Buy a business
Many businesses begin when an entrepreneur has a ‘eureka moment’ – a sudden flash of inspiration about a potentially viable idea for a profitable business. However, other entrepreneurs are not so lucky and despite possessing the necessary ‘know-how’, experience and passion needed to build and run a successful company, they are unable to generate the initial idea needed.
Buying a business that has already been established (or taking on a franchise) can be far quicker and easier than beginning from scratch, especially for those who don’t have any solid business ideas and would prefer the security that comes with an already developed business or concept.
Acquiring a business that already has a strong market presence means that someone else will have done most of the legwork for you – coming up with a great product, establishing a customer base, hiring a team of suitable employees etc. However, with that said – taking on an existing business or franchise is not without its challenges, and the time and effort required for a successful acquisition should not be underestimated.
According to industry statistics, approximately 90% of individuals who search for a UK business do not complete the purchase. Though numerous reasons for the low conversion rate were cited, most were reportedly first-time buyers who admitted to having completely underestimated just how much was involved in the process of buying a business.
Business ownership may well be the best investment you ever make, but you need to ensure that you are successful and to do this you must be well prepared, properly equipped and in possession of the right information. This comprehensive guide intends to present the key stages of buying a business in a simple step-by-step format, providing you with the tools needed to help you make the right decisions along the way.
For further advice and guidance about acquiring a franchise, please visit our separate fact-sheet to find out more.
Buying a business - the advantages and disadvantages
Though there are many advantages to buying an established business as opposed to starting from scratch, it is not all plain sailing. Taking the reigns of a company in which you have had no prior experience will present challenges to even the most experienced entrepreneur. With this in mind, it is advisable to consider both the advantages and disadvantages before fully committing to an acquisition:
- Most of the extensive groundwork required to set-up and establish a business will already have been carried out for you.
- Businesses that have been up and running for some time will already have an existing client base, suppliers, equipment and systems in position.
- The previous employer is likely to already have taken on experienced employees who are fully trained and confident in their job roles.
- Any teething problems will have already been resolved.
- Previous owners may be able to provide a certain level of support and guidance during the handover period.
- The business will be based on a tried and tested formula.
- It may be easier to obtain future financing if a business has a proven track record of profitability.
- Cash flow will generally be more instantaneous than it would be if starting a business from scratch.
- More often than not, a large initial investment is required.
- Costs will be incurred for the business transfer costs. Solicitors, surveyors and accountants will also charge.
- If the business is being sold on because it is losing money then you might need to invest more than the sale price in order to give it the best chance of success.
- Why is the current owner selling and will this affect the takeover and/or staff morale?
Buying a business - an overview
Though the process of acquiring a business will vary between companies, generally speaking it should involve the following key stages (though not necessarily in the given order):
Defining the business you want to buy
What type of business do you want to buy? Once you have established the sector in which you wish to work, undertake thorough research before creating a shortlist of businesses in which you have a genuine interest.
Once you have expressed an interest in a company that is for sale they should provide you with a sales memorandum that highlights key features of the business and outlines what will be included in the sale. Assess and compare the businesses on your shortlist before progressing to the next stage.
The purpose of a sale memorandum is to present a business at its best, but purchasers must ensure that what is presented to them on paper is what they are getting. At this stage, a purchaser should be looking to view the business premises and their team of advisors should also go about conducting their own valuation.
Financing a business
If you don't have enough capital to buy an existing business outright then you will need to consider additional options. Lenders will usually need to see details of the business/sale particulars such as accounts for the past three years, financial projections, details of personal assets and liabilities.
Making an offer
Once a buyer has gained an adequate understanding of the business that they are looking to purchase, it is then time to submit a formal offer.
A key stage of the sale process that allows you to bridge the gap between what is being offered for the price and what you feel what is being offered is worth. Negotiating both the price and the terms of the business are both hold equal importance.
Heads of Terms
A document in which the main terms of sale are laid out - allowing both buyer and seller to outline the agreement in principle before due diligence and drawing up legal documents begins.
