Buying a ready-made business rather than starting one from scratch can be less risky, providing existing sales are good, costs are under control and cash flow is healthy. It can also work as part of a strategy to grow your existing business. But what does the process involve?
Like anything, buying an existing business comes with various advantages and disadvantages. Before choosing this option, you should be clear what they are.
So, although acquiring another business can take you to a whole new level of success – caution is advised.
Many factors affect the value of a business, including type of business, how old it is, sector or market, location and (obviously) profitability. Even the state of the local or national economy can affect price, as can the reason for the sale and how soon the owner needs the money. When considering businesses, always find out why the sale is taking place.
Sellers usually value their business before they offer it for sale, but that doesn’t mean you must accept their valuation.Find out more
Generally speaking, longer established, more stable businesses with valuable assets and good monthly levels of cash generated from vibrant markets sell for more than younger business with fewer assets or established businesses in diminishing markets.Find out more
Tried and tested formulas are often used when businesses are valued.Find out more
If you’re lucky, you may hear about good business for sale through word of mouth. Otherwise, there are numerous websites that list small businesses for sale, as do local and national newspapers and the business and trade press.
Some of the most popular websites with businesses for sale include:
A trade association or local business support organisation (e.g chamber of commerce) might be able to provide leads, while business brokers/transfer agents/selling agents match buyers and sellers. Your suppliers or customers might even know of businesses for sale, as might your accountant or solicitor.
You should have a fair idea of the type of business you want to buy and how much you can afford to spend. This will help you to save time and effort by narrowing down your search.
Don’t shy away from asking, at the outset, why the owner is selling their business. As you will learn the more you search, not all opportunities are good ones. Where necessary, seek advice from experienced professionals (e.g. an accountant, solicitor or business broker) – it could prevent you from making an expensive mistake.
You should never buy a business without getting your accountant and legal adviser to carry out thorough due diligence.
After deciding which business you want to buy, you and the seller sign a document called a “heads of terms”, which set out preliminary terms agreed in principle by you and the seller.
Then you need to carry out comprehensive due diligence. At this point you, your solicitor and accountant should be given full access to the business’s records to verify:
Any significant contractual arrangements included in the deal will need to be checked, as will loans and other financial arrangements, actual and pending disputes and intellectual property rights.
The process of due diligence enables you to find out that what you think you’re buying and what you actually buy are the same thing. And, crucially, whether you’re being asked to pay a fair price.
If due diligence exposes any significant issues, you and your advisers should try to renegotiate the deal – or walk away if you cannot. The seller might be able to easily sort out some issues or to mitigate risk you might be able to write an indemnity into the sale and purchase agreement.
Buying a business can be a long, complex and demanding process. So that it’s less of a drain on you and your time – and to lessen the chances that you’ll make a costly mistake – find a law firm with experience of helping people like you to buy small businesses.
A solicitor can look over the heads of terms and sale and purchase agreement to make sure the terms are acceptable (they’ll raise any issues that aren’t). They can also help with any legal requirements a bank or other funder has.
If legal due diligence reveals no issues, your solicitor will deal with completing the transaction, ensuring that contracts are signed as necessary and your money is paid to the seller or their solicitor in return for the business.
Expert advice is also essential when considering the financial aspects of businesses being offered for sale and carrying out financial due diligence, of course, so find an accountant with relevant experience. If you already own a business, you should get advice on the tax implications of buying another one, because some restructuring may be necessary.
You should never buy a business without getting your legal adviser to carry out thorough due diligence.Read more
Before any purchase, your accountant should be given full access to the business's records to evaluate the financial claims made by the seller.Read more
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