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?
Why buy a business?
Like anything, buying an existing business comes with various advantages and disadvantages. Before choosing this option, you should be clear what they are.
Advantages of buying a business
- You know how much your costs will be, how much you’ll turnover and what profit you’ll make (although all can change).
- Raising finance can be easier and you won’t have to find premises, suppliers, machinery, equipment, vehicles, staff, etc, which saves time and money.
- The business will already have some market profile and customer relationships (trying to build both from scratch can take time and be expensive).
- The business also has its own systems and possibly experienced staff who can provide knowledge, expertise, and continuity.
- Businesses can only grow so far or fast from their own sales. Making acquisitions (ie buying other enterprises) can enable you to scale your business by securing greater market share or giving you access to new products or services you can sell to your existing customers. It can give you access to staff with knowledge or experience you don’t currently have or even enable you to diversify into brand new markets.
Disadvantages of buying a business
- It’s usually much more expensive than starting one from scratch and you may have to come up with the money upfront.
- There can be significant legal or accountancy fees to pay.
- Finding the right business and funding can take time when you’re probably busy enough with your current business.
- Even if your due diligence is sound, you could still be buying hidden problems, possibly with staff, suppliers or customers
So, although acquiring another business can take you to a whole new level of success – caution is advised.
How are businesses valued?
Many factors affect the business value, 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.
Seller valuation
Sellers usually value their business before they offer it for sale, but that doesn’t mean you must accept their valuation.
After carrying out your own research (or later after your accountant has carried out due diligence) you may conclude that the business is worth less and try to negotiate a lower price.
Age
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.
Age isn’t always a factor. Sometimes newer businesses can be highly valuable thanks to their intellectual property, market position, unique competences or other factors. Market share is key, of course, because buyers normally look for healthy balance sheets and cash flow forecasts, while strong relationships with customers and suppliers can also boost value.
Formulas
Tried and tested formulas are often used when businesses are valued.
Methods differ from sector to sector, but different multipliers are usually applied to yearly post-tax profits. In other cases, cash flow forecasts, sector norms or even simple estimates of how much it would cost to create a similar business from scratch are used.
Where can I find businesses for sale?
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.
Key steps when buying a business
Refer to this checklist to ensure you move through the different stages of buying a business in a considered and effective manner.
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What is due diligence?
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:
- it is the legal owner of any real estate, assets, and shares being offered
- that the financial claims made by the seller are fair and accurate.
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.
What professional support should I access?
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.
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