At this stage due diligence checks will be carried out by the purchasers and their team of advisors before the sale is driven to completion. These checks ensure that the buyer has the opportunity to verify the information they have based their offer upon so that they can feel assured the business they are buying is worth the price.
If the due diligence check unearths any discrepancies that the buyer feels impacts the worth of the business they are buying, negotiations can be reopened.
Sale and purchase agreement
After both the buyer and seller agree on a price and terms, there are legalities that need to be completed. The sale will need to be documented in the sale and purchase agreement that is based upon the Heads of Terms.
Once the buyer and seller have entered into a legally binding agreement there are still certain conditions that will need to be met before the transaction can be closed.
Deciding what type of business you want to buy
Choosing the right business type
The kind of business you should buy will largely depend on your previous professional experience and skill set. Generally speaking, it would not make good business sense to become involved in an area that you know very little about, no matter how good the deal may look.
A business that correlates with your areas of expertise, lifestyle and ambitions will provide the company with the best chance of success, as understandably, it is both less of a struggle and more enjoyable to prosper in a business when you love the work you are doing and the industry you work in.
Even in businesses that have already established themselves, there is always plenty of room for innovation and creativity. With this in mind, consider what it is you think you can offer a company that is already up and running, and also what you would like to get back.
With such a vast number of businesses on the market, whittling down the options and identifying the single one that is going to work for you can be a laborious task. Begin by looking at what is important to you, what your motivations are and ultimately what you would like to achieve. Consider the following points to help you to do this:
- Personal skill set - What company will give you the opportunity to utilise your knowledge and experience?
- Capital - How much money can you afford to invest in the business?
- Salary expectations - What level of profit do you need to both return on your investment and to provide for your needs?
- Industry sector - Are you knowledgeable about the business area and do you know about the regulations, laws and licenses that may apply?
- Location - Many businesses can be relocated without too much upheaval so consider expanding your search.
Focusing your search
After you have settled upon a business type, you can begin your search for the perfect company - but how do you know where to begin?
There are thousands upon thousands of businesses on the market at any one time, so knowing where to look is really half the battle. Below are a few tips that may help you to look in the right places and to ultimately reduce the amount of time you spend searching:
- Trade magazines and journals - These often carry listings and have the benefit of having eliminated businesses from unrelated industries.
- National and local newspapers - Many carry adverts for both businesses and business premises.
- The Internet - There are plenty of websites which specialise in listing businesses for sale.
- Use a business broker - They often maintain a list of businesses that are for sale.
- Approach a business - If the business you want isn't on the market then do some background research and approach the business owner.
- Word of mouth - Business associates and trade contacts may know of good opportunities.
Once you have established a shortlist of businesses that are of interest you will need to make a sound judgment on the viability and truth of worth of what you may potentially be buying.
In order to properly evaluate a business and assess your options you will need to gain access to certain pieces of information. For example, the current business vendor needs to provide potential buyers with evidence that their official records and accounts are up to date, as well as granting access to documentation showing any relevant outstanding loans, leases, tax returns and profit/loss statements.
These documents should give you some indication as to whether the business demonstrates a steady and sustainable profitability, and if all is in order could also give you peace of mind that all of the company’s obligations are being upheld.
Once you have assessed the business and what is on offer, if you still wish to proceed the next stage of the process is business valuation.
Business valuation is a difficult operation because both the vendor and the potential purchaser will have an objective view as to how much the company is worth.
In most cases, vendors will already have had their financial advisors carry out a valuation of the company as a basis for their asking price. However, it is also recommend that buyers seek an independent valuation carried out by their own team of financial advisors.
It is not unheard of for a vendor to place an unrealistically high price tag on their business in order to compensate for any value that may be lost in negotiations. For this reason and many others, a second valuation is extremely important in order to fully understand a businesses true monetary value.
There are various forms of business valuation but before getting down to the nitty gritty costings it is important to establish how healthy a business is before putting a price on it.
Financial advisors will be looking out for the following attributes to help them to ascertain whether or not the business is in good health:
- History - What is the history of the business?
