Buying a Business in Spain (Post coronavirus)

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Posted and filed under Businesses in Spain.

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Coronavirus has changed buying a business in Spain. Also business life in Spain will never be like it was.

This is my opinion rather than a fact, but I’ll need a lot of time to be proven wrong. The good news if you can call it that, is it’s going to be worse elsewhere. Spain will get off relatively lightly compared to a city like New York. Where 50% of restaurants are not even pretending that they will open after Covid 19. Rents and cost of living in Spain are low. That will attract location independent employees.

A Zoom call from Alicante is just as effective as a Zoom call from city centre London. Without the noise, pollution, Brexit fallout or high prices. We are going to see a surge in new and inventive ways to earn money in Spain. The reason why so many of us are entrepreneurs is that we have the ideas. And we don’t care if we fail. We’ll get up and do it all over again.

Re-inventing how to buy a business in Spain

In 2004 Spanish Solutions invented the future of legal and tax and consultancy offices in Spain. Now we have to invent it all over again. When most people think of owning a Spanish business, they are thinking of beginning from the ground up. They are talking about developing their own ideas and building the company from scratch. Problem is you’ll be copied and intimidated. I think value for money soon will have a different meaning though. It is soon not going to be about price, but it’s what the client is getting for their money.

Starting from scratch, building that bar, inventing that law office or real estate business in Spain presents some distinct disadvantages. There is the difficulty of building a customer base. Also getting the relevant licences, (have you met our Orihuela Costa town hall ?). Together with marketing the new business, contracts with suppliers, cash flow, accounts, hiring employees. And all without a track record or some sort of reputation to go on. It is not easy and it is not cheap. Remember that we estimate that 1/3 of all the businesses we know now, will never reopen. Or at best will open in a very different form.

Recession

Recession means nearly half of the companies we know are going to close and/or change ownership. Another contributing factor to the statistic of businesses about to close is that the businesses on the Orihuela Costa tend to be owned by, how can I say this, slightly older people. There are not many new business people coming into the market, until now.

A recession is the very time young people and people reinventing their careers appear on the market. If a 60 year old estate agent has enough cash in the bank anyway, does she really need the work involved in rebuilding her business after Coronavirus. Or will she just pack up and sell it? More business owners than you think well go for the latter option. I have bought and sold a lot of companies in Spain since 2001. In some cases, I literally bought and sold the same business. However, in other cases, I started it and sold. And I represented owners too in my old career as an estate agent. I know how this works.

Our experience of buying a business

In the Alicante region of Spain, we were involved in Internet cafes (Call net), also hairdressers. Plus bars, (Paddys Point, La Zenia; Bog Road, Cabo Roig) restaurants (Zest, La Zenia), cafes (The Sandwich shop) , wine / tobacco store, (La Zenia wine). Furthermore my real estate company (Comaskey.com), Travel agency (Estival / La Zenia Travel) and my property rental company- Comaskey Rentals to name a few. The businesses, after we sold them, had varying degrees of success. Same too with businesses I purchased. Some were good like La Zenia Travel, others were bad, very very bad, and cost us a lot of money, stress and heartache.

We broke too many rules when buying, with the best intentions. Generally, buying an existing business in Spain is less risky than starting from scratch.
I bought some businesses on gut instinct, others I should never have touched. The most expensive mistakes were when I bought or invested to help a friend or associate out because I felt sorry for them. Not the right reasons to do it. I would not advise anyone to buy a business in Spain without talking to a law office first. Look what Spanish Solutions or a similar firm can do for you.

