If you’re interested in starting your own business, it can be less daunting to buy an existing operation with a proven track record than to set up yourself from scratch. However, the time and effort required to find, research and complete a business purchase is considerable and there can be many pit-falls along the way: you’d be foolish to embark on the process without the professional advice and guidance of an experienced business solicitor and accountant.
How to find a business to buy
Before you can even begin to look for a suitable business purchase there are many important decisions to be made. You need to give careful consideration to what kind of business will be best suited to your interests, skills, financial status/expectations and level of commitment – and, just as important, how the purchase will be funded. You’ll also need to research your chosen business sector and decide what legal structure will work best for you: franchise or existing business; limited company or partnership? Making the right decisions at this early stage could save you a lot of money and mean the difference between success and failure.
If time is precious, you may want to engage the services of a business transfer agent who (just as an estate agent finds properties to match a buyer’s criteria) will do the searching on your behalf. Otherwise, you’ll find details of businesses for sale in newspapers, trade journals and magazines and, of course, on the internet. On the other hand, if you have already identified a potentially suitable business but that business is not immediately for sale, you should use a professional advisor to make an anonymous initial approach on your behalf.
How to value a business
Once you’ve approached your potential business acquisition, you’ll need to negotiate an initial set of principal terms upon which the deal will be based. You should expect to sign a confidentiality agreement before any information is exchanged.
Thorough preparation for this process is vital: you need to attend negotiations with a list of the information you require and an understanding of the implications. An experienced company/commercial solicitor will help take the headache out of this process and ensure that nothing is missed. Key to the negotiations is the need to acquire sufficient information about the business against which to make a fair valuation including:
- past activities and track record
- current performance (sales, turnover and profits)
- financial situation, taking into account cashflow, stock, debts, expenses, employees, and assets (including intangible assets such as good will, reputation, intellectual property rights and relationships with suppliers)
- the competition
- current trends in the industry
- the reasons behind the sale
Inevitably the seller will have a different view as to the true value of the business and the value will always be subjective. However, remember that, in time, a good business will always justify the purchase price whereas a bad one may not ever allow you to recover financially.
What is due diligence?
Due diligence is an agreed period (usually 3-4 weeks for a small business) when you will be able to access the business’s books and records to verify that all of the information that you have been told so far is true and accurate. Often, the seller will agree to take the business off the market during this period (the exclusivity period) in return for an initial down payment.
A proper and effective due diligence procedure goes way beyond simply verifying the financial information. Your review must also include a thorough investigation of the company’s:
- employees property (particularly lease commitments)
- contracts and orders
- intellectual property rights (patents, trademarks, licences)
- systems and technology
- research and development
- legal and corporate issues (including any outstanding litigation).
In short, you want to complete the due diligence period knowing exactly what you are getting into. Potential deal breakers and other key issues should be raised immediately to maximise the time available to resolve such matters. In particular, you need to take legal advice about what happens to any existing employees as there are a raft of regulations that apply when a business is transferred as a going concern. The legislation is complex but, in brief, any changes to staff that you may wish to make after the purchase could result in you being summoned to an employment tribunal for unfair dismissal. It’s vital, therefore, that existing employees are informed and consulted during the due diligence process.
How to complete a business purchase
During the due diligence period your solicitor will draft a ‘sale and purchase agreement’ incorporating all the agreed terms of the sale. Subject to renegotiation as a result of the findings from due diligence, you and the seller will then exchange contracts with completion at a late date or agree to exchange and complete simultaneously. Completion will be subject to:
- transfer of finance
- transfer of contracts/licences
- transfer of any leases
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The sooner we become involved in the process of helping you to buy a business, the better understanding you will have of the associated risk and the more likely it is that your purchase will be successful.
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