- Performance - What are the current performance levels in terms of turnover, profit and sales?
- Projections - Is there a business plan template and future projections in place?
- Current finances - Are there any debts you would have to take on, what expenses are there to consider and how is the cashflow managed?
- Reason for sale - Why is the business being sold on and will this effect the valuation? For instance, if a business owner is being forced to sell because of decreasing profits, this may impact the value.
- Outstanding litigation - Is the business (or has the business) been involved in any major litigation cases?
- Regulatory changes - Have any regulatory changes recently been made in the industry which may impact the business?
Once your financial advisors have determined whether or not the business is strong, they can then move on to conducting the valuation itself. There are numerous methods of valuation and the most suitable option that is going to produce the most accurate value will really depend upon the business model. Below you can find a brief summary of the more popular business valuation methods:
- Asset based valuation
Asset-based valuation is one of the more commonly used methods, and as indicated in the name it calculates the value of a business based on the sum of its assets. This method is not popular with new businesses because their future value should be worth more than their assets.
- Book value
Very simply explained the book value is the assets less liabilities.
- Adjusted book value
This method is different to the standard 'book value' valuation in that it deducts intangible assets (goodwill, patents etc.) from assets.
- Liquidation value
Bases the valuation on what the business would be worth if its physical assets were liquidated. Intangible assets are not included in this valuation.
- Replacement value
Uses the value of the replacement value of assets to determine how much it would cost to replace a business from scratch.
- Earnings based valuations
Bases the valuation on potential future earnings, making it the most popular method for new businesses.
For further information about business valuation, please visit our separate fact-sheet to find out more.
Financing a business
If given the opportunity most people would jump at the chance of taking on and running a successful business - but very few have the financial provisions in position allowing them to do just that.
If you are considering buying a business then obviously you will need to make sure you can pay for it. If you do not have savings available that mean you can do this independently then you may need to seek help from an external party. There are a number of financial options buyers could consider - from asking their bank through to seeking investment from family or friends:
Banks are the most common form of outside financing for the purchase of small businesses, with 60-70% of buyers approaching their local bank as their first port of call to borrow money.
There are several options available to those who are considering borrowing money from a bank to finance a business venture. In most cases short and medium term financing options such as overdrafts, bridging and working capital aren't going to be of much use, with long-term business loans generally being more suitable.
Once the lender has viewed the necessary documents they then decide whether to approve the loan request. Often it is not for 100% of the amount that has been asked for - meaning the remaining cost will have to be funded from elsewhere.
Financing from family and friends
There are numerous benefits to approaching family or friends for investment or a loan. The fact that they are not governed by rules and regulations may mean that they are able to offer more flexibility than a formal lender in terms of interest rates, guarantors and repayment period.
They are also more likely to know you as a person, your circumstances and your drive and passion for the business which you are seeking investment for - meaning they are less likely to require a lengthy business plan.
Despite the benefits of borrowing money or gaining investment in this way, these arrangements are often unwisely based upon trust and verbal assurances. If arrangements are conducted on an informal basis without a legally binding formal finance deal having been drawn up - both lenders and borrowers should be aware that any misunderstandings could potentially ruin the relationship.
Best practice for borrowers who are considering asking family or friends for help is to treat them in the same fashion as they would a formal lender:
- Specify how much you need and how long for.
- Specify how much you could afford to repay each month.
- Specify how many shares they will receive and when they will be paid.
- Make it very clear to an investor if they will have any financial liabilities for your business.
- Think very carefully about asking friends or family for money if a formal lender has turned you down. If you still decide to go ahead then ensure you let them know the reason your proposal was rejected.
- Bear in mind tax obligations - for the borrower, loan interest can be deducted from taxable profit. For the lender, any interest earned must be declared as taxable income.
- If they agree to loan you the money or to invest, a verbal agreement is in no way legally binding. A formal written agreement will need to be drawn up.
Making an offer
An offer should only be submitted with serious intent, so before proceeding with this step a buyer should be certain that they wish to purchase the business.