Spanish Solutions help with Buying a Business in Spain

  • Pre-screening the businesses for you. We have recommended many people not to buy businesses that they present to us. Often the reason was because the seller wouldn’t provide full financial disclosures. Or we thought that the business is overpriced.
  • Helping clients to buy the right business for them. If you hate bars, don’t buy an Irish pub. Just because it’s Spain doesn’t make it any easier. We help the business buyer discover that an industry they had never considered is the ideal one for them.
  • Negotiating. Everyone thinks they are better at negotiating than they are. In fact 85% of people say they have above average negotiating skills. We help both parties stay focused on the ultimate goal, getting the deal done.
  • Assisting with the red tape and paperwork. Our lawyer and accountant know the latest laws and regulations. The ones that in Spain affect licenses and permits. I had a lawyer say to a big client recently, if they open a particular business, the best case scenario is that they’ll avoid jail; that’s protection! Working with a Spanish lawyer who knows his or her stuff dramatically reduces the risk. A risk that you’ll neglect some crucial step in the process
  • When you buy a business in Spain, you take over an operation that’s already generating cash. You should have an established customer base, (like a property rental business). Also a good reputation and hopefully loyal, knowledgeable employees.
  • You don’t have to reinvent the wheel by setting up new systems and policies. The formula for running the business has already been put in place, or has it? Is the customer base tied to the previous owners like in a friendly local bar?

Other options to buying alone

In Spain, buying a business, rather than starting it yourself, can often be more costly. Then again bankers and investors generally feel comfortable dealing with a business with a proven track record. Buying a business may give you valuable legal rights too. These can prove very profitable. One thing for sure, when buying a business in Spain, there’s no such thing as a sure thing. Certainly, the more qualified opinions you get, the better.

Here is a thought about buying a business in Spain? Have you considered partnering up? So you want to buy a business but you hate red tape, accounting, tax etc. Why not find someone who loves legal and taxation work? Give them equity in the firm in exchange for them taking the laborious work away from you? This frees you up to do the fun stuff- serve your clients!

Steps to Follow

The pitfalls don’t end there. If you’re not careful, you could get stuck with obsolete inventory and uncooperative employees. Or outdated distribution methods. To make sure you get the best deal when buying an existing business, be sure to follow these steps.

  • The Right Choice: Buying the perfect business in Spain begins with choosing the right type of an industry with which you are familiar. Furthermore one which you understand. You should think about the types of business you’re interested in first. Especially those that match your skills and experience. Consider the size of business in terms of numbers of employees, locations and sales.
  • Next you should pinpoint the geographical area of the business. If its a bar that is very different to a call centre or even a home based property rental business. Assess the costs of doing business in that area. Wages and taxes are cheaper in Spain, especially outside of the main sites of Madrid, Valencia and Barcelona.
  • Once you’ve chosen the sector and a region, investigate every business in the area that meets your requirements and might be bought or acquired.
  • Look in the Costa Blanca People or Leader local newspaper’s classified section under “Business for Sale” for businesses in the Torrevieja area. Start there.
  • Maybe run your own ad describing what you are looking for in an investment. Talk to Spanish Solutions and other law offices in Spain. We know who is looking for a buyer. Often without ever putting up a For Sale sign. Just because a business isn’t listed doesn’t mean it is not for sale.
  • I know business owners in the property, bar and most types of industry. Many of them might not have their businesses for sale but privately, if we approached them. (Especially with the Coronavirus crisis), they would consider selling. We can talk and possibly make them an offer.

Evaluating the value of a business

I personally would recommend a buyer think about these to help evaluate the value of a business in Spain.

