This article was first posted on the 22nd of January 2017.
Is this the year you’ll buy the business you’ve always dreamed of owning? If you’re ready to take control of your own future, our 10 steps to buying an existing business are just what you need.
The decision to buy a new business isn’t one to be taken lightly, yet for many it’s a way to pursue a longed for dream. By purchasing an established business with, a readymade customer base, employees, suppliers and premises, you hit the ground running.
So where do you start? Here’s the 10 steps you need to work through.
1. Know what you want
It is surprising how many people like the dream of owning a business, but haven’t narrowed it down any further. It is imperative that you do your research.
The more specific you can be at this point, the more likely you are to find something which suits you. Be specific on;
- size of the business
- how many staff you are willing to manage
- whether you need a management team to be in place
- if you want to be hands on and involved in the day to day
- if your preference is for investment with a strategic role
With this research you have a blueprint to apply to the businesses you find. It is unlikely that you will match every criteria, but you will immediately know which ones miss the mark by a big margin.
2. Create a benchmarking process
When we assist clients in formal acquisition searches we use our Value Builder survey to create a benchmark ability.
So consider that you’ve worked through your ideal business criteria but your background means you could be attracted to multiple sectors. How can you compare the suitability of a business in hospitality to one in manufacturing?
Creating a benchmark facility that assesses where each business fits within their market, as well as how it operates is the key.
With our Value Builder survey, the end result is a score. What is measures is that business’s position in its market, the good practices which underpin it, as well as profitability. Comparing scores between a hospitality business and a manufacturing one then becomes possible. A benchmark.
3. Credibility and professionalism
Buying a business can be a long drawn-out process so it’s important to be credible and professional at all times. Never assume that, as a buyer, you’re in the driving seat, but do present yourself professionally.
- Always respond quickly, to calls and emails. If you can’t reply fully, send a holding message of acknowledgement.
- Make requests for additional information clearly and courteously.
- Do not loose your temper, in person or by email. This causes nothing but friction and rarely benefits a cause.
You will be meeting the current business owners and possibly some key staff. You will have to work with them and alongside them if your purchase is successful. You need to be on good working terms.
4. Research each business
This is a tricky balancing act which is hugely influenced by the business you are targeting.
As a potential buyer, you need to know as much about the business as is necessary for you to make an offer to buy. As the vendor, the business owner wants to protect their competitive advantage. Consequently, they will be reluctant to share some information with you. This is in your best interest too.
If you are the successful buyer for a business, you don’t want to find out that the full customer order book and all customer contact information has been shared with other enquirers. That jeopardises the position of the business in the market and leaves customers open to being poached.
So you need to get as much information as possible to make your decision to buy or not, but be respectful when a line is drawn. Once an acceptable offer is agreed you will get full access in due diligence (item 9).
5. Make your offer
We see many one line offers which simply state something like
“I offer £200,000 for the business XYZ” and it’s not good enough.
Businesses are complex things; your offer needs detail. Below is not an exhaustive list, but the most common items that should be included in your offer.
- Sole trader, partnership or limited company. Sales can be for the goodwill and assets of a business, or in the case of a limited company, for the shares of that company. Tax is different on each and you should consider if either affects the business’s relationship with its customers.
- Business premises. Are these owned or leased? Do you intend to purchase the premises if they are owned? If they are leased, will you accept a lease assignment or is your offer dependent on negotiating new terms with the landlord?
- Fixtures and fittings. Would you like furniture, fixtures and fittings to be included in the sale? A business needs the equipment necessary to generate turnover, but craftsmen tools are often personally owned. Be clear on what you expect to be included with the business. There are less obvious items to check on like trademarks and website domain names.
- Stock. How much stock is held by the business? What is its value, is it all saleable? Is it included in the price or do you pay additionally for it at completion? Do you need to limit the value that you can pay?
- Employees. Does TUPE apply? This requires expert advice or you could end up in an unfair dismissal hearing.
- Key Staff. Who are the key members of staff and how do you plan to retain them? You might have to incentivise them to remain and can build this into the terms of your offer.
