Buying a Business25th June 2019
There are many things to consider when buying a business and you will need to seek professional advice, so that you are aware of every aspect of the process. It is important to understand in detail the business you are thinking of buying.
Alistair Heron, Partner from our Exeter office, tells us more about the things you need to consider when investing in a business:
One of the advantages of buying an existing business is that the initial hard work to get the business up and running will already have been done. This includes things like developing the business and marketing plans, finding experienced employees and solving any teething problems, building and maintaining a good reputation and generating a reliable income.
For the business you are considering, there should already be an established customer base and a network of contacts in place. All of this you can capitalise and build upon. With these in place, you may also find it easier to obtain the finance you need.
As you are probably aware, buying a business will often require a large sum of money upfront and you will need to ensure that you have budgeted for professional fees. In addition to this you will need working capital to help with cash flow while you are getting to grips with your acquisition.
Sometimes, there may be issues with staff members readjusting to a new employer. This can occasionally cause confusion or friction, but all of these things can be overcome with the right attitude and an organised approach.
Here are some guidelines on the essentials of buying a new business:
Which business is right for you?
Think about what skills you have and what motivates you to work hard every day. If you are new to the sector, research it thoroughly and find out if this sector has long term prospects. Think about things such as: what competition do you already have locally, nationally or internationally? Can you compete?
You may already know the answers to these questions, in which case you can shortlist a few businesses that you are interested in. These can be those already advertised and on the market, or you could approach business that are not openly advertising to sell.
View and Valuate
Arrange to view the business you are interested in, with an expert adviser if necessary, and discreetly observe how it works. Ask as many questions as you can, not only to the vendor but also to the business’ existing customers and suppliers. This should either allay any fears or flag up areas of concern. It will also help you to gauge your valuation of the business. For example, if the vendor is selling due to decreasing profits then the business value will be lower.
You will need to look at the business’ current sales, turnover and profit. Investigate its financial situation including cashflow, debts, expenses and assets. It may be wise to bring in a specialist financial adviser at this stage to provide expertise and help inform your offer. The valuation stage is probably the most vital in ensuring the success of your purchase.
There are several sources of funding that you can explore, such as finance from the bank, equity finance or part-financing from friends and family. Most will require that you have full details of the business and sales particulars, accounts for the last 3 years and details of your own personal assets and liabilities. Again, it would be pertinent to speak to a professional here.
Once funding is secured you will need to make a formal offer to the business owner. You will need to do this in writing even if you have already made a verbal offer. At this stage, it is necessary to instruct a solicitor to check that everything is as it should be before you commit yourself.
Once an offer has been accepted there is a period of time that is usually between three to four weeks, known as due diligence, where you can access and investigate the business’ books and records. Ideally you should get financial advisers and solicitors to help you identify risk areas.
There are normally three types of due diligence and an advisor for each would be recommended.
- Legal due diligence
Solicitors can check that the business has a legal title to sell, that it has ownership of all the assets and that regulatory and litigation issues are fully addressed. This happens as part of a sales and purchase contract.
- Financial due diligence
This involves checking through the numbers and making sure there are no black holes or hidden financial issues.
- Commercial due diligence
Finding out the business’ place in the marketplace, checking competitors and the regulatory environment.
Due diligence is not solely about the finances of a business. It will also help you to fully prepare for what you are getting into, providing you with a full picture of what needs to be fixed and what that will cost. You may be able to negotiate an overlap period to get to know the business inside out. You and your solicitor need to verify the information you have based your offer on. If you are purchasing the premises, an independent survey and valuation would also be a good idea.
Nothing is set in stone until you have met all the conditions of the sale to complete. Once your financial statements are verified, leases and contracts have been signed and transferred, VAT registration is either transferred or a new one set up and finance has been transferred, you will have completed your business acquisition.