  1. Inventory. Spanish Solutions have contracts and official inventory contracts ready to use. We refer to all products and materials inventoried for resale. Or for use while servicing a client (number of units for sale, fridges etc). A qualified representative or stock taker should be present during any examination of inventory. Do you really know that the material works properly or the food is within date?Has it been paid for? What’s on hand at present? What was on hand at the end of the last fiscal year? Also, check the inventory for salebility. How old is it and the quality? What is the condition? My uncle once bought a cheap container of Coca Cola one January from a distributor- the problem was it had Santa Clauses all over it and he struggled to move it on! You don’t have to accept the value of any inventory, but you should know what it is worth.
  2. Furniture, fixtures, equipment and the building. Including all products, signs, office equipment, staff car and van, furniture and the assets of the business. We will help you get a list from the seller with the make and model number of each piece of equipment. Is the equipment purchased or leased? How much the seller has invested in leasehold improvements? What modifications will you have to make to the building or layout in order for it to suit your requirements and to get licences?
  3. Contracts and legal documents. Here is the money. Contracts include all lease and purchase agreements. Also collaborations; sales contracts; employment agreements and all instruments used to legally bind the business. Much of this will be in Spanish. The difference between exclusive and non exclusive deals with suppliers for example can make or break your business. Spanish Solutions can evaluate all other legal documents too; fictitious business names, patents, articles of incorporation, registered trademarks, copyrights etc. Is there valuable intellectual property? You must have a Spanish patent specialist lawyer evaluate it. What about a real-estate lease? You will need to find out if it is transferable and how long it runs for and more.
  4. Tax returns for five years. I’ve seen small business owners try to sell without real accounts. Even then in Spain, tax returns do not tell the full story. Owners may buy products they personally use at home or lease a car using company funds. You have to ask your lawyer to use their analytical skills to determine what the actual worth of the business really is.
  5. Financial statements for the five years. Self evident but to evaluate these statements, and compare them to their tax returns is vital.
  6. Sales records. Ah sales, the life blood of the business. This info will be logged in the financial statement. But you should also evaluate the monthly sales records, open every file, for example if its a real estate business. Check till receipts and lodgements made for a weekend versus sales figures. Break sales numbers down by product or service categories. Such as property sales versus property rentals, Food versus drinks etc. If before you commit to buying, the seller doesn’t want to release their largest accounts by name, it’s fine to assign them a code but you need to get this done. You can buy a business without actually buying an SL company. But will you be liable for any outstanding debts or legal cases? Only a good Spanish Lawyer will tell you.

And More..

More items for you to check…. (I told you buying a business in Spain is not easy). Have you checked out: List of liabilities, Money owed but debtors and creditors, Debt disclosure. Leases, Hire purchase deals, loans and any other debt to which the business has agreed. None of this is fun, but also you need to know:-

  • Customer patterns. How many clients are first-time buyers? One time buyers? How many customers were lost over the past year?
  • Marketing. How does the owner obtain customers? How is the company perceived by its market?
  • Advertising costs
  • Price checks. Evaluate and compare what you see in the business you are looking at, with standards and competitors in the industry.
  • Industry. You should find out and think about the industry as well as the specific business. Find out if sales in the industry, as well as in the market segment, have been growing here in Spain. Are the businesses about to be made illegal or super unattractive? Like with short term rentals a few years back?
  • Location and area. Especially important to retailers. Also bars, restaurants and cafes who draw the majority of their business from the primary location.
  • The Reputation of the business. Interview customers, ex clients, ex staff, current staff, suppliers to determine the reputation of the business.
  • Inflated salaries. I saw a case whereby the owner had a relative on the payroll who never was working for the company. All of this should be looked at by a qualified team

Pricing of a business

So what’s a fair price to buy a Spanish business? Usually, the owner has one idea of how much the business is worth. While the buyer will typically have another viewpoint. Coronavirus changes everything. Do you have a delivery business or a high street restaurant? One has a value that is about to double, the other cut in half. Both sides are dealing from a different perspective.

There usually are very few solid facts upon which to base the price decisions. What a seller paid for the business 10 years ago for example. This should not influence what a new client now pays for the business. Ditto what a similar business was sold for pre-Coronavirus.

