Before making an offer there are some important things to investigate. Initially you may only have access to the business' sales memorandum. Sellers will usually ask you to sign a confidentiality undertaking or non-disclosure agreement before you can access sensitive or detailed information. They will usually also ask for details about you (via a CV) and evidence of your ability to fund a purchase.
After an offer is made and accepted, due diligence is carried out. This is where the buyer looks at the business in detail, including its finances, its employees, outstanding litigation, major contracts, IT and other technology.
It may sound complex, but professionals such as accountants, solicitors, chartered surveyors, business transfer agents, business brokers and corporate financiers can help. You can also do some of the research yourself.
2. Assess a company's assets
Once you have found a business you are interested in, the first thing you should do is find out exactly what is for sale, or decide which parts of the business you are interested in buying. You may agree to purchase the whole business or just its assets, ie its equipment, stock and order book. If you only wish to buy the assets, you will need to determine whether the seller will sell them with or without compensation due to loss of tax benefits, for example from a share sale.
Whether you want to make an offer for the whole business or just its assets, there are several important things to check, including whether:
- the business has full legal ownership of all key assets such as plant, equipment and property. Ask to see documentation that proves all equipment and stock you are purchasing has been fully paid for and is not purely leased by the business - for example, check computer software licenses
- it has warranties and guarantees for any major pieces of equipment included in the deal such as computers, photocopiers, vehicles, etc
- any intellectual property is protected and registered. The Intellectual Property Office or a patent lawyer can help you check
- what supplier and key customer contracts involve. Make sure you understand what these legally require from the business
You will then need to decide how much these assets are worth, although to value the business as a whole you will also need to look at documentation such as its profit and loss account.
The above list is not exhaustive. There may be other things you need to check depending on the business you are considering buying. It is sensible to take advice from professionals with experience of valuing businesses and their assets, such as accountants, lawyers, chartered surveyors, business transfer agents, business brokers and corporate financiers.
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. Read information about the Companies House WebCHeck service on the GOV.UK website.
3. Legal and financial checks
When considering buying a business, ask the vendors for any information you wish to see. They should be happy to provide this, although you may have to sign a confidentiality agreement. The seller will want to protect certain aspects of the business, so some information may be off limits until close to completion - despite your signing of a confidentiality agreement.
The legal and financial things to check and where to get help with these include:
Information about the business
Check the vendor has the legal right to sell the business as there may be more than one decision-maker involved. If the business is a company registered at Companies House you will be able to get the necessary information from GOV.UK.
The original business plan
Ask to see the original business plan. This will outline issues such as start-up finance which may, for example notify you of any outstanding loans.
Ask to see the business' accounts, including the detailed management profit and loss account and balance sheet. These and other documents may be available from Companies House on the GOV.UK website if the business is legally formed as a company.
Ask for documentation regarding outstanding loans and debts. Get your accountant to look at any financial details.
Ownership of assets
Check the business has legal ownership of its key assets and what the terms are. Ask your solicitor to check the property deeds for premises owned by the business, for example, or ask for the rental agreement and speak to the landlord if you want to run the business from its current premises.
Check with the Registry Trust for any court cases or late-payment actions being taken against or by the business that could affect its finances or reputation.
If the company is registered at Companies House, you can 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 GOV.UK website, some at a small fee, helping you assess the value of the business and its assets. Read information on the Companies House WebCHeck service on the GOV.UK website.
You should also ask for information and documentation regarding the business' current employees, IT and other technology and issues relating to the environment.
It is sensible to take advice from professionals with experience of valuing businesses and their assets, such as accountants, lawyers, chartered surveyors, business transfer agents, business brokers and corporate financiers.
4. Employment, IT and environment checks
One of the key considerations when thinking about buying a business is its existing employees. Normally a new business owner has to continue to employ the existing staff on their current terms and conditions under rules known as the Transfer of Undertakings (Protection of Employment) Regulations (TUPE).
Your main concern when assessing a business in the first instance is how much the current terms and conditions are going to cost on an annual or monthly basis. To do this you should:
- ask to see copies of employee contracts. However, you need to remember that these may differ for different levels of employee
- look at the monthly wage bill, National Insurance contributions, pension contributions and any other benefits. This may include company cars, health insurance, gym membership, travel loans etc
Remember any documents you see are highly confidential. Many of the business' employees may not know the business is up for sale. Once you have bought a business you need to comply with TUPE and other employment laws.
Other considerations include:
IT and other technology
A business' IT system is often vital to its smooth running. You will therefore want to consider how old any systems and equipment are and whether it is being sold as part of the deal. You will need to ask questions such as:
- what is the value of the IT equipment and other technology?
- are they under guarantee?
- what is included? Does it all belong to the business?
- are there ongoing IT maintenance and service agreements/contracts essential to the business?
- what contingency plans does the business have in place for data loss? Does it have policies and procedures in place? Who has access to this data?
Another consideration will be the business' effect on the environment. Depending on the business sector it may have to pay environmental taxes and have other obligations in this area. If you think the business may be affected, speak to Natural Resources Wales.
You can contact the National Resources Wales Helpline on 03000 65 3000.
5. Operating within the law
Much of the information you'll want to know about a business you are hoping to buy will be confidential, while some will be publicly available.
Information such as employee and customer records, for example, will be protected under the Data Protection Act, while other details will just be commercially sensitive.
If a vendor is keen to sell then they should co-operate fully and give you all of the information you need to arrive at an offer. This may include looking at bank loan details, property rental contracts and intellectual property licences, for example.
It is likely you will be asked to sign a confidentiality agreement (also known as a non-disclosure agreement). This protects the existing business owner and stops you from using any information you have learned about the way the business is run should negotiations breakdown.
Get a solicitor or lawyer to read anything you are asked to sign or check carefully for any clauses that could have a negative impact on any other businesses you own or are considering starting. You may already be looking at developing a product similar to one offered by the business, for example, and the confidentiality agreement may prevent you doing this if the deal falls through.
Once a business has been purchased it is important to respect the Data Protection Act for any information transferred to you under the sale, such as employee records and client information. It is wise to seek expert legal advice or speak to the Information Commissioner's Office to ensure you operate within the law.
6. Where to get help and advice
There are many different advisers that can help when buying a business, but if it is a registered company you can do some checks yourself because many of the documents you require, such as profit and loss accounts, will be available from Companies House via their online WebCHeck service. It is possible to obtain copies of a company's accounts, annual return and other key documents. The documents can be downloaded, some at a small fee.
Other experts worth contacting:
- business transfer agents, business brokers or corporate financiers can help you through the process of due diligence from start to finish for a fixed fee or percentage of the sale price
- a solicitor or lawyer will be able to help by looking at any legal contracts, including property deeds, for example
- an accountant will be able to help you by looking at the business' finances, such as profit and loss accounts
- an intellectual property agent will be able to search for any intellectual property licences the business holds. The Intellectual Property Office can also carry out searches on existing patents
- a chartered surveyor will be able to help you assess the value of the business' property
It is essential that the advisers you choose are experienced in business transfers and valuations.
Word of mouth is the best way to find a good adviser. Always ask any potential adviser about the last 5 deals they have worked on in the relevant sector and ask for references from previous clients.
You should also check that your advisers hold any necessary qualifications or certification and are members of relevant associations or trade bodies.