Buying a business can offer you the opportunity to enter a new industry or sector, acquire an established customer base, and improve existing products or services with your ideas.
So how do you go about buying a small business? The UK is a good location for any entrepreneur who’s looking to acquire an established business and in this article I’ll explain the benefits of buying an existing business, the steps involved in the process, financing options, legal considerations, and common challenges faced by buyers.
Benefits of buying an existing business
One of the main advantages of buying an existing business is that you don’t have to go through all the challenges and time required in starting a new company from scratch. By acquiring an established business, you gain immediate access to an established brand, existing customers, experienced employees, and systems and processes. Together, these significantly reduce the time and effort required to establish a presence in the market and you will be generating revenue immediately.
Normally, you also have the additional advantage of being able to tap into the experience and knowledge of the previous owner, helping you navigate industry-specific challenges and avoid pitfalls.
Of course, you won’t be looking at a business that’s for sale unless you believe you can improve it, add new products, or grow it in some you’re your ideas and strategies to drive growth could involve expanding into new markets, developing new products or services, or just making it work more efficiently (and so reducing costs). If you can grow the revenue of the business you have acquired and make it more profitable, you are immediately increasing its value and making it more attractive whenever you come to sell the business.
Disadvantages and risks of buying an existing business
You should consider the risks and disadvantages in buying an existing business. For example, you will need an initial lump sum of money to buy the business; you will also need finances in place to support any cashflow requirements of the existing business, which typically would be the cost of payroll for staff or rent for premises.
On the risks side, you need to understand why the owner is selling the business – is it because they are thinking about retiring, or they want to do something else? Or is it a more significant issue for you as the buyer, for example a new company has entered the market as an aggressive competitor or customer demand has dropped. Or maybe there is a legal issue or employment problem.
You need to find out more about all these issues in both your initial research and detailed review of the records for the business (in a process that’s called due diligence).
Steps in buying a small business
Buying a business can be broken down into steps that you’ll follow as you work through the process of acquiring a business. For example, you need to work out if the market is growing or shrinking, if there are tough competitors, are the products or services high-quality, and does the staff have the expertise to help you grow the business.
Identifying the right business
Finding the right acquisition target that aligns with your goals and objectives can be a daunting task. If you are looking for a small business, there are established brokers and online lists of companies for sale. Some companies sell just some assets (for example, a website or a particular product), others are selling the entire company. If you buy a company, you are taking on its history and you need to make sure you understand any debts or loans or issues.
Before you start any formal purchase process, you need to thoroughly research the market and identify potential acquisition targets. This step involves assessing industry trends, analyzing the competitors, understanding the financials, operations, and any IP (intellectual property) and stock that is involved.
Once you have identified a suitable business by talking to brokers or going direct, you can ask for the information memorandum (IM) that will provide key financial and performance details to help you make an initial offer that is subject to due diligence (which means it depends on what you find out in the next step when you dig into more detail).
once you have contacted the seller and agreed to start the process, you need to carry out an investigation into the business and look for all the problems (and benefits) so you are aware of risks. This process is called due diligence and is an essential step to ensure that the business is a viable and sound investment.
This step is essential to the entire future deal as it gives you access to the records of the business that will allow you to assess the risks, opportunities and ultimately the value of the business. Normally, you would look at due diligence in three parts:
Commercial due diligence: the stock, customer profiles and feedback, market conditions, product quality, systems such as warehousing);
Financial due diligence: financial performance, debtors, creditors, sales records, salaries, loans, etc;
Legal due diligence: trademarks, intellectual property, customer contracts, supplier terms, employee contracts, claims, etc
Valuing the business
Determining the fair value of a business can be complex, as it involves assessing various tangible and intangible factors. It’s well worth talking to a specialist accountant or valuation service who can help you get an accurate valuation. There are many different ways to value a business – including looking at its profitability, its assets, its future growth potential, cashflow, and more. When you calculate the valuation, you’ll need to also look at the issues and risks and your costs. Typical issues might include the costs associated with any employees who transfer across as part of the sale (ie do they have a generous benefits package); is there debt or a legal issue pending against the business, etc.
Making an offer on a business for sale
Making an initial offer involves determining the value of the business based on its assets, liabilities, past financial performance, and future growth potential. It is important to consider factors such as market conditions, industry benchmarks, and the seller’s motivation to negotiate a fair and reasonable offer. There are many different ways to value a business – I’ve explained some of the most popular later in this article.
Negotiating the purchase price and terms
Negotiating the purchase price and terms is a critical step in the acquisition process and normally follows on from due diligence since you now have all the information about the business. This terms of your offer might include discussing the payment structure, financing options, and any contingencies or warranties that may be included in the agreement. Effective negotiation skills and a thorough understanding of the business’s value proposition are essential to get a good deal.
Financing options for buying a business
Financing the acquisition is a crucial consideration. There are various options available, including traditional bank loans, venture capital, private equity, seller financing, and crowdfunding. Each option has its own advantages and considerations, and it is essential to carefully evaluate which financing option aligns best with your financial goals and risk tolerance.
Legal considerations and hiring professionals
Engaging legal professionals, such as solicitors and accountants, is vital to ensure a smooth and legally compliant acquisition process. They can assist with drafting and reviewing contracts, conducting further due diligence, and providing guidance on any regulatory or legal requirements that need to be fulfilled.
How long does it take to buy a business?
The duration of the acquisition process can vary significantly depending on various factors, such as the complexity of the business, negotiations, due diligence, and legal requirements. On average, it can take anywhere from a few months to over a year to complete a business acquisition. It is important to be patient and diligent throughout the process to ensure a successful outcome.
Transitioning and managing the acquired business
Once the acquisition is complete, the focus shifts to effectively managing and integrating the acquired business. This involves developing a transition plan, communicating with employees and stakeholders, and implementing strategies to maximize the synergies between your existing operations and the newly acquired business. Effective leadership and change management skills are crucial during this phase.
Buying a business in the UK can be a great way to get a fast start in a new market. I’ve outlined the steps required to navigate the acquisition process – always remember to conduct thorough due diligence, negotiate effectively, and have trusted professionals (especially an accountant and lawyer) to help guide you through the financial and legal aspects.