I'm saying is there is alwayspotentially a legitimate business expense.
I have got a client who has brought amotor home, put you through the business
(12:32):
because they came to me and said, I'mgonna buy a 200,000 pound motor home.
It's like, oh God, you've been watchingthe news and the SMP, you get caught.
No, I. They send people every singleweek to different locations across
Scotland to build garden rooms.
(12:52):
They've worked out with my help.
They're spending half a millionpounds in accommodation.
They spend 200,000 pounds this year on amotor home that holds up to four people
and they deploy them in teams of four.
Then they would only have tospend 3000 pounds a year in motor
(13:12):
home birthing campsite fees.
Oh, well that's justbusiness sense, isn't it?
Like that's no different than mearguing, talking to a different
supplier 'cause their food isslightly cheaper for my restaurant.
It's a genuine business case.
when you send out all your letters,you're gonna get a lot of things go.
Is that a business expense?
(13:33):
Like can you justify that?
And they, what?
They should be able to come round toyou and instantly say is that, yeah,
so here's the facts and the figuresby spending this money on this, this
is the time, the money, et cetera.
I'm saving as a business.
If they can't do that, no.
They're just putting it throughthe business for tax efficiencies.
(13:53):
Distressed businesses, anyone in theroom looking at buying distressed
businesses . Distressed businesses foryour first acquisition is a challenge
because you really need to knowwhat you're doing with a business.
If you've got years of businessmanagement behind you and a track
(14:15):
record of going in and turning aroundbusinesses and making 'em profitable,
you've got a fighting chance./
Want to buy a business the smart way?
Download Jonathan Jay's freebusiness buying toolkit.
It's packed with 16 reports,checklists, cheat sheets,
and more to help you succeed.
This is the ultimate toolkit for anyonewho wants to buy a business successfully.
(14:38):
Claim your toolkitnow@dealmakerspodcast.co uk.
/Before I go any more into it though, dowe all know what a distressed business is?
Yeah.
Yeah.
So business cash flow might be a bittight, technically might not be solvent,
certainly never gonna be able to borrowmoney against it until you sort it all
out living kind of paycheck to paycheck.
(15:02):
Really hoping that invoice thatyou've just sent out today gets paid
tomorrow and not in 20 days likeyou've told them on the credit terms.
'cause you need to payanother bill yourself.
Distressed businessesare huge opportunities.
Okay?
I brought a business, it'sour second acquisition.
Brought it for a pound upto its eyeballs in debt.
(15:26):
The person came to me and said,look, yeah, I'm an amazing
bookkeeper and an accountant.
Turns out I'm pretty crapat running a business.
You'll be amazed how manyaccountants and bookkeepers
are crap at running a business.
But they said, look I'mup to my eyeballs in debt.
It's all personally guaranteed.
Like I say, I up to yourI 50,000 pounds, okay?
(15:47):
Which for many of us inthis room isn't an issue.
Like that's manageable.
But for her personally, twoyoung children going through a
divorce, it wasn't manageable.
She needed consistent, reliable income.
So she was gonna go and get a job.
So she said, look, can Ijust give you my clients?
And , look, you look after my clients.
(16:08):
If I refer 'em to you, said, look,I've known this lady for a while.
Said, look, I'll do you one better.
I'll buy the business for apound and I'll give you a job.
'cause in my head I'm thinking, Christ,my accountants just put their notice in.
I need a new staff member.
She's really good.
Two birds, one stone.
(16:28):
So we brought that business.
That was four years ago.
I'm still servicing the debt, but we havemade a lot of money out the back of that
business from cross-selling and upsellingall our of the services to those clients.
So it can be a success.
It depends what your goal is.
My goal was I need a new staff member.
(16:49):
Got one.
Nice and easy.
In the accounting world and in a lot ofservice industries, the main driver for
us to buy businesses isn't turnover.
It's not new clients.
'cause the drop off rate of clientof those clients is phenomenal.
It's actually, I want that team of people.
(17:10):
I want those employees to save mehaving to recruit for more employees.
So if that's your goal and you don'tmind having a bit of a distressed
business, great way to do it.
But overall, distressedbusinesses can be a challenge.
If you want a distressed business,two key people to having your network,
(17:31):
one is your accountant and bookkeeper.
Just say to 'em, oh, howare your client's doing?
Anyone looking to sell up and get out.
My client has just tripled hisbusiness overnight, not from a
broker, not from letters, but fromactually just saying to me, Johan, if
you ever come across any businessesin this sector that are profitable
(17:52):
and run well and they're looking toget out, can you just let me know?
That's not hard, is it Your accountant?