- Contracts. Check the contracts are transferrable on the sale of the business. Some are not and would leave you without a secure customer base. Perhaps a key customer is due to renew their contract. You may want to include this renewal (and the vendors assistance in securing it) into your offer terms.
- Handover period. A vendor can hand you the keys and walk away, or you can ask for a period of dual working to ensure a smooth handover. If you want an extended period of handover and involvement, you will also need to provide details of their renumeration. You can’t expect them to work for free. Are there any key activities you particularly want handed over (e.g. major trade show).
- Timing. This can be critical for some seasonal businesses. Retailers and hospitality make the bulk of their profit over the Christmas period, so you might look to complete before that. Gyms see income spikes in the New Year. Soft play centres quieten in the summer months. When would you want to complete on the purchase of your business. Don’t forget to avoid your own holiday commitments too.
- Non-compete. The last thing you want is to buy a business from someone who then sets up again in direct competition to you. You can reasonably request to exclude them from the market in your geographical area and for a set period of time.
You will be expected to put forward your best offer. Don’t take the tactics for buying distressed businesses and apply them to secure, profitable businesses. You loose any credibility you had.
6. Acceptance or decline
If your offer is put together well and detailed, a vendor has much more opportunity to accept or decline specific aspects of it. Rather than getting a flat refusal, you may get to the one sticking point which is easily resolved.
Don’t let a £300,000 deal collapse on the disagreement of who keeps a £5,000 car. Look at the bigger picture.
7. Heads of Terms document
The final accepted offer should then be summarised into a Heads of Terms document (HOTs). This is signed off by both buyer and vendor so there is no confusion on what has been agreed.
The HOTs will be used by your solicitor to draw up the final contract of sale and purchase. A well drafted HOTs will minimise the background work a solicitor needs to do and shorten the expected completion time.
8. Professional advisors
If there is a business broker working in the process, their duty is to their client, but they will be at the centre of all negotiations. Use them to question, clarify and resolve non-legal issues which come up. They have the ear of all parties on all sides.
If you’ve not already found them, you need a good commercial solicitor. You need someone experienced in business sales to ensure you have the right protections. It if comes to light in a year’s time that tax wasn’t paid under the previous ownership, you need to have protections in place so that HMRC don’t come after you.
You may need specialist advice for HR or industry specific regulations too.
You will need an accountant or at least a competent finance director for the next step of due diligence.
9. Due Diligence
Due diligence is your opportunity to go through the business with a metaphorical fine toothed comb. You still can’t stomp all over the business, it has to operate normally, so you may have to spread this over a number of days.
This is your opportunity to confirm that everything you have been told about this business is accurate. That there are no skeletons in the closet with regards to HMRC. To examine the stock and confirm that it’s saleable.
Practically, you will be able to request sight of financial records, confirm customer contracts, trace past orders through to delivery.You will also have full access to HR records for salary verification.
You can’t check every single bit of activity, but you can trace and check a random selection. Use your time wisely and keep communication open, not accusatory. Remember, this could be the first time you meet the wider staff and you don’t want to alarm them about the sale. You want to reassure them.
The more complicated the business, the more complicated the deal structure may be. From the time HOTs are agreed to completion can often take around 12 weeks. Some will move more quickly, others take far longer.
The acting broker or solicitors will have estimated a suitable timeframe. To keep to this, turn paperwork around as efficiently as possible.
If you sit on a request for information and delay it, the next piece of the process cannot start. A couple of days here and there can add up to months of delay for the completion if everyone behaves the same way.
Then there are the banks. If you’ve not been in business before, you may have lending to draw down, business bank accounts to open, company names to register, VAT to register. These all take time and a lot of ID checks.
Never underestimate how long these things can sometimes take.
Picking up the keys
Those were our 10 steps to buying an existing business. The exciting part is picking up the keys at completion, and the hard work begins.
Our biggest piece of advice from this point is not to change anything too quickly. Having a new business owner is often quite enough for staff and customers to accept.
Start making big changes fast with the finesse of a bull in a china shop and you run the risk of alienating both. That puts the business you’ve invested in at risk.
Now that you do own your dream business you want it to be successful and grow. You also want to be able to sell it in years to come for a great value. Download our ebook for 8 common-sense steps to improving business value.