If you're thinking about running your own business, buying a company that's already established may be quicker and easier than starting from scratch.
However, you will need to put time and effort into finding the business that's right for you. Also, the costs involved in buying an existing business can be substantial and should not be underestimated.
This guide takes you through the steps of buying an existing business, including how to assess and value a business, your obligations to any existing staff and where you can get professional help.
2. Advantages and disadvantages of buying an existing business
If you get it right, there can be many good reasons why buying an existing business could make good business sense. Remember though, that you will be taking on the legacy of the previous business owner, and you need to be aware of every aspect of the business you're about to buy.
- some of the groundwork to get the business up and running will have been done
- it may be easier to obtain finance as the business will have a proven track record
- a market for the product or service will have already been demonstrated
- there may be established customers, a reliable income, a reputation to capitalise and build on and a useful network of contacts
- a business plan and marketing method should already be in place
- existing employees should have experience you can draw on
- many of the problems will have been discovered and solved already
- you often need to invest a large amount up front, and will also have to budget for professional fees for solicitors, surveyors, accountants etc
- you will probably also need several months' worth of working capital to assist with cashflow
- if the business has been neglected you may need to invest quite a bit more on top of the purchase price to give it the best chance of success
- you may need to honour or renegotiate any outstanding contracts the previous owner leaves in place
- you also need to consider why the current owner is selling up and how this might impact the business and your taking it over
- it's possible current staff may not be happy with a new boss, or the business might have been run badly and staff morale may be low
3. Deciding on the right type of business to buy
Ideally any business you buy needs to fit your own skills, lifestyle and aspirations. Before you start looking, think about what you can bring to a business and what you'd like to get back.
List what is important to you. Look at your motivations and what you ultimately want to achieve. It is useful to consider:
- your abilities - can you achieve what you want to achieve?
- your capital - how much money do you have to invest?
- your expectations in terms of earning - what level of profit do you need to be looking for to accommodate your needs?
- your commitment - are you prepared for all the hard work and money that you will need to put into the business to get it to succeed?
- your strengths - what kind of business opportunity will give you the chance to put your skills and experience to good use?
- the business sector you're interested in - learn as much as you can about your chosen industry so you can compare different businesses. It's important to take the time to talk to people already in similar businesses. The internet and your local library will also be good sources of information
- location - don't restrict your search to your local area. Some businesses can be easily relocated
4. Where to look for a business to buy
Many national and local newspapers carry adverts for businesses and business premises for sale.
Depending on what sector you're interested in, you could look in trade journals.
You could put in your own advertisement, saying what you are looking for. You can get contact details for most newspapers, magazines and trade journals from press directories available at your local library.
Some magazines - many of them with their own websites - specialise in buying and selling, like Exchange and Mart, Loot and Daltons Business. These sources tend to be specific to certain kinds of businesses.
Business brokers, transfer agents and corporate financiers all maintain lists of businesses for sale.
Prepare a CV and info sheet about yourself and what you are looking for, your skillset and your ability to fund. Once prepared, circulate this to agents so that they can assist in matching a business with your requirements. This also shows the agent and their client that you are efficient, organised and serious.
On the internet you will find several listings websites where you can search for businesses or place 'business wants' adverts - sometimes for free. You can search for businesses for sale on websites such as Daltons Business and Businesses for Sale.
Other websites offer databases of business transfer agents and business brokers. These act in a similar way to estate agents - they are experts in valuing, marketing and selling businesses. They can help you find the right business and can also put you in touch with possible sources of finance.
When looking for a transfer agent ensure they are members of a trade organisation like the International Business Brokers Association (IBBA) or Institute of Commercial and Business Agents (ICBA). Members of such organisations are subject to a code of conduct and membership demonstrates that they possess the necessary professional skills, knowledge and experience.
If the business you want isn't available, do some research and don't be afraid to make an approach to a business owner. However, an unsolicited approach may take the vendor off guard. You should also be respectful of the vendor's need to safeguard confidentiality. A business broker, transfer agent or corporate financier will be able to help you find a business that may not be obviously for sale.
Finally, don't forget word of mouth. Ask around among trade contacts, business associates, and at exhibitions and conferences.
5. How to value a business
Valuing a business can be one of the most worrying parts of buying an existing business.
Your accountant may be able to help you value the business, but a business transfer agent, business broker or corporate financier will be best qualified to provide valuation advice.
A healthy business
To get a general idea of how healthy the business is, look at:
- the history of the business
- its current performance - sales, turnover, profit
- future projections or a business plan
- its financial situation - cashflow, debts, expenses, assets
- why the business is being sold
- any outstanding or major litigation the business is involved in
- any regulatory changes which might have an impact on the business
As part of your investigations, talk to the vendor and, if possible, the business' existing customers and suppliers. The vendor must be comfortable with you doing this and you must be sensitive to their position. Customer and suppliers may be able to give you information that affects your valuation, as well as information about market conditions affecting the business. Such research can also be done on the internet or at your local reference library.
