A Guide to Buying a Business
Published on: 2011-08-21
Introduction to Buying a Business.
Searching for a business to buy? Thousands of people search business for sale websites every day for an existing business, as opposed to starting one from scratch. This is because buying a business is less risky than starting your own one, but finding the right business amongst thousands of business for sale listings can be tricky. Despite understanding the business sale process, you'll also need to consider the advantages
of buying a business, to determine if it's the right option for you.
This guide is meant to provide readers, who plan on buying a business, with an overview of what is involved in the buying process. It's by no means an exhaustive resource but it serves as quick primer to give you an idea of the major elements of the process. So if you're considering buying a business and you want to learn more, then this guide is for you.Buying the right business.
The easiest way to decide on the right type of business to buy is to think of what your strengths are, or what your passion is. If you've always dreamt about buying a hotel or owning a pub then that’s always a good place to start.
One suggestion is imagine the sort of business you would have the most fun running. If you're not having fun then it’s unlikely that you'll work very hard to make it an outstanding success.
Another suggestion is to buy a business that plays to your strengths and experience. So for example, if you're an experienced salesman and you want to buy a business, consider buying a business that requires a large amount of customer facing or telephone selling to play to your strengths.
Franchises are also becoming more and more popular as an alternative to buying a business. Please see our guide on buying a franchise.Identify businesses and create a shortlist.
There are many good sources of business for sale listings around these days. The internet has made finding a business easier and websites like ours have allowed sellers to advertise for less, resulting in a comprehensive list of businesses for sale across the country. Websites like Business4Sale.co.uk provide you, as the potential business buyer, with thousands of business for sale listings from almost every business sector and location in the UK and best of all it won’t cost you a penny!
Another way to find a business to buy is by visiting your local business transfer agents. They would be happy to sit down and establish a set of criteria you need fulfilled before buying a business. They also have a number of businesses on their books and are actively looking for buyers for these businesses. You might find they already have your perfect business for you, but in most cases they are able keep your details and search criteria to notify you in the future of similar businesses for sale. Their services are normally free for buyers but some do levy a small charge for the service.
When buying a business through a business transfer agent, make sure they are members of The National Association of Estate Agents, or NAEA as it is referred to. This should indicate they conform to a code of conduct and reduces the likelihood of being messed about.
Traditional sources such as newspapers and trade publications often include a classified section listing businesses for sale. If you’re looking to buy a business in a specific sector then try looking in magazines or publications specific to that sector. The problem with business for sale listings in print media is that they are normally quite costly to place. As a result, there a few listings and the amount of information displayed is minimal.
It is also very common for business owners to sell their businesses to friends or family, so keep your eyes peeled and your ear to the ground for anything that might suite you. Do your research and get more information.
While deciding on businesses to add to your shortlist, do a bit of research and try to answer the following questions:
• Is this business in a growing, mature or declining industry?
• How many hours will I need to commit?
• Is there a local demand for the product or service?
• How competitive is the industry?
Once you have shortlisted a few listings that you think might be worth taking a look at, make some enquiries via telephone or through a website like Business4Sale.co.uk.
Remember, sending an enquiry is free of charge and it gives you a chance to shorten your shortlist even further. You should have a list of relevant questions that you plan to ask the seller. This ensures the seller knows you are serious about buying a business and you'll find he/she will be more likely to provide you with useful information.
Some good questions to ask the seller are:
• How much profit does the business make and does that figure include the owners salary?
• What is the exact location?
• Is the businesses yearly revenue growing or declining?
• Is the business dependant on its current owner or can it function without him?
• Does the business have any unique products or services that competitors don't?Arrange a viewing.
Once you've shortened your list the next step would be to attend a viewing of the business. Look at the condition of the assets and make a note of the how enthusiastic the staff are. Staff enthusiasm can tell you a lot about how the business is managed and could provide clues to potential future problems or opportunities. If you are in doubt about something, ask the seller.
