Feedback on first deal for a newbie searcher in the UK

December 12, 2024

by a searcher from Imperial College London in London, UK

Hello everyone, I wanted to share a deal that I'm currently looking at to get thoughts/feedback from more experienced searchers. This is the first deal for me, so any advice is really appreciated! I'm keeping some details a bit vague for obvious reasons :)

Manufacturing Business based in the UK Turn Over is ~£3M Net Profit is ~£400k

There is ~£1M in stock and raw material There is a manufacturing plant in India, worth around £400k
12 employees in the UK, 30 employees in India

Seller will take all cash from the company, except for enough working capital for 3 months (~£600k)

High level questions:

Any advice on purchasing a business with a manufacturing plant overseas in India? Any specific things to watch out for?
Any advice on financing providers for this type of deal? (i.e. who will be able to raise money on an asset in India)
Any contacts who can help with due diligence in India?

Thank you!

Reply by a searcher
in Stafford, UK

First of all first deal is very tempting and it is very easy to loose sight of red flags in emotions. The more you investigate, the less issues you may encounter. Buying a business is one thing, but making it work is another story. My approach is that often the most important questions are the one we do not ask. It is also good to walk before you run. You can always extend the company by buying another businesses (even this one), but once you take a bite too big, it may be hard to swallow. Why is the seller leaving and taking all the cash? Is there a possibility there may be things he wasn’t transparent with? Is cooperation between entities based on the Seller’s relationship? How do you know you can maintain it after he/she is gone? If the plant is overseas, this may not be fully a manufacturing company, as production doesn’t take place (at least in majority) in the country. It may be in fact an import/retail company, no matter what’s on paper. How come you have those numbers if you haven’t done full due diligence? At that point you might know literally nothing about the business. How are you sure 600k would be sufficient, and what guarantee you have you will not run out of working capital before 3 months? How do you plan to manage such scenario? How liquid is the stock? For now you have no information about how to finance or conduct due diligence in India - some international laws may be impactful. Mind things have changed after Brexit, not all historic data may be applicable. That is an additional problem and specific specialists in the team should be considered. How well do you know the market and the industry condition? Do you have enough expertise within your team to understand where this ship will sail? I am no expert, but those things came to mind immediately. It is good to consider few buying options for comparison, and for ease of mind that we have a choice and can step out - that’s a handy leverage on negotiations. It is true some issues may be dealt with later, and buying is the task on hand, but I would rather focus on making money in next months, than to try cleaning up someone else’s mess.

Reply by a searcher
from London School of Economics and Political Science, University of London in London, UK

I do not want to sound overly negative, as certainly many complex deals have been pulled off over time, but from my general experience of speaking to lenders / search investors…

As you’re a first timer and a good bulk of the IP / productive value here all appears to be overseas, or at least dependent on the overseas facility, lenders are likely to see it as significant risk, as future enforcement if the deal were to go wrong would rely on them being able to enforce on the assets in India, or have some ability to run them, which for a small SME deal is not the type of risk they are likely to take on.

Also adds a significant level of risk around electricity pricing /labour supply / regulatory exposure in India, which I don’t think they would like. Sounds as though there may be general supply chain concentration risk also if you peel back a layer further of inputs into the factory.

Most UK lenders who are open to lending to search tend to want the opportunity to be something which is very much “down the fairway” without too much hair attached to the deal.

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