Have you ever considered buying a business? Whether you are an experienced entrepreneur or just starting out, acquiring a ‘ready-made’ business offers a number of advantages.
For established businesses, an acquisition can help them break into new markets or acquire machinery, skilled workers or innovations or simply remove competition that can help their operations grow more quickly.
Meanwhile, new entrepreneurs can acquire a ‘turn-key’ business that is already generating cashflow or alternatively requires relatively minimal work to start generating profits compared to starting from ground zero.
However, the process of buying a business is not without risks, especially at the deal-making stage. Here, BJ Chong, a Director with Palmers Solicitors, has put together some quick tips to help.
Research, research, research
Before even approaching another business do as much background research as you can.
Find out exactly who owns it, look into its previous accounts, what it owns, the order book, what it needs to operate, debts and obligations, premise liabilities and even speak to its suppliers – don’t be afraid to ask questions.
Once you make that initial contact with a seller you will need to obtain as much information as you can from them.
Check to see whether they have recent management accounts you can check and find out if the company has any debts or obligations that alter the value of the deal.
Some owners may be selling for retirement, others may think that a new owner could help the business grow, while some may have concerns about the business and are seeking a quick exit. Learning more about the reasons for a sale could alert you to issues within the business and also enable you to price the deal accordingly.
Be honest
You should also be honest with yourself and ask whether the deal is suited to your needs and whether any issues can be feasibly and quickly fixed.
It sounds a bit clichéd but try to make decisions with your head, not your heart. If you are unsure, why not ask a trusted friend or professional adviser for their independent opinion?
Draw up heads of terms
If you are serious about purchasing a business create a heads of terms agreement. This should set out the points that have been agreed in principle between parties during the course of negotiations.
Heads of terms provide serious intent and have moral force, but do not commonly legally bind the parties to conclude the deal on those terms or even at all.
Despite this, they are a great first step in setting out the intended purpose of the transaction and the aims of each party.
Make sure you have access to sufficient finance
Once the basic terms of the sale have been agreed you will need to ensure that you have sufficient funding to cover the costs of the transaction.
Few business owners fund the whole of a sale out of their existing personal or business funds.
Instead, many seek out a loan or investment that allows them to access the funds they need.
Of course, this requires lenders and/or investors to sign off the investment in the new business, which can be challenging and take time. Expect to be asked for a business plan.
Entrepreneurs should factor this process into the timeline for their transaction and ensure they have the funds they need to complete it.
Depending upon the circumstances, you may even be able to negotiate deferment of part of the sales price or vendor financing.
Don’t be afraid to walk away at any stage
Possibly one of the most important tips is to walk away if the deal isn’t right. Transactions have been known to fail at the last second, perhaps after due diligence uncovers an unexpected issue.
Until a legally binding contract is entered into, a deal can always be cancelled or, in some cases, renegotiated.
Ask for help
If you haven’t bought a business before, or even if you are an experienced entrepreneur, it pays to seek out help from a professional.
For advice and support, please get in touch with our expert team.