It’s important to remember that sellers often prefer to keep the sale of their business private to prevent poor trading or unrest amongst staff, which can occur when a decision to sell is made. So be discreet but thorough and make a note of key findings. Evaluate the business.
Once you've found the right business, you'll need to try to evaluate its worth. There are many factors that will need to be taken into account and below is a list of some examples:
• What are similar businesses selling for?
• Is it ideally located for good trade?
• How dependant is it on the current owner being present?
• What position does it hold in the marketplace and are customers familiar with the brand?
• What is the value of the businesses fixed assets?
There are three main routes you can take when valuing a business. They are, making use of an accountant, specialist business valuation agent or read as much as you can about the topic and try to come up with an informed guess. Naturally the third is less reliable, but it's worth noting that a business is only worth what somebody is prepared to pay for it.
There is no substitute for experience, so try to use professionals like accountants and agents if you can. Don’t be afraid to ask how they came to a particular value and try to verify as much of what they say as possible.
See our business valuation guide
for further reading on how to value a business.
Once a value is established, you should look at whether or not you need to raise additional finance. Lenders usually require the current trading statements of the company for a period of 3-6months. If you don't have these then it’s quite likely you may need to compile a business plan to explain your attempts to forecast the sales of the company you wish to purchase.
High street banks are the most common source of small to medium sized business funding and they will generally provide loans of up to 60% of the businesses value. This leaves you to come up with the remaining 40%.
Many business owners rely on family and friends to help them finance a new business purchase but beware that this does also open the door to serious dispute should the business fail. Submitting a formal offer.
Once your finance is in place then it’s time to put in an offer based on what you think the business is worth. Remember to submit all offers in writing regardless of whether you have placed an offer over the phone and ensure that the phrase "subject to contract" is present in all correspondence with the seller. It is advisable to seek professional advice when tabling an offer.
There are strategies for putting in offers. These include discounting the price you feel the business is worth by between 10- 25% leaving room for negotiations. We advise you ask the professional who conducted the valuation to offer some suggestions or advice.
Try to negotiate a period in which you can become familiar with the business before taking over completely. This can help to make sure there are no major skeletons in the closet.
The likelihood that you will have to negotiate on your price is very high, so try to stay below what you feel the business is worth. Remember that this is a business decision and that emotions can negatively affect your ability to make good business decisions.
One other useful tip is to be creative with your offer and negotiations. For example if you can't get the seller down in price, try get them to allow you to pay the difference at a later date or link it to the businesses performance, giving you a better chance of establishing a positive cash flow before having to part with money.Undertake Due Diligence
Due diligence is a period negotiated between you and the seller in which you can verify the information given to you about your prospective new business.
It usually occurs after you have negotiated a price, but can sometimes occur prior to price negotiations, and gives you a chance to check the company’s financial position in relation to the information used to compile your offer. It’s also a period in which you can identify business weaknesses and solutions to strengthen the business you intend to buy.
Key issues that need to be addressed include:
• Financial position
• Staff terms and conditions
• Environmental Issues
• Major Contracts and Orders than need to be fulfilled
• Management style and whether changes need to be made to improve the operations of the business.
• Unsettled litigation
So try to gather as much information as possible from internal sources (company documents) and external sources (Tax office, bank, and landlord) to compile your analysis.
Prospective buyers for a small businesses usually need between 2 weeks and 1 month to complete a proper analysis of the business, but larger businesses have been known to take two or three months to evaluate.
If you discover that the seller has not been honest when disclosing information you can either decide to call the whole thing off or start renegotiating the price down accordingly.
During this period the Seller may still choose to continue advertising the business for sale.
We suggest you get help from a solicitor or accountant, who will be able to assist in most matters relating to this topic.Completing your purchase.
Once you're happy with the information you've collected and the financial statements of the business you plan to buy have been verified, any leases, contracts, licenses need to be transferred. You will also need to transfer the finance to the seller and complete any remaining paperwork.
You’ll need to sign a business sale contract, which should include a non-compete clause preventing the seller from starting up another business in competition to yours. You are then the proud owner of a new business.
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