Buying a private, limited company can bring many challenges. This makes it important to understand the process of how to buy a business to help navigate each of the stages.
In this guide, we outline the key points to consider when deciding if buying a business is right for you, and the stages of the process you’ll need to follow to make the purchase.
Is buying a business right for you?
Even if you’ve already made the decision to buy a business, it’s worth considering this question.
Buying a business could work for you if:
- You’re a business owner and you want to expand by acquiring another business, perhaps a competitor or a business that would complement your own.
- You have the money to invest but you feel that starting a completely new business would take time that you just don’t have. Buying a business that is set up and ready to go could be the answer.
- You know of a business that, for whatever reason, is going through a period of hardship. You feel that you have the expertise and enthusiasm to get it back on the road to success.
On the flip-side, consider potential reasons why you might not want to buy a business, such as:
- You don’t have the capital to invest, or at least not sufficient capital to purchase a business. You may, however, be able to afford to start your own business.
- If you buy a business, you inherit not only the business and its assets, but all the other stuff that comes with it – employees, creditors, contracts and reputation. Even if the business is profitable, remoulding the business to suit you will take time and perhaps even expenditure.
- If the business does have employees, then they may not be happy with a new boss and the new rules you bring into play. Can you cope with a staff dogged by low morale when you feel excited and enthusiastic with your new business?
What about starting your own business?
The benefits of starting your own business are that it’s yours from the outset. Even if you set up your business as a company with other directors and shareholders, you have a say in the form and identity of that business from day one.
If lack of capital is an issue, then starting your own business will generally cost less than buying an existing business, although funding will usually be easier to access for an already running business that can prove its track-record.
What kind of business do you want to buy?
Key considerations include:
- What industry are you interested in, eg food, fashion, recruitment?
- What size of business do you want to buy?
- What should the current business turnover be?
- Where are the business’ premises?
Look objectively at your current position and whether you have the skill, capability and capital to buy and run the business? What is the market like? Do you research into the business’ market and its competition. You should also have an in-depth understanding of the financial commitment required to operate the business.
How will you fund your purchase?
If you already have the capital to hand, then you won’t have to worry about this question, but what if you need a little (or a lot of) financial assistance to buy a business? Where can you turn?
Often the first place that business owners turn for finance, banks will usually lend up to 60% of the purchase price of a business. This leaves you to find the remaining 40%.
They’re not just giving their money away though and will want plenty of proof that you and the business are a good investment. They may ask for:
- Audited accounts, for the last three years, of the business you intend to purchase
- Revenue projections for the business once it is yours
- Your expected cashflow once you have made all payments each month (including the bank loan)
- Your business plan as proof that this is a sound investment on their part, laying out what you plan to do with the business, including any improvements you intend to make to it
- Valuation of the business you intend to buy, provided by a professional. This may include any physical property (such as an office or hotel) as well as the business’ income and other assets.
- Details of the agent who is acting on behalf of the business owner
- Details of your previous work experience and career, including any relevant experience that would make you suitable to run this particular business
- Your asset and liability statement, outlining what you own and what debts you have
- Your bank statements for the last six to twelve months
- Proof of your identity and residency, e.g. your passport
Business finance broker
Business finance brokers act as go-betweens for business owners seeking finance. They have access to hundreds of finance providers and are not tied to any particular brand.
Some brokers will charge commission to you, while others will charge the commission to the lending finance provider.
he advantage to using a broker is that, with their knowledge of all the lenders offering finance and the many deals on offer, they can find the best deal for you and your individual situation.
Also known as ‘business angels’, these individuals or groups, with capital to invest and business knowledge to share, search out new ventures that they deem to have potential. Think Dragon’s Den.
They will provide investment in return for shares in your company (the business you wish to buy) with the intention to generally see a return on their investment in the short-term rather than long.
Unless one of these individuals is already a personal contact, or even a family member, it’s wise to seek professional advice before approaching any private investor.
The Financial Conduct Authority has strict regulations on seeking investment through private investors.
Venture capital funds
Venture capital funds invest in businesses that provide a high return on their investments. They are interested in innovative ideas with a chance of rapid growth.
The money that a venture capital fund invests in a business may be to the level of millions of pounds, and they will expect the business owner to invest in the business too, financially and with their involvement in the daily running of the business.
Is there a way to buy a business with little or no money?
If you don’t have the capital to buy a business and the above finance options aren’t open to you, what else can you do?
Secure finance against the business’ assets
The business that you want to buy will probably have assets, such as property or equipment. It may be possible to raise capital on these assets to finance the business purchase.
Some banks or financial lenders may offer a loan secured on the assets of the business but it’s important to use professional advice before entering into any such arrangement, with a full knowledge of any liabilities involved.
Set up a co-operative
It may be possible to join together with other investors to buy a business. Obviously, you won’t be the sole owner, but you will be a ‘business owner’.
