All You Need To Know About Buying A Newsagent, Post Office, Corner Shop Or Convenience Store

This is in response to a client of mine who was considering packing in the day job in the city and moving to the country to buy a newsagent type business. I document below the discussion and advice I gave him and his wife which I hope will help other investors considering such a business purchase.

Liquor licence: If alcohol is being sold on the premises you need to apply for a new licence to permit you, the new owner, to sell alcohol. This involves going on a short course.

Lease: If it’s a leasehold property, the lease does not automatically transfer either. The landlord has to grant you a new lease (or there may be the possibility to get a sub lease).

The existing lease will probably have what’s called an assignment clause ie. a clause giving the leaseholder the right to assign the lease to a new owner, but the chances are that the contract will also require the leaseholder to get the landlord’s permission first and get the landlord’s approval of you as the new tenant.

And there is no law compelling the landlord to agree. They often don’t. Or they drag the matter out for months / years! Often they insist on you coming up with a large deposit and/or signing a personal guarantee. They may even use this as an excuse to up the rent.

There have been cases where people shelled out money to buy a newsagents only to discover later that they couldn’t get a lease on the property (or couldn’t transfer the lease) and had to vacate the premises as a result!

There are three types of commercial leases. As a buyer you need to know which one is best for your circumstances. It is not a good idea to sign any lease without taking proper legal advice.

News Distributors & other suppliers: You’ll probably have to open accounts with the firms who distribute newspapers and magazines, and open accounts with several other suppliers. Many of them, especially the news distribution firms, will require a deposit as they have no history of trading with you and don’t know you from Adam.

The size of the deposit will vary but it can sometimes be a fairly hefty sum.

Here’s the funny thing with newsagents - they never give you the number that matters. They’ll quote their weekly takings. Or their annual turnover. Or their gross profit.

None of those matter!

What you want is the net profit … the amount that you’ll actually be taking home every week / month / year. As they say, turnover is vanity, profit is sanity.

Get accounts covering several years: You need to have full business accounts covering at least the last 3-5 years. This is so that you know the average profit the business is making and are not basing all your expectations on one unusually good (or bad) year. Note also that accounts submitted to Companies House and elsewhere are often abbreviated versions of the accounts and not the full final accounts (complete with Profit & Loss statement).

Note also that salary is not the same thing as profit: If the business is making £22K a year in net profit, but if the P&L account doesn’t show a salary the owner has paid himself, then it’s not a profitable business. He’s working probably 12 hours a day, six days a week. Given all the hours he’s devoting to the business, that £22K works out to less than minimum wage!

The business needs to generate enough to pay at least a minimum wage for the time spent PLUS a profit because, well, you bought a business, not a job.

Remember, the business needs to generate a salary as a reward for time spent and a profit as a reward for the capital you’re investing and risk you’re shouldering. You may take all of it out in the form of a dividend at the end of the year rather than a monthly salary, or you may take a small amount on PAYE to benefit from your personal allowances, but however you construct it for tax purposes your total benefits need to be enough to have covered both a salary and profit.

Calculation Challenges: Get the figures checked out by a professional who knows where the fiddles typically are in this specific type of business. For example, newsagents often include Lottery takings in their turnover. However, the Lottery takings are not your money, you’re collecting this on behalf of Camelot. Your share is just 5% of those takings and it’s only that 5% which should be included in the turnover.

Ignore cash in hand: Vendors sometimes claim that they’ve made more profit than shown in the books. Strictly avoid getting into any discussion about cash-in-hand! If a number can’t be proven in the books then do not pay for it!

No, don’t get tempted to include these “cash” figures in your calculation. Whether you intend doing a bit of cash-in-hand yourself, or not, make it clear to the vendor that you will not take into consideration any off-the-record receipts or earnings.

Hidden costs: What is the seller not paying for? For example, does he not have business insurance? If you’re going to be properly insuring the business you need to deduct the cost of premiums from the profit currently showing.

Does the seller’s partner, or other family member, occasionally help out in the shop? If they are not getting paid for that work then you need to deduct the amount it would cost you to hire someone to come and assist for those hours.

There are often several other such hidden costs and it’s up to you, the buyer, to find them..

