Buying a business in the UK is an exciting time for anyone, but what are the things you need to consider before you take that leap of faith? In this article, we’re going to explore this very subject and share useful information specific to the process of buying a business.
You’ve taken time to think about why you want to buy a business. You’ve researched some potential businesses. The question is what’s next?
1. Viewings and Valuations
It goes without saying that the major consideration in whether you choose to purchase a business is the price.
Of course, you may have been given a valuation from the seller, but in order to be adequately protected, you should get it valued independently.
Before you dive into spreadsheets, though, take the time to make contact with the seller and request an initial viewing. Just as you would view a house, try to get a sense of the business from an impartial standpoint. You certainly shouldn’t be led only by these first impressions, but a gut feeling is always valuable.
Be aware as well that many business owners do not want the news of their sale becoming public knowledge externally, or internally. Therefore, always be discreet and be prepared to be asked to sign a confidentiality agreement (though only do so after seeking legal advice).
If your viewing goes well, it’s time to put together your valuation. This is obviously a critical point, so while you can do it on your own, it’s always wise to get some help, usually from a specialist accountant that works well with your legal adviser, who may be able to make a recommendation.
When it comes to the valuation, there are a number of things you’ll want to consider, which include:
- Individual Circumstances – Why is this business on the market? Does the owner have any personal or professional reasons why they may need to sell quickly and could you benefit
- Entry Costs – How much would it cost to start a similar business and develop it to a similar level of the one you’re considering buying? Are there any industry-wide rules of thumb that you can use for calculating entry costs?
- Tangible Assets – What assets belong to the business that are perceptible by touch? Examples could include machinery, tools, property and stock.
- Intangible Assets – What assets does the business own that are a little harder to define? Examples could include goodwill, reputation or intellectual property.
As you can see, valuing a business can quickly become a complex task, which is why it’s always recommended to seek advice when doing so.
2. Deciding a Deal Structure
When buying a business, one of the most important decisions to make is exactly how you buy it.
At this point, you have two options: buy the assets or buy the shares.
Both of these have their own advantages and disadvantages so make sure you take the time to research them fully and speak to an expert. For now though, below is a quick overview of each.
In an asset sale, it is not a company itself that is up for sale, but it’s assets. This has the benefit of meaning you’re not liable for any claims against the company (such as debts in relation to assets which were carved out of the sale).
However, on the other side of the coin, you’ll not be able to “purchase” the company’s existing customers, as they are contracted to the company.
Buying a company’s shares means you’ll step directly into the shoes of its old owner without any major interruption. This has the benefit of allowing the company to maintain its customer contracts but also means you’ll take on any liabilities.
Because of the potential risk of buying a company through its shares, you’ll find that the sales process can take much longer because of the detail you need to go to when conducting due diligence (don’t worry, we’ll come to that soon).
3. Dealing in Broad Brush Strokes
If you like the look of a business and are happy with the price you’d be paying, it’s time to organise your thoughts on some paper with the seller.
What we’re talking about here is the putting together a Heads of Agreement document (aka Heads of Terms) or a Letter of Intent. These are generally non-binding documents (usually because they include the phrase “subject to contract”) that outline the main points of the deal.
By the time you come to set out a Heads of Agreement, it’s possible you will have gone through a large amount of negotiation with the seller. If so, then this is a good line to draw to make sure everyone is on the same page.
Once you’ve signed a Heads of Agreement, you might also consider putting together a closing checklist. This is useful for both parties because it lists every document, instrument or action that must be delivered in order to efficiently manage the project and complete the sale. This will be particularly useful when it comes to the next step, but remember to seek early advice from your team of advisers.
4. Performing Due Diligence
At this point, it’s definitely time to get some professional help (if you haven’t already). Due diligence is the process of investigating your target acquisition and finding anything that could put you or your business at risk.
This is especially important if you’re buying a company via its shares, as you’ll be taking on all the risks that come with it, from tax and solvency issues to regulatory and contractual litigation.
As such, you (together with your accountant and solicitor) will need to go through every document with a fine-tooth comb to make sure you don’t buy a business that is going to blow up in your face.
Buying a business can be a long drawn out process, so you don’t want to waste time and money by not considering the process as early as possible.
The main thing you need to consider, though, is who you’re going to ask to help you. Buying a business represents a huge investment that could come back to haunt you.
Therefore, just as you would hire a professional to check if a house was safe before you bought it, you need a team to look after your best interests when buying a business.
And what would you know, Glaisyers has just the team to help. Get in touch today to find out how we can make your next business purchase a successful one.