It is imperative, however, that a legally drawn-up partnership agreement between you and the other investors is set in place.
You will need capital to purchase a franchise but not as much as you would need to buy a non-franchise business.
There are many franchise opportunities throughout the UK and within numerous sectors.
This is an opportunity to step into a brand, with its existing set-up, reputation and business practices already in place, without necessarily laying out a large amount of money.
What is the process to buy a business?
Once you’ve found a business that you want to buy, what should you do next?
a) Approach the vendor
Contact the business owner to register your interest in buying their business. At this point, there is nothing fixed in stone. You may withdraw your interest at a later stage. This is simply an initial approach to open communications.
Be aware that this isn’t simply a one-way communication. The vendor will want to know why they should sell their business to you:
- What industry experience do you have?
- Are you already a business owner or is this a first step into self-employment?
- Why are you interested in their business?
- How will you pay for the purchase?
- What are your future plans for the business?
Equally, this is your opportunity to ask the vendor questions too:
- Why are they selling? Is it a choice or do they have to sell?
- Are the assets of the business included in the sale?
- What price range are they interested to sell at?
- Are there already employees in place and will these individuals remain with the business after the sale?
b) Due Diligence – Part 1
Before you go any further, you need to know that the business you wish to buy brings no major challenges or problems with it. It is in your interests to carry out a process of preliminary due diligence before any firm offer can be made for the business.
At this stage, you may not have access to the business, but an initial investigation can be carried out by researching the business’ market and its main competitors.
Meeting with the vendor may be an excellent way to get a feel for the business, although do bear in mind that the vendor’s main intention is to sell the business, so they may not fully mention any problems. Do ask, however, if it is possible to visit the business premises.
Research the demand for the business’ products or services. Is it a failing demand or is it sustainable? Are there any recent or upcoming trends that it could feed into? What is the situation with any supplies it relies on?
Talk to industry experts for their views on the future viability of the business and its market.
c) Professional Advice
Approach any professional services you wish to use for the purchase such as the agent whom the vendor has hired, a solicitor, or a financial advisor.
You will have to factor in any fees for this advice as part of the business purchase.
d) Evaluate the business
Before making your initial offer, you should take professional advice to value the business you wish to buy.
This kind of specialist advice will know exactly what to include in this valuation, the questions to ask the vendor, and how to assess future income, growth and risk.
Be aware that the advisor may come back with information that actually dissuades you from buying the business because the risk is too great, for instance, or the business has no potential for growth.
e) Your initial offer
If you do decide to go ahead, then your initial offer should be based on the above valuation, any competing offers to buy the business, and the vendor’s acceptable price range.
Be flexible but be aware of your top price that you are not willing to go beyond, with defined reasons for that price should the vendor ask.
Make your offer in writing, using the words ‘subject to contract’ so that it is understood that you are not committed to the purchase until everything is agreed to the approval of both sides and final contracts are signed. Lay out what you are willing to pay and exactly what you expect to receive in return.
Point out any advantages of your offer over competitors such as a commitment to retain existing employees, for instance.
Once the offer is made, don’t be afraid to chase it up.
f) Sign the Heads of Terms Agreement
Also known as the heads of terms agreement, this document sets out the terms of the sale. It is not legally binding but is useful in keeping the sale process on track.
This document may include, but not be limited to,
- the price you have agreed to pay and what you expect to receive in return
- the payment structure (whether the payment is paid in one whole amount at one time or parts of it are deferred, whether shares are involved in
- the purchase, and so on)
- responsibilities on both sides
- periods of confidentiality
- periods of exclusivity
- any warranties or indemnities provided by the vendor
- the timetable of the whole process outlining deadlines and timescale
g) Due Diligence – Part 2
Whereas the initial due diligence was based on your own research, the detailed due diligence required at this stage will be carried out by specialist professionals who can provide a more informed analysis of the business you wish to buy.
The legal due diligence requirements at this stage include,
- confirming the legal ownership of the business and all assets included in the sale, such as equipment, registered patents or property
- checking for the existence of past, current or pending lawsuits against the business
- looking into contractual obligations, for instance, employee pensions or contracts with suppliers
- considering any effect that a change of ownership might have on the business
In addition to the legal due diligence, you may wish to carry out an employee audit and check the business accounts, if the vendor will allow you access.
With the due diligence checks in place, you will be in a stronger position to negotiate any changes to the terms of the purchase.
h) Sale and Purchase agreement
This agreement lays out the legal obligations of both sides and, along with the signing of contracts and payment, marks the completion of your purchase.
You’ve bought a business.
Why legal advice is essential
As you can see, the process of buying a business is complex and requires a vast array of specialist knowledge.
Bring specialist legal advice on board can offer the reassurance that not only are you making a good investment but that your new business has a sound footing to go forward from.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.