Apart from getting the accounts verified by someone who knows the industry - and knows where skeletons are typically hidden ie., not your average high street accountant - there are numerous other checks you need to conduct.

If you have a solicitor acting on your behalf s/he may conduct some of the checks, but they will not flush out all the potential risks and dangers (of which there are many). It falls upon you to go through everything with a fine tooth comb.

It’s caveat emptor or Buyer Beware. Buying a business is a B2B (Business To Business) transaction and you do not have any of the protections that the law gives consumers. There is no right to a cooling off period, refund or change of mind. Discover flaws and/or accounting irregularities after the sale …. and there’s probably nothing you can do about it except swallowing the resulting loss.

Some of the things you might want to check:

Hours: Don’t accept the owner’s claims on the number of hours he works. Owners often under quote the real hours and fail to include all the time spent ordering stock, doing accounts and catching up with sundry other tasks. Verify the hours yourself and form your own opinion on how many hours per week are required.

What will you have to outsource? Are there functions currently being provided by the seller which you can’t provide? For example, if the current owner is doing his own payroll for employees, do you have the skills and tax/PAYE understanding to provide the same services, or are you going to have to outsource these tasks? Outsourcing costs money and you need to deduct costs like these from the current profits to get a fair idea of how much the business is likely to earn once it passes into your hands.

Real reason for sale: Ignore the reason provided. There’s usually another reason as well! And you need to find this other reason. Does the seller know of a Tesco Express being planned in the vicinity? A major competitor like that would sound the death knell for your business.

But that’s not the only risk. Perhaps the council is planning on pedestrianising the street or removing parking outside the shop. Such changes could severely impact on your business There could be numerous other reasons.

There are no hard and fast rules about valuing a news agency or cornershop. There’s no multiple of turnover, multiple of profit type calculation. There is no pre-defined element of goodwill that needs to be included. Those are all valuation myths.

You pay whatever you can negotiate. You pay whatever you can get away with. It’s as simple as that. And it helps to have a savvy negotiator on your site – someone not just good at negotiating but expert at negotiating business acquisition transactions!

Sellers often sell for a fraction of their original asking price because they know there isn’t a lot of demand for news agencies / corner shop / general store kind of business and they need to take what they can get. You need the strategy and advice to ensure you get maximum benefit from this unique advantage you have.

Having an expert on your side is particularly important if the seller is being represented by a business broker or a business transfer agent. However nice and helpful the broker may seem, remember that he is paid by the seller, not you. He has only the seller’s interest at heart and he knows how to play you to get the best price for his client; he has probably done it a hundred times before whereas this may be your first such transaction!

You need someone with the experience who can not just negotiate the price but advise you on strategy. Did you know, for example, that you can often negotiate to pay part of the price in the future ie., get a free loan from the seller in the form of what’s called a “seller’s note”?

Stock at Value: The price for these businesses is sometimes often quoted as £x plus SAV or Stock At Value. I recommend never paying for stock at value but

a) doing a proper and detailed stock take yourself ie. not accepting the seller’s word or the seller’s calculations;
b) calculating the total spent to buy that stock – yes, you want cost price, not retail price and
c) not paying that full price but offering about 60% - 70% of that price to buy all the stock.

Why not pay full price for the stock? Multiple reasons. For one, there will be some stock that is “dead” and not selling. There will be other stock that you wouldn’t necessarily have bought if you were starting a new business. There will be some items that reach their expiry dates before they are sold.

By taking the stock you are doing the seller a favour as he can’t very well offload all that stock elsewhere. And a good negotiator will get you a discount on the price of the stock.

Valuation based on what the seller invested in the business: Sellers sometimes base their asking price on what they invested in the business, or how much they paid to acquire the business. But what they paid is not your concern. The seller may have overpaid because he did not have a professional to negotiate the price for him, or simply because he is foolish. You should not have to pay for his mistake.

If you need assistance with any aspect of this purchase, use my contact page to get in touch - I can introduce you to the right accountants / solicitors who specialise in business sale transactions. If you need other assistance, say with strategy advice on negotiation, that's available too.

Prices: Specialist legal, accountancy and other consultancy in this field start at around £100 - £150 per hour.