Bookkeeper is at the heartof a network of businesses.
I've got 750 businesses in my firm.
That's 750 different introductionsI could potentially make there.
(18:14):
'cause at some point, we all exit ourbusiness as a individual in society.
Two certainties after, onceyou're born, tax death, don't
matter what you do, you're gonnasuffer both you a business owner.
You've got a third certainty in lifeexiting of your business, whether that is
(18:38):
willing, planned and organized, whetherit is rapid 'cause of a life changing
moment, whether it's because you've beenhit by a bus or whether you are retiring,
you will exit your business at some point.
So I've got 750 people looking toexit their business at some point.
(19:01):
Sounds like a group of peopleyou probably all want to meet.
So your accountants andbookkeepers have the same network.
Next person you want to get onreally well with is the person.
No one ever wants to talk to yourlocal insolvency practitioner.
Okay?
Liquidators, I guarantee youthey'll be one at every B and i and
(19:23):
business networking meeting going.
Some are really, reallyfriendly, some are less friendly.
The good ones, the proactive onestake an approach to liquidation.
Insolvency of how canI save this business?
They see themselves as doctors agood practitioner, uh, insolvency
(19:43):
practitioners today will try and so savethe business first before they liquidate.
So my guy always comes to me and says,Johan, I've got this business going.
This is roughly the valuation.
Do you know anybody?
He offered me a, uh, women's lyrebusiness for five grand the other week,
(20:05):
decided the wife might not agree withme dealing with that, so I left it.
But my insolvency practitionerfriend is the busiest he's ever been.
It's not covered in the media 'cause we'renot having a global crash or anything,
but he's busier now than he was in 2008.
Businesses aren't recovering, theyaren't doing great after COVID.
(20:29):
It's a, it's not anall or nothing anymore.
Like it's not everyone's suffering.
So it's not in the news, but thereis a huge category of businesses who
are really struggling and there'sa huge category of businesses
that are doing exceptionally well.
There's less of a middle ground.
There's a lot of reasons behind it.
HMRC are getting really tough withcollecting debts, bounce back loans,
(20:53):
still being paid back, et cetera.
They're still struggling.
They can't borrow money, et cetera.
So if you're looking for distressedbusinesses, talk to your accountant
or bookkeeper for any kind ofbusiness, regardless of quality.
If you want a distressed business oreven potentially a good business, but
they don't get 'em as often, go toyour insolvent insolvency practitioner.
(21:16):
'cause a genuine, uh, tax efficientway to close your business when
you've been running it for 20 yearsis to liquidate it and retire.
That doesn't mean bankruptcy, it justmeans you're shutting down the business.
You're settling all the matters,and the excess cash gets paid
out under the dispose, uh,business asset disposal scheme.
(21:37):
So that's 14% instead of yourcapital gains tax return.
Okay?
So sometimes you insolvencypractitioner will get a good business
and they, they're just old andthey want to retire Make sense?
Yeah.
Other thing to look out for on accounts.
Director's loans
directors are, and shareholdersare terrible for understanding
(22:00):
that I'm gonna pay you a millionpounds for your business.
Oh, fantastic.
However you owe this business due tothe director's loan that you've been
taking out for years and not payingback properly on your tax return.
Looking at this, you owe this businesshalf a million pounds, which when
you've been running your businessfor 20 years, it's quite achievable.
(22:22):
So actually you're only gonna gethalf a million pounds paid out.
Now that's a great tool for you guys'cause you can go, look, I'm gonna pay
you half a million pounds on day one.
How does that sound?
Oh, fantastic.
Already spending that money.
But it's just writingoff your director's loan.
(22:42):
So you've, you're gonna exit yourbusiness and you're not gonna suffer
half a million being declared onyour tax return that's gonna suffer,
pay all your different income taxes.
Okay, so I'm doing you a favor.
'cause if you don't do this,you're gonna pay a lot of tax.
Whereas if we declare it as part ofthe sale of the business, you're only
(23:04):
paying the co uh, capital gains onthe business asset disposal relief.
Okay.
The problem is they startgetting a bit upset.
Well, what do you mean I've not got, I'mmissing half a million pounds of my money.
So, well you've technically had itand spent it for the last 20 years.
Well, my accountant didn't tell me that.
Why would they?
(23:25):
No, it's not an issue until youdecide to sell the business.
Have you told your accountant you'relooking at selling the business?
Oh, no, no.
I've, I've just had thisletter from you in the post.
I'm just looking at it now.
It's like, yeah, so you've notplanned for it so your accountant's
not told you something 'causeyou've not had to plan for it yet.
