Buy an existing business

1 Overview
2 Advantages and disadvantages of buying a business
3 Decide on the business to buy
4 How to value a business
5 Due diligence
6 Buying a business
7 Looking after existing employees

1. Overview

Buying a company that's already established may be quicker and easier than starting from scratch.

However, you will need to put time and effort into finding the business that's right for you. Also, the costs involved in buying an existing business can be substantial and should not be underestimated.

This guide takes you through the steps of buying an existing business, including how to assess and value a business and your obligations to any existing staff.

2. Advantages and disadvantages of buying a business

There can be many good reasons why buying an existing business could make good business sense. Remember though, that you will be taking on the legacy of the previous business owner. You need to be aware of every aspect of the business you're about to buy.

 Advantages

  • Some of the groundwork to get the business up and running will have been done
  • It may be easier to obtain finance as the business will have a proven track record
  • A market for the product or service will have already been demonstrated
  • There may be established customers, a reliable income and a reputation to capitalise and build on. There will be a useful network of contacts
  • A business plan and marketing method should already be in place
  • Existing employees should have experience you can draw on
  • Many of the problems will have been discovered and solved alread

Disadvantages

  • You often need to invest a large amount up front, and will also have to budget for professional fees for solicitors, surveyors, accountants etc
  • You will probably also need several months' worth of working capital to assist with cashflow
  • For a neglected business you may need to invest more on top of the purchase price to give it the best chance of success
  • You may need to honour or renegotiate any outstanding contracts the previous owner leaves
  • You also need to consider why the current owner is selling up. Think about how this might impact the business and your taking it over
  • Current staff may not be happy with a new boss, or the business might have been run badly and staff morale may be low

3. Decide on the business to buy

Any business you buy needs to fit your own skills, lifestyle and aspirations. Before you start looking, think about what you can bring to a business and what you'd like to get back. List what is important to you. Look at your motivations and what you ultimately want to achieve.

It is useful to consider:

  • Your abilities - can you achieve what you want to achieve?
  • Your capital - how much money do you have to invest?
  • Your expectations in terms of earning - what level of profit do you need to be looking for to accommodate your needs?
  • Your commitment - are you prepared for all the hard work and money that you will need to put into the business to get it to succeed?
  • Your strengths - what kind of business opportunity will give you the chance to put your skills and experience to good use?
  • The business sector you're interested in - learn as much as you can about your chosen industry so you can compare different businesses. It's important to take the time to talk to people already in similar businesses. The internet and your local library will also be good sources of information
  • Location - don't restrict your search to your local area. Some businesses can be easily relocated

4. How to value a business

There are several valuation methods you can use to value a business. Your accountant may be able to help. However, a business transfer agent, business broker or corporate financier will be best qualified to provide valuation advice.

Look at:

  • the history of the business
  • its current performance - sales, turnover, profit
  • future projections or a business plan
  • its financial situation - cashflow, debts, expenses, assets
  • why the business is being sold
  • any outstanding or major litigation the business is involved in
  • any regulatory changes which might have an impact on the business

Talk to the vendor and, if possible, the business' existing customers and suppliers. The vendor must be comfortable with you doing this and you must be sensitive to their position. Customer and suppliers may be able to give you information that affects your valuation, as well as information about market conditions affecting the business.

For example, if the vendor is being forced to sell due to decreasing profits, your valuation might be lower.

Intangible assets

Valuing the intangible assets is usually difficult and could include:

  • the company's reputation
  • the relationship with suppliers
  • the value of goodwill
  • the value of licences
  • patents or intellectual property

 Other factors that will affect the value:

  • stock
  • location
  • assets
  • products
  • debtors
  • creditors
  • suppliers
  • employees
  • premises
  • competition
  • benchmarking - what other businesses in the sector have sold for
  • who else in the sector is for sale or on the market
  • the economic climate - will any new government legislation have an impact on the business

5. Due diligence

Once an offer has been made and accepted a period of time is allowed for you to access the business' books and records. This is known as due diligence.

It should give you a realistic picture of how the business is performing now, and how it is likely to perform in the future. It should also highlight any issues or problems which might need warranting or guaranteeing.

There are traditionally three types of due diligence. You might need different advisors for each:

  • legal due diligence - as part of a sales and purchase contract, the lawyers can check that the business has legal title to sell, ownership of all the assets and that regulatory and litigation issues are fully addressed
  • financial due diligence - checking the numbers and making sure there are no black holes or hidden financial issues
  • commercial due diligence - finding out the business' place in the marketplace, checking competitors and the regulatory environment

Don't start due diligence until you have agreed a price and terms with the seller. They may agree to take the business off the market during your investigation. This is known as an exclusivity period and the seller will often ask for a down payment to secure it.

The investigation period is negotiable - but most small businesses need at least three to four weeks.

Where to get help

Ideally you should get accountants and solicitors to help you identify risk areas. If it is registered with Companies House, you can also obtain copies of the company accounts, the annual return and the other key documents.

Due diligence is about more than the finances of a business. You need to know exactly what you are getting into, what needs to be fixed, what it will cost to fix, and if you are the right person to take on this business.

 Key areas to cover are:

  • employment terms and conditions
  • outstanding litigation
  • major contracts and orders
  • IT systems and other technology
  • environmental issues
  • commercial management including customer service, research and development, and marketing

You may also need information from external sources such as the landlord, tax office or bank.

Read our guide Buying business premises

6. Buying a business

An organised approach will help you find and acquire the right business.

Get professional advice

Professional help is invaluable as you go through the negotiation, valuation and purchase process.

Research

Research the sector you're interested in, including the best time to buy, and shortlist two or three businesses.

Initial viewing and valuation

Be discreet - the owner may not want staff to know they are selling, but be thorough and record key findings.

Arrange finance

Lenders generally require:

  • details of the business/sales particulars
  • accounts for the last three years
  • financial projections - if no accounts are available
  • details of your personal assets and liabilities

Make a formal offer

If you make your initial offer by phone, follow this up in writing. Head your letter 'subject to contract' and include this phrase in all written communication.

Negotiation

Before completing the sale, it may be worth trying to negotiate an overlap period so you have time to become familiar with the business before taking over.

You and your solicitor need to verify the information you have based your offer on.

If you're buying premises, you may want to arrange an independent survey and valuation, even if a lender is also carrying out their own survey and valuation at your expense.

Completion

Even after you reach an agreement on the price and terms of sale, the deal could still fall through. You have to meet certain conditions of sale to complete, including:

  • verification of financial statements
  • transfer of leases
  • transfer of contracts/licences
  • transfer of finance
  • transfer of existing or new VAT registration

7. Looking after existing employees

There are regulations that govern what happens to employees when someone new takes over a business.

These apply to all employees when a business is transferred as a going concern. This means employees automatically start working for the new owner under the same terms and conditions.

Employment tribunal awards

When you buy an existing business, you might decide you need to employ fewer staff. But be careful about making any changes, as an employee might take a case to an employment tribunal for unfair dismissal or unfair selection for redundancy. It's best to consult a solicitor before making any such changes.

Inform and consult employees

You may want to discuss reducing employee numbers or reorganising staff. However, it's a good idea to wait until you have completed the due diligence period, but before you take over the business. As the new employer you should inform and consult all employees - including employee representatives - who may be affected.

Pensions

As their new employer, you do not have to take over rights and obligations relating to employees' occupational pension schemes put in place by the previous employer. However, if you don't provide comparable pensions arrangements, you could theoretically face a claim for unfair dismissal.

Read our guide Buying business premises.

Contact your local Business Gateway office.

Your local office will be able to answer your questions on this or any other business subject. 

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