Price is a very hard element to pin down. When we sold Comaskey Properties we used a simple earnings x 2.5 multiplier. I paid one years earnings for Estival tours which became La Zenia Travel. For the Bog Road, Cabo Roig we priced it at a yield for the investor once he left the existing tenants in place. (Brilliant deal for everyone)

To arrive at a price based on the book value, you have to find out what the difference is between the assets and liabilities of a company. This, if you use our accountants, has usually been done already on the balance sheet. Net worth is then multiplied by one or two and we arrive at the book value. (Of course, it’s not this simple)

Return on investment

Probably in Spain the most common means of judging any business is by its ROI. That is the amount of money the buyer will get from in profit after taxes. Don’t confuse ROI with profit, they are not the same thing.
Typically, a small business should return anywhere between 15 and 30 percent on investment. If you buy a bar or an office now, you should pay for it in five years, if you are running it yourself. As a Landlord, you should pay for the building in 8 years. If you have done your homework.

Capitalised earnings

Valuing a business based on capital earnings is similar to the return-on-investment method. Here normal earnings are used to estimate future earnings. A good Spanish accountant will help determine the standard capitalisation rate. It is determined by comparing the risk of the business investment. Versus other investments such as government bonds or stocks. Since Coronavirus, the value of stocks has dropped by ⅓ so can we trust this method?

Intangible Value

Some business owners, like us, try to sell goodwill as an asset. Intangible value is real, particularly if the business has built up a regular trade and a strong accounts. However is it the financial value of the accounts or their psychological value, that counts. It is so hard to say. I always asked for maximum return on our name, reputation etc. If you have gotten this far in the deal bad news… there are still some serious mistakes you can make and Spanish Solutions can help you to avoid!

Mistakes buying a business in Spain

Tremendous mistakes are made by people who are anxious. They want this business to be just right and they rush the details. This leads to fatal mistakes. 90% of these businesses will be dead within two years so when we say “fatal” it’s exactly what it sounds like. Some of the more common mistakes are:

  • Not using your own lawyer. This is the single biggest mistake people make when buying a business in Spain. It is hard to believe that anyone will sign a contract prepared by the other party, without first checking it with their lawyer. A Spanish lawyer may charge you 500 euro to check a contract and save you 50,000 euro or 500,000 euro. Why would you not ask your lawyer to check everything? You show the sellers your lack of experience and leave yourself wide open.

If you sign the contract the seller has prepared, then you are at the mercy of that lawyer. The deal will be legal, almost certainly, that is not what I’m saying. It’s worse than that. The business seller’s solicitor is employed by the seller to represent the seller, not you.

  • Buying on price. Good business ideas can be too expensive even in Spain. Buyers sometimes get too much sun and they don’t take into account ROI. If you invest 20,000k in a business that returns a 5% net, you are way better off putting your money in stocks and shares or even a Spanish rental property. Any type of intangible security, especially just after the coronavirus is going to produce more than five percent.
  • Cash flow. The death of the business, before it even starts. In Spain, so often buyers use all their cash for the down payment on the business. They are suddenly insolvent should Coronavirus, an ash cloud in Iceland or a temporary dip in sales occur. Buyers fail to predict future cash flow and it costs them everything. It can cost them not just the business they bought. But also any security they put up towards it (their house, their remaining cash and their UK assets too in some cases).
  • Failure to verify all data. I trust people, but I like to cut the cards anyway. Business buyers accept all the information and data given to them. Why wouldn’t they ? They want the figures to be correct. The seller feels their lack of experience and talks the buyer into virtually anything. We have seen it happen.
  • Buying all the debtors. Generally it makes good sense to buy the receivables or what is owed to the business. But take a real estate company sale. What happens when one deal that was due to complete next month falls apart? And you’ve already “bought” it from the seller of the business? What if all of the deals don’t happen?
  • Strict payment schedules. Novice business buyers often overestimate their revenue during the first year in particular. They can take on unduly large payments to finance the buyout of the business. This is a bad idea. Revenue rarely pans out during the first year of any operation. Due to numerous non-recurring costs like equipment failures, a hole in the roof, employee turnover, etc. It makes sense to have a payment schedule that begins fairly light. Afterwards it then gets progressively heavier, but the buyer’s accountant will help, if you are using one.
  • Treating the seller unfairly. People in Spain often think that, because they are buying a business, the seller does not matter. I have seen a seller choose one buyer over another because he agreed to keep the existing name of the company. Whereas the one who was paying more, wanted to change it.
  • Too often, the inexperienced buyer will be cold, and heartless. Just because you may have some money doesn’t mean that you can insult the cafe/bar your seller put ten hard years into. Or the property company he started from the ground up. This will cost buyers money.
  • Worse still, if the buyer has been mean or disrespectful to the sellers, as soon as there is a problem, how motivated will the seller be to help them? Not very is the answer.
  • No Transition Time. I have sold companies and literally left the next day. Really the purchase is a big change for employees, especially for a small business. A smooth transition, keeping existing staff and especially the previous owner in place for a short transition time is important. I saw a bar sold last winter and the new owners changed the name, fired the manager and pretty much let the owner know she was no longer welcome there. The customers in the local corner bar resented the new owners and the business never recovered.