But whilst it can be almost a dealbreaker, I've seen people walk away
(23:48):
going, I'm not gonna sell my businessif I've got to write that loan off.
It is there though, for you to be ableto negotiate and get that no money down
deal across the line, but it has tobe paid back to the business somehow.
So they either declare it throughtheir tax return and that writes
it off and it's declared as pay YEor whatever it's declared as, or
(24:15):
it gets declared as capital gains.
And I'm doing you a favor here.
I'm helping you save some tax.
By giving you this as part of the deal.
It's the same as money in the bank.
Anyone had a conversationwith a business owner?
Well, they think the money in theirlimited company bank belongs to them.
Yeah.
It's a tough sell, isn't it?
Right?
(24:36):
It's really tough to educate themgoing, look, that money belongs to the
business, got nothing to do with you.
You just run the business, but thatmoney belongs to your business.
Same principle with diuh, director's loans.
You've already had the money,you just don't realize it.
But if they want to take themoney outta the business bank
(24:56):
account, you have the power.
You can decide in structuring it, do Ibe nice and go look, we'll build it into
the offer so you can declare it as acapital, uh, capital gains tax relief.
So it's a lot more tax efficient.
Or do you go, I need that moneyif you're gonna take it out.
(25:18):
I'm not gonna do you any favors here.
I'm gonna make sure you suffer the tax.
At which point they go, you know what?
I'll leave it.
It's fine, don't worry.
So directors loans accounts,very powerful negotiation tool.
So always, it's one of my firstthings I go to when someone sends
me a set of accounts, where is,where's the director's loan account?
(25:42):
Uh, that's my first step.
How much can I write off thebusiness valuation overnight?
And then I look at the cash in the bankand go, oh God, there's 400 K in the bank.
He's gonna think that belongs to him.
So both are very, very good negotiationtools, but both can be quite challenging
as well to get across the line.
(26:04):
All make sense?
Yeah.
So we've talked about goodwill, we'vetalked about distress businesses.
We've talked about add backs,like well as a director paying
themselves a proper salary, likeincluding dividends, et cetera.
This is prolific in the accounting space.
(26:24):
The amount of accounting firms Ispeak to almost monthly, where they
go looking to sell my business.
Oh, okay.
That's fine.
This have a look at the accounts.
How much money are youpaying yourself now?
There's no, no real profit here.
Well, I, I take my 12 and ahalf thousand, is that called?
Okay.
I take about 20,000 poundsa year in dividends.
Hang on a minute.
(26:45):
So I've got to replace you asthe owner of this business.
I. To run and look after all yourclients and your team, I'm gonna
have to put a manager in place.
You are currently paying yourself 32 anda half thousand pounds a year salary.
Yeah.
Right Through dividends and salary.
Is that right?
Okay.
For me to replace you, it'sgonna cost me 50 grand a year.
(27:07):
'cause that is what an a qualifiedaccountant costs on an annual salary
before pensions, before nationalinsurance, before everything else.
And all of a sudden they go, oh.
Now in a lot of businesses you'll find thebusiness owners are overpaying themselves.
So that's fine.
There's an add back to be hadthere because it's not gonna
cost you as much to replace them.
(27:29):
But always double check what arethey paying themselves And like we
were told this morning go on Indeed.
And have a look at what's it gonnacost you to replace that role.
Then if they turn around and go, oh,wife's on the books, she's our bookkeeper.
Is that right?
How much you paying herabout 15,000 pounds?
(27:51):
It's like, okay, she part-time.
No.
Well, you know, you know what it's like?
She just, she comes in eachday with me and she does the
bookkeeping Is that right?
So if we, um, if you and the wife areoff, do I need to replace your wife?
Well, you know, you couldget a bookkeeper out.
Say what else does she do?
(28:11):
Oh, not a lot is like Right.
Hang on.
So speak to the wife.
What, so what do you doon a day-to-day basis?
What do you go up to?
Well, I normally answer the phones.
Chase some credit su some creditors havea chat, do get some orders put in, deal
with some emails, an answer the postmake the coffees when people come in.
It's so, so I'm already gonna have toreplace you with a receptionist at least
(28:37):
25, 30 grand for a receptionist a year.
She's paid 15.
That's not an ad back is it?
That's in your favor.
So when they go, here's my list of adbacks, it's something, hang on, hang on.
Like company car.
Yeah, I want to add back the company car.
I said, well actually that'snot a good add back as big
(28:58):
add back as you think it is.
Alright, you are payingsilly money for a Mercedes.
But if I put a manager in this place, I.
I may have to provide a companycar which you haven't got anymore.