Before buyers set about making an initial offer it is recommended that they sit down with their financial advisor so that both an initial offer and a maximum offer can be calculated. When coming up with these two figures, the initial valuation of the company and the competition should both be taken into consideration.
Know why you are going in at the price you are as opposed to ‘going in low' for the sake of doing so. Being prepared to articulate to the seller why you feel your offer is reasonable may work in your favour.
Once the initial offer has been calculated buyers will need to submit a formal offer. Preferably, this should be made or followed up in writing. The letter should be headed subject to contract as this makes it clear that at this stage the buyer is not yet committed.
The letter should include details of the specifics of what you are prepared to pay and what you expect to receive in return. This is also an opportunity for buyers to highlight the benefits/positive points of the sale, for example if they are considering keeping on all current employees.
Though a buyer should give the seller some time to consider their proposal, they should be sure to chase up the offer so that any outstanding issues can be clarified and resolved. Be prepared for the seller to return with feedback and possibly suggested revisions to the terms.
Heads of Terms
Once an initial offer has been submitted and accepted and both buyer and seller are satisfied with the checks that have been made, a firm purchase offer known as the Heads of Terms will need to be drawn up.
The Heads of Terms should detail the key points of the sale including what is included in the price, the price and payment method or structure, exclusivity arrangements and any preconditions for the sale.
The contract itself is intended as a point of reference for the advisory teams of both buyer and seller and is thus not automatically legally binding. However, specific sections of the Heads of Terms such as exclusivity, confidentiality, warranties and indemnities will be set out in separate documents and will carry legal weight.
Preparing the documents in question with the upmost care is extremely important if a seller wants the sale of their business to go through without a hitch, and having a reliable team of business advisors on hand to help draw up the Heads of Terms will help to make this possible.
A seller who does not meet the preconditions of the sale, who violates any warranties or who has mislead the buyer with false information could find themselves in hot water - either without a buyer and back at square one - or worse still, being sued for damages.
After both parties have signed the Heads of Terms the buyer’s advisory team will then carry out due diligence checks.
Due diligence is a period of time in which the seller grants the buyer access to their company's books and records so that they are able to verify the claims that have been made thus far.
Whilst it is true to some extent that due diligence is a time in which buyers can verify the financial position of the company they may be about to buy, many wrongly believe that what is most important is making sure the information given in terms of financial statements and accounts is correct.
Whilst of course it is important that this information is by large accurate, the past is in the past and while these statements will give you a glimpse of what has happened previously, time should also be spent investigating a company’s potential future path.
As well as looking at the accounts, financial aspects are just the tip of the iceberg and the company's customer base, suppliers, legal and corporate issues, contracts, sales, marketing and employees must also be scrutinized.
Areas to cover
The due diligence procedure can be spilt into three sections, each of which you will generally need to use a different financial advisor for:
- Legal - Lawyers will need to ensure that the company has ownership of all assets and that all litigation issues have been resolved.
- Financial - This is the stage of due diligence in which financial advisors such as an accountant will verify financial information and will perform checks to ensure that there are no hidden issues.
- Commercial - Analysing the businesses current position in the marketplace is an important stage as it could help buyers to determine the probability of future success. Competitors, suppliers, contracts, customers and marketing are just a few of the areas that should be subjected to inspection.
Do I need an accountant to help with due diligence?
Buyers are perfectly within their rights to carry out due diligence checks independently, but even for individuals who may be experts within the field - an accountant and a solicitor still come highly recommended.
They will be well versed at carrying out diligence checks meaning that whilst they run the numbers and verify financial activity, buyer’s efforts can instead be spent investigating other areas.
If a buyer does decide they wish to perform the checks themself and the company is registered with Companies House, copies of company accounts and annual returns can be obtained from the Companies House website - often for a small fee.
How long should due diligence take?
Some sellers try to negotiate the shortest possible due diligence period in a bid to limit the chances of a buyer uncovering any surprises that may influence the sale terms or timescale.
However, from a buyers perspective the longer the due diligence period the better as the longer the length of time the more they can learn about the business and the more time they have to investigate and resolve any problems.