There are other ways to acquire a company in Spain and we think “partnering up” might be the future when buying a business in Spain. And a way to get us through this Covid 19 time. There is so much that can go wrong as you can see with a traditional purchase of a business in Spain. Are you thinking of getting into business in Spain? Spanish Solutions can help with legal, tax and business experience.I’m personally available to help you to check out your ideas too- We have done it many times before so please feel free to reach out.

Ian Comaskey

10 Comments

  • Melanie Keefe

    Great Post and advise. Am looking to buy 2 kiosks on golf resort. There at already up and running but the owners want to move back to the uk. I am in the UK and don’t have Spanish residency on an nie number! We have rented in the resort for the last 2 and a half years but haven’t been back since covid hit. They currently own the lease and licence but the kiosks are actually owned by a third party. So we would potentially be taking over the lease and licence. Do I need to be resident in Spain, not sure where to start……

    • Nicola Ryan

      Good Morning Melanie,

      Thank you for your enquiry and kind words.

      You would need to be resident in Spain, to be self-employed, we are sorry. If you hold a British passport, your application for residencia (non-lucrative visa) would need to go through the Spanish Embassy prior to your visit to Spain. We would recommend you contact the Spanish Embassy directly to discuss your plans and to confirm if there is a visa which would allow you to do this. We hope this helps and all the best with your future plans.

      Kine regards
      Nicola

  • Dwight E Grupp

    Hi ,
    I am looking a purchasing a coffee shop in Moraira, Alicante, Spain and wanted to see if could help me, maybe a lawyer contact. Also if you are familiar with this particular business. Here is the link to it. https://spain.businessesforsale.com/spanish/established-caffee-shop-and-bakery-in-moraria-for-sale.aspx

    • Amanda Thomas

      Dear Dwight, Our senior lawyer would be happy to help, I am going to email you now,

      Kind regards, Amanda

  • Di beach

    Do you have to be a Spanish resident to buy an sl company?

    • Nicola Ryan

      Good Morning Di,

      Thank you for your enquiry.

      You are able to purchase a limited company, in Spain, if you are not a Spanish resident. As you are non-resident you would need to submit more documents. Should you need any assistance with the completion of the sale or the legal checks required beforehand, please do not hesitate to contact us, we would be delighted to help.

      Kind regards
      Nicola

  • Sophie

    Good Afternoon,

    Im currently trying to gather information on buying a small cafe in Tenerife. Im wanting to get all the information and knowledge I need to decide whether this is a viable option for me or not.

    Is there someone I can contact to find this information out and get some advice please?

    • Amanda Thomas

      Dear Sophie, We wish you all the best with this but I am sorry you need a lawyer in Tenerife as we could not help with this, Kind regards

  • Alan

    Thank you for the nice article.
    I will be travelling to Malaga within 2 weeks with the intention of investing in several rental properties. Do you offer services for such ventures also?

    • Nicola Ryan

      Thank you for your enquiry Alan,

      Yes, we can help you with this for sure, we will contact you directly to discuss this matter further.

      Kind regards
      Nicola

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