So I'm gonna have to replace thatcompany car with another one.
Which means the add backs are notas powerful as they think it is.
(29:20):
So always get 'em to give youa list of add backs and really
research that like plan ahead.
Like do I need to replace that role?
Because especially if it's family related,they're probably underpaying them.
So actually it's in yourfavor for that add back.
'cause then you can go, well I'lladd that 15 K back, but that means
I'm adding in 30 K on my side'cause I've got to replace them.
(29:43):
And now you're starting tochip away at that ebitda.
So bear in mind with accounts isit's a snapshot in time, and if the
accountant's clever, they'll makesure you are reporting your annual
accounts at a good time of the year.
So for example, we had a, someonecome to us and said, oh, gonna
(30:06):
buy a kitchen fitting business.
So, okay, cool.
Looks at the accounts.
These look good.
A hundred k sat in the bank in June.
Said, okay, not too manydebtors, not too many creditors.
This is all looking really good.
I, as of the 30th of June, sojumped onto a call with them and
(30:29):
said, look, what's your seasonalitylike, oh no, we're busy all year.
Sold off.
No one gets a kitcheninstalled in December.
You might run late and thennot have one for the Christmas
lunch like you are seasonal.
No, no, we're busy all year.
Is that right?
So you are telling me you've got peopleout for four weeks in December and four
(30:49):
weeks in January installing kitchens?
Well, yeah, we're busy all year.
Okay.
Then I deployed my secret weapon.
So my secret weapon is what iscalled a source of funds report,
traditionally used by conveyingsolicitors for when you buy a house.
(31:09):
When you buy a house, you get an emailsaying you need to fill out this form.
Tell us where you're getting allyour money from to buy the house.
And you have to declare it all.
And then they want bankstatements to back that story up.
The modern conveyancing solicitorswill use a source of funds tool like we
(31:30):
do where I send your seller an email.
In that email is a link.
They click that link, you go, itasks, right, who do you bank with?
Oh, RBS click RBS.
Great.
Log in for me.
It logs them in.
They log in.
It captures two years oftransactional data, puts it into a
(31:51):
report and sends it direct to me.
Okay, now remember that bit.
That's important.
I. I've instantly got two yearsworth of data of your bank account.
Read only like once.
Once I've got the day, once thereport's compiled and sent to
me, it disconnects from the bank.
Completely safe.
I can't get in there and do anything.
(32:12):
I can't see anything apart fromthis PDF report and CSV file.
I get
all of a sudden this kitchen fittingbusiness isn't looking quite so good
because it's like, you know, youknow, you said you're not, you're not
seasonal and you're busy all year.
Yeah, yeah.
So you've got a hundred K in thebank in June, but for the last
(32:32):
two years, by December you are50,000 pounds in an overdraft.
You didn't tell my client that, did you?
Oh, well, you know, that's just, that'spart of the industry, so, no, but my
client has got to find 50,000 pounds tocover that overdraft and then more money
to pay you your deferred consideration.
(32:54):
So we're putting morestress on the business.
Funnily enough, deal got scrapped'cause it wasn't quite as good as
that snapshot in the accounts made.
Its look like.
But if I hadn't done that secret weaponof mine, which most other accountants
don't do, you would've only foundout once you moved in, I'm sorry,
(33:17):
I've, I've got to find a 50,000 poundoverdraft and I'm a new business owner
and they've just closed the one theold business owner had 'cause they've
got a change of ownership term on it.
All of a sudden you'vegot a real big problem.
Starting to see theimportance of cash flow.
If your accountant says, oh, don'tworry about using these snazzy tools.
(33:39):
We'll get some PDF bank statements.
Anyone remember CarilionBig building company.
Government backed went bust, didn't it?
Would you like to know why
on the account was a bank account
with a photoshopped bank statement?
(34:03):
No one at this big four auditing companyhad the common sense to go better.
Just go and check that that bankstatement's genuine and true and
right to the bank and ask, get themto clarify the balance on that date.
Soon as that came to light afew years later, Ian goes bust
with chat GPT, my best friend.
(34:25):
And all the AI imagegenerations that we can do,
it's really easy for some someone tocreate a fake bank statement and to
put a line in the accounts to say,I've got this bank state, I've got
this bank account with all this money.
So if someone says to you,just send your PDFs, no.
(34:45):
If you remember back to my secretweapon, they click that link, they
log in, the report comes direct to me.
No one can interfere and corrupt the data.
'cause it comes directly to me.
It doesn't go via them.
They don't see the data I'm getting,I just get the report so I know
it's good, honest, and true.
