How to buy a business

How to buy a business

December 9, 2019
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In this article, find out the proccess of how to buy a business including arranging finance, due diligence and completion…

Venturing into the commercial arena can be a daunting (and expensive) step. You need to be sure you know exactly what you are buying, understand any risks you are taking, and also be confident about any future potential. In this article GA Solicitors share some of the most important steps in the process to buying an existing business:

 

1. Identify the industry

Do your homework. What sector are you interested in and why? Is there a particularly good time to buy in that industry? Is it a sector which will remain well supported by the economy and government? Do you have enough understanding to be able to lead a business in that sector? Are there any changes in regulations expected in the short and longer term?

 

2. Get a good team behind you

This is one of the most crucial steps. Professional and expert guidance is essential to minimise any risks and ensure you get the best deal. The earlier you take advice from them the smoother the process will be and the better the outcome.

You will need an experienced commercial solicitor who is well versed in business acquisitions. Your solicitor will ensure all terms are agreed fairly and the risks to you are minimised as much as is possible.

You will also need an accountant or corporate finance expert. They will be able to look through the business’s accounts and identify any issues or problems early on in the negotiations.

A business broker can also be instructed to make introductions or start discussions on your behalf.

 

3. Finding a business

You have identified a sector, now you need to find the business. When looking at options, keep in mind:

• Locality – do you want to stay local to where you already live? If further afield, could the business easily relocate?
• Budget – how much are you looking to spend?
• Size and turnover
• Can you make a success of it?

You could also consider businesses that are not actively looking to sell. If the timing is right for the shareholders you may beat other competitive bidders to the table and broker a good deal.

 

4. Initial viewing

This part in the process may need discretion as it is often the case that the owners will not want to alert staff to the fact that they are looking to sell the business.

This is your chance however to start dialogue with the sellers and find out more about the business and why they are selling. You could also even pose as a mystery shopper to get an experience of the business first hand.

 

5. Valuation

The valuation of the business will take into consideration property, machinery and equipment, turnover, profitability and ongoing contracts.

 

6. Arrange finance

It is unlikely you will have the cash up front required to purchase a business outright. Therefore you will need funding in place to complete the transaction.

Be aware that lenders will generally require all of the below information:

• Details of the business and its sales particulars
• Detailed accounts for the previous three years
• Financial projections for the business
• Your own personal information such as liabilities and assets

There are various options in regards to finance including bank loans, equity finance, angel investors and financing from friends or family.

 

7. Make an offer

Once you are ready to make an offer ensure this is also put in writing and make it clear that the offer is subject to contract.

 

8. Heads of agreement

The heads of agreement is a useful document which outlines the key aspects of the sale into one concise document. It can include:

• Payment details
• Responsibilities of each party
• Periods of confidentiality
• A timetable of actions up to completion e.g. releasing payments or certain information provided

 

9. Due diligence

Once and offer is made and accepted, a period of time is granted to allow you more detailed access to the business’s books and records. The official term for this is due diligence. This period is negotiable but usually takes around three or four weeks for a small business, more for larger businesses and transactions.

This is where your trusted advisors come into their own as diligence will be required across three key aspects:

• Legal due diligence – The solicitor will cover a breadth of detail including legal titles, ownership of assets and regulatory and litigation issues
• Financial due diligence – The finances will need analysing in great detail to identify any black holes or financial issues
• Commercial due diligence – what is the business’s place in the marketplace? Who are its competitors? What is the regulatory landscape?

If the business purchase includes premises, you should also consider whether any additional surveys are required.

10. Negotiations

The due diligence period may have flagged up some potential issues which mean you want to amend your offer to reflect any additional financial input or risks that will be required by you after the transaction.
You can also negotiate additional terms, such as a handover period to allow you more time to become familiar with the business.

 

11. Completion

Once all the details are agreed you can move towards completion. Although be mindful that this can take some time as certain conditions of sale must be met.

These include:

• Verification of financial statements
• Transfer of any leases or deeds
• Transfer of finance
• Transfer of all relevant contracts and licences
• VAT registration

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