For example, if the vendor is being forced to sell due to decreasing profits, your valuation might be lower.
The most difficult part is valuing the intangible assets. These are usually difficult to measure and could include:
- the company's reputation
- the relationship with suppliers
- the value of goodwill
- the value of licences
- patents or intellectual property
You should consider how the value of these assets could be affected if you decide to buy the business.
The list below details other factors that will affect the value:
- benchmarking - what other businesses in the sector have sold for
- who else in the sector is for sale or on the market
- the economic climate - will any new government legislation have an impact on the business
Once you have considered all these factors you can then decide how much you want to offer, or whether you want to buy it at all.
If you do decide to make an offer, and agree a price with the seller, a period of time is allowed for you to verify that all of the information you have been told is accurate. This is known as due diligence.
6. Make sure a business is worth buying: due diligence
Having done your research, you should verify the information you have been given about your prospective new business. Once an offer has been made and accepted a period of time is allowed for you to access its books and records. This is known as due diligence. It should give you a realistic picture of how the business is performing now, and how it is likely to perform in the future. It should also highlight any issues or problems which might need warranting or guaranteeing.
There are traditionally 3 types of due diligence you should do. You might need different advisers for each:
- legal due diligence - as part of a sales and purchase contract, the lawyers can check that the business has legal title to sell, ownership of all the assets and that regulatory and litigation issues are fully addressed
- financial due diligence - checking 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
When to begin due diligence
Don't start due diligence until you have agreed a price and terms with the seller. They may agree to take the business off the market during your investigation. This is known as an exclusivity period - and the seller will often ask for a down payment to secure it.
The investigation period is negotiable - but most small businesses need at least 3 to 4 weeks.
Where to get help
Ideally you should get accountants and solicitors to help you identify risk areas but, if it is registered with Companies House, you can also obtain copies of the company accounts, the annual return and the other key documents filed by your target business using the Companies House WebCHeck service. The documents can be downloaded from the Companies House website, some at a small fee, helping you assess the value of the business and its assets.
Due diligence is about much more than the finances of a business. You need to come out of this period knowing exactly what you are getting into, what needs to be fixed, what it will cost to fix, and if you are the right person to take on this business.
Key areas to cover are:
- employment terms and conditions
- outstanding litigation
- major contracts and orders
- IT systems and other technology
- environmental issues
- commercial management including customer service, research and development, and marketing
Dig as deeply as you can and use whatever documents are available. For instance, if you're looking at employee records, you could check out:
- payroll records
- staff files
- copies of pension and profit-sharing plans, plus financial statements, if relevant
- employment contracts
- the staff manual
- union contracts, if relevant
You may also need information from external sources such as the landlord, tax office or bank.
7. Step-by-step: how to buy a business
An organised approach will help you find and acquire the right business.
Get professional advice
Professional help is invaluable as you go through the negotiation, valuation and purchase process.
Research the sector you're interested in, including the best time to buy, and shortlist 2 or 3 businesses.
Initial viewing and valuation
Be discreet - the owner may not want staff to know they are selling, but be thorough and record key findings.
Lenders generally require:
- details of the business/sales particulars
- accounts for the last 3 years
- financial projections - if no accounts are available
- details of your personal assets and liabilities
There are several possible sources of finance you could consider
Make a formal offer
If you make your initial offer by phone, follow this up in writing. Head your letter subject to contract and include this phrase in all written communication.
Before completing the sale, it may be worth trying to negotiate an overlap period so you have time to become familiar with the business before taking over.
You and your solicitor need to verify the information you have based your offer on.
If you're buying premises, you may want to arrange an independent survey and valuation, even if a lender is also carrying out their own survey and valuation at your expense.
Even after you reach an agreement on the price and terms of sale, the deal could still fall through. You have to meet certain conditions of sale to complete, including:
- verification of financial statements
- transfer of leases
- transfer of contracts/licences
- transfer of finance
- transfer of existing or new VAT registration
8. Looking after existing employees
There are regulations that govern what happens to employees when someone new takes over a business.
These apply to all employees when a business is transferred as a going concern, meaning employees automatically start working for the new owner under the same terms and conditions.
Employment tribunal awards
When you buy an existing business, you might decide you need to employ fewer staff. But be careful about making any changes, as an employee might take a case to an employment tribunal for unfair dismissal or unfair selection for redundancy. It's best to consult a solicitor before making any such changes.
Inform and consult employees
If you do want to discuss reducing employee numbers or reorganising staff, it's a good idea to do this once you have completed the due diligence period, but before you take over the business. As the new employer you should inform and consult all employees - including employee representatives - who may be affected.
As their new employer, you do not have to take over rights and obligations relating to employees' occupational pension schemes put in place by the previous employer. However, if you don't provide comparable pensions arrangements, you could theoretically face a claim for unfair dismissal.