(35:06):
An accountant can tell astory with a set of accounts.
The bank account never lies.
There is a slight caveat if they don'ttell us about every bank account,
but they normally have the bankaccounts listed on their accounts.
So I can go 1, 2, 3, 1, 2, 3.
Fine.
(35:26):
When you are doing financial duediligence, do not care about the accounts.
They're the last thing to worry about.
Cash flow.
The accounts aren't gonna paythe deferred consideration.
The accounts aren't gonna pay you.
Your deal maker fee, your bank balance is.
So if that bank balance dips into anoverdraft every flipping week, you've
(35:50):
got to say, oh, am I happy with that?
Will I get the lendingto be able to cover that?
'cause overdrafts arean absolute nightmare.
They're expensive.
Even if to have the facility is expensive,
they always have a change of ownership.
So the moment you take over, thebank gets notified and goes, oh,
(36:12):
well we'll just turn that off.
We were happy to lendto the previous person.
We're not necessarilyhappy to lend to you.
And on top of that, every time thebanks go, oh, markets are a bit iffy.
We're a bit exposed here.
We'll, uh, we're going and tidy up some ofour liabilities in the form of overdrafts.
(36:34):
Literally, my client who's ranhis business for 20 years, had an
overdraft facility for 15 years.
His bank sent him a letter saying due tothe changing climate in your industry,
we're closing your overdraft facility nextweek and you need to pay it immediately.
Funnily enough, didn't have25,000 pounds just to pay an
(36:55):
overdraft facility off that.
They have the power to close thatfacility and not tell you why.
So when you're doing your financialdue diligence and there's an overdraft,
assume you're not gonna get it.
Go and talk to Martin aboutother funding options for it.
But you're better off with invoicefinancing than an overdraft.
(37:18):
So ultimately accounts are important'cause they tell a story, but it tells
the story that the accountant andthe business owner want you to see.
So that is why we alwaysdefault to the bank.
'cause that is factual.
The amount of people that have told me, ohyeah, don't have any lending, it's fine.
(37:39):
I do this secret weapon.
That's a, that's a lenderrepayment going through there.
'cause not only does it give me two yearsworth of transactions, puts it into a
nice graph with all the ups and downsand spikes in cash in and cash out tells
me exactly how much an average month thebusiness needs to survive in cash terms.
(38:01):
Also then goes, here are your10 biggest outgoing suppliers.
Here are your 10 biggestincoming payments.
Here are all the repeating in payments.
I'm going down HMRC.
Yeah, that's fine.
Close brothers.
Invoice finance for you.
Hang on a minute.
You says you've not got any lending.
(38:21):
Oh, well we didn't in the accounts, butwe've now taken out an invoice facility.
Why?
Well, things are a bit tight.
Oh, well you weren't sayingthat to my client last week.
So.
Not only do we get all this greatdata from the bank, but it reveals
all of the warts in the system.
(38:43):
Everyone convinced that bank datais more important than accounts
for financial due diligence?
Wonderful.
Also, before you even cometo us, do yourself a bit of
commercial due diligence.
Okay?
Have a look at their website.
How old is that looking?
Check out their social media.
(39:03):
Just Google the business name.
'cause if they're in the media,you'll soon know about it.
Legal due diligence and financialdue diligence are the ones
that we always talk about.
. But commercial due diligence iswhat you need to be doing as well
as to see the bigger picture.
So I don't look, and the lawyerdoesn't always look to see, have they
(39:26):
got a bad reputation in the press?
, Have they been through employmenttribunals very publicly and stuff.
Has there been a coupleof deaths in the factory?
Do people keep walking outminus one arm on a Friday like.
You are building a picture.
The financial due diligence makespart a big part of that picture.
(39:46):
The legal due diligence makesa big part of that picture.
But you need to put the surround,the frame around that picture
with the commercial due diligence,which you can really easily
do just by doing it in Google
.Anything can be a red flag.
So everything we do in financialdue diligence is about risk.
(40:07):
We are highlighting thingsthat are potentially risky.
This half of the room may go I'm happywith that level of risk of that issue you
found we're gonna continue doing the deal.
This half the room might turn aroundand go, I'm not touching that.
Like, risk can be mitigatedwith spas and legals and stuff.
But yeah first of all, it's not a redflag until they can't answer the question.
(40:30):
That's great.
It's like when you ask for managementaccounts, it takes 'em six weeks.
That just 'cause they haven'tgot management accounts
today isn't a red flag.
The fact it takes 'em six weeksto get it to you is a red flag.
'cause it's, they've obviously gotabsolutely terrible financial record
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