How do I buy a business?

Starting up in business doesn’t necessarily mean you need to, well, start up. Purchasing an established enterprise can cut out some of the challenges of building one from the ground up.

By Giulia Rhodes on 09/05/2019

Blog Image | How to buy a business | Headline 1

Buying an existing business can offer plenty of benefits over starting from scratch. With an established customer base, reputation (hopefully good), operating systems and market presence, the early leg work should be taken care of. In addition, your purchase could include additional assets such as stock, equipment, staff and premises. You also get to hit the ground running, while retaining room to bring in changes.

Businesses which have been struggling can also present good opportunities if you can identify ways to turn things around. But, acquire with care – a successful purchase still requires plenty of preparation and hard work.

What type of business should I buy?

It’s a good idea to follow a passion or identify a field you’re interested in – from making cakes to installing technology.

Think about what you will actually be buying. Do you need a business with premises (a beauty salon or bar, for instance) or are you buying a brand (a mobile service, such as business training)? If property is involved make sure you are well informed about leases, repairs and any restrictions. Also, think hard about its location, foot fall, local demographics and existing clientele. In face-to-face services your client base, and the availability of new customers, is key.

A franchise – buying the right to use an established brand name through an initial fee and ongoing revenue percentage – can be a way into a successful business with limited funds.

What do I need to know when buying a business?

The answer, basically, is everything. Find out as much as you can about the sector and the enterprise. Talk to as many people as possible.

You need to know how much the business will cost up-front and when operational, what return will you see on your investment and why it is for sale. The current owners may be off to sail the world having made their fortune, or they may be cutting their losses in the face of difficulties. If the picture is less than rosy, you need a solid strategy. Be rational and pragmatic. This might be your dream, but it has to stack up financially.

So, while your passion might be cooking, running a restaurant is as much about suppliers and staff as sautéing and seasoning. Examine accounts, turnover, profits and existing contracts – which you are likely to have to honour or renegotiate – with care. Look carefully at the client base. How big is it? How much repeat business is there? Can you grow it?

What about employees?

An experienced team can be invaluable. They’ll know the business, market and clients. Find out about their contracts and whether they intend to stay. Morale may be low in the run up to a sale, so diplomacy, reassurance and enthusiasm will be important. Make sure you are up to speed on your obligations under Transfer of Undertakings Protection of Employment regulations (TUPE) as well.

How do I value the business?

The seller will have a price, but you need to work out yours. Do your own sums and benchmark against other similar sales.

Your valuation should take account of history, current performance including turnover and profit, debts, expenses, assets and cashflow. Consider any forthcoming regulation which might affect business.

In addition to the overall health of the business, the value will reflect the tangible and intangible assets. The former include premises, equipment and stock (reflecting their condition). For the latter consider intellectual property, business relationships, reputation.

Past performance is useful, but it isn’t a guarantee of future trade. So look at what’s in the order book right now and consider competition and market conditions. If there is a similar business along the street, is there enough business to go round?

An accountant or business advisor can help you crunch the numbers, using established formulae.

photo-1506079334139-58105ce48c5b

What happens once my offer is accepted?

If a sale is agreed, you have a period – usually around one month – in which to do your due diligence: accessing all the company books and records in detail. If there are issues you may need to discuss appropriate warranties and guarantees with the vendor.

Look carefully at employment conditions and rights, litigation, major orders, contracts and technology. You might need to collate information from the tax office, landlord and bank.

What advice should I seek out?

At this stage you will need a lawyer to do the legal due diligence and to draw up and check contracts. An accountant can check the finances forensically. If there are problems they may be well hidden, so look carefully.

If the sector is new to you, speak again to those who know it. Think about what expertise you will need to bring in, being realistic about your skills. Do you know how to do the technical roles? Look online for useful, free advice sources (such as https://www.gov.uk/business-support-helpline).

How can I fund my purchase?

You may have capital or savings to invest, but it's likely you will need financial assistance as well, either for the purchase or for cash flow top-ups as you get going.

There are more options available now than ever, with online services from specialist small business lenders sitting alongside traditional bank loans. All need careful preparation, research and thorough understanding of repayment terms and liabilities.

What mistakes should I look out for?

If you have done your homework you should be well prepared. Make sure you have accounted for any professional fees and unexpected expenses, though. Businesses need several months of cash flow to run day-to-day and to weather any storms.

Consider real life too. Have you accounted for your own living expenses while things get off the ground? And don’t forget to take a day off now and again!