Unless a buyer finds an obstacle that is so great that it can't be resolved, in most cases small issues do not mean that the business is necessarily bad. When the investigation is complete there is always the option to renegotiate the sale terms to account for the new findings.
As due diligence checks are coming to a close both the buyer and seller should be in the final stages of completing the sale agreement. Typically, a sale purchase contract and any additional documentation will include the following information:
- Sale agreement - Documentation that details what is included in the sale.
- Tax deeds - This is the sellers insurance against any unforeseen taxation.
- Indemnity agreements - This is where the seller agrees to compensate the buyer for any charges the company may have sustained before the sale.
- Records from the board meeting in which the ownership transfer and resignation of directors was discussed and agreed upon.
- Transfer documents for any existing contracts, leases, licenses etc.
- Agreements for any deferred payments that are to be made by the buyer.
- Finance details such as loan or share agreements.
- Letter of disclosure from the seller and evidence regarding warranties.
- Non-compete agreements - Written and signed assurance from the seller that they will not set-up a company which could be considered as a 'competitor' within a given time period.
The documents listed above will be prepared by the solicitor(s) acting on behalf of each party and once signed the originals will be kept by the relevant side. The buyer’s solicitor must then prepare a file of all of the documents discussed for both the buyer and seller.
The very final stages of completing the sale mainly involve tying up any loose ends. For example, the buyer's solicitor will need to make sure that the change of directors and ownership are registered with Companies House and the buyer will need to make sure they have registered for VAT and have informed and spoken to any employees that have been affected by the business sale under the Transfer of Undertakings (Protection of Employment) (TUPE) regulations.
Providing that all of the above stages have been well-managed and carried out meticulously, buyers can walk away feeling confident that they have obtained the best possible deal for a business they believe they can continue to develop.
Business advisors - Do I need them?
Buying a business is a major life change that is not likely to occur very often during the average career - meaning that even the most well versed entrepreneurs are unlikely to posses all of the necessary knowledge and experience needed for the smooth acquisition of an existing business.
The many stages involved in buying a business can be quite daunting to a potential buyer, which is why it is advisable for them to have a team of professional advisors to hand to plan ahead and assist in the management of the purchase.
Having a team of professional advisors on your side will mean that the correct procedures are followed, the likelihood of mistakes is reduced, and the sale is completed as quickly as possible. It will also mean that you are free to focus much of your attention on other areas of the acquisition.
For advice on legal aspects of buying a business, it is advisable to take on a solicitor who will be able to manage this area on your behalf.
The same goes for the financial aspects of the sale. Advice on business valuation, finance and tax is always best obtained from a qualified accountant who has prior knowledge and experience of buying and selling businesses.
Checking the qualifications and experience of any potential financial advisors is an important factor in putting together a strong team who will help you to achieve the best possible deal. Often advisors are required to make business decisions on your behalf, so it is advisable to hire only individuals who are able to provide evidence of any relevant previous experience. Be sure to ask them what experience they have of purchasing businesses of a similar size, what references they are able to provide and what services are covered in their fees.
Do I need an accountant to help me buy a business?
Although hiring an accountant to assist in a business acquisition is not a legal requirement, buyers may find it very difficult to handle the financial end of the process independently.
A good accountant will be on top of the regularly changing rules and regulations involved, and most importantly will be aware of which ones apply to you.
An accountant who has prior knowledge and experience of business acquisitions could help buyers with the valuation of businesses, due diligence checks, locating and securing funding, negotiating with vendors and certifying that all of the information provided by the seller is correct.
Taking on an accountant to carry out the above procedures will mean that some of the responsibility of taking on another company will be removed from your shoulders so that you are free to focus on other areas of the business acquisition.
If you would like to find out more about accountants, how they could help you and where to look for one, please visit out FAQs page to find out more.
Please note, this guide is intended for guidance use and does not cover all situations or provide a full statement of the required legalities. We highly recommend that anyone considering buying an existing business appoint a team of advisors (accountant, solicitor, financial advisor) who can provide professional support.
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