Recently, I have been helping a young entrepreneur to buy a new business and thought to share my top ten things to consider when buying a business.
1. Funding sources – Have you got the funds to invest in buying the business? If you do not have the funds, could you afford to borrow? Would buying the business with the borrowed funds make a sound investment and enable you to repay both the loan and interest?
2. Motivation and purpose – Be clear on why you want to buy a business. What is your motivation for buying an existing business? Be clear about what you are getting for your money. Is it a share of an existing business or are you buying just the business assets? Is it value for money? Is there an alternative means of getting the same? E.g. Could you build the same business from scratch at perhaps a lower cost? If you didn’t buy that business, what could you do with the money?
3. Ownership structure of new business – What legal structure is your new business going to take? It could be a company, or you could run it as a sole trader or in be partnership. Choose a structure that is most appropriate for the type of business given the risks involved, level of turnover and profitability.
4. Your experience in the industry – What experience have you got in that industry? If you do not have much experience, could you afford to hire an industry expert to help you run and manage the business or are you willing to learn and acquire new knowledge in the new industry? To run a successful business, you require specialist industry knowledge in order to be more effective and make a profit.
5. Time scales and availability – Buying a business can be a lengthy process, requiring detailed negotiations and reference to multiple documents. There will be legal contracts exchanged so the finer details and the terms and conditions attached to the deal must be well understood before making a commitment to buy. It is important that you allow enough time for the negotiation process and to deal with any unexpected discoveries.
6. Commercial Due Diligence – This is perhaps the most important aspect before buying a business. You should undertake thorough due diligence to satisfy yourself that the business is viable. Commercial due diligence is a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential. You should review the financial accounts including the Profit and Loss account and Balance Sheet for at least the last 3 years. You should verify the assets and liabilities of the business and understand what will be passed on to you and what will not. You should review contacts with all stakeholders e.g. customers, suppliers and employees and understand your obligations to them when you buy the business. The seller should provide you with a buyer’s pack containing information about how the business is valued and what is included and what is not included. The seller is under no obligation to disclose matters they do not consider material to the sale, but legally they cannot give false or misleading information, so be sure to ask as many questions as possible. It is your responsibility to satisfy yourself as to the value of the business before entering into any contracts, so do take the time and if necessary seek professional advice to make sure this is done right.
7. Risk Register – After the commercial due diligence exercise, you should prepare a risk register showing areas of uncertainty in the business. Against each risk, there should be an action to mitigate the risk and reduce the likelihood and impact of each risk. E.g. What if you lost 25% of the customers? How will you ensure that the customers continue to visit your business?
8. Business plan – this is where you plan the future of your new business and decide how you will develop and improve it. What products and services are you offering? Are you targeting the right customers? Who are your competitors? What are your strengths, weaknesses, opportunities and threats? What will your strategy for growth be? What will your internal management structures look like? What is the projected financial plan? Will you be profitable? What is your expected rate of return? It is important to have a business plan that you can implement once you have bought the business. Furthermore, this exercise helps to highlight any areas you should be asking for additional information from the sellers before it is too late.
9. Tax implications of buying a business – you should plan for tax when buying a new business. The scope of taxes will differ depending on each business e.g. If buying shares and the value is over £1,000, stamp duty will be payable; if buying a property, then Stamp Duty Land Tax will be payable. If buying a company, the purchaser would also acquire the inherent tax liabilities both known and unknown. It is therefore important to carry out a tax due diligence review to cover amongst other things, corporation tax, PAYE and National Insurance and VAT. Your circumstances will determine which taxes are applicable.
10. Professional advice – it is important to seek professional advice when buying a business. A good accountant will make the necessary checks and inquiries so that you are armed with full and complete information when making your decision to buy. A good solicitor will draft the contracts and obtain warranties and indemnities from the seller to reduce your risk exposure. A surveyor may be needed if you are buying a building or signing certain types of leases. Again, your circumstances will determine what professional help you need.
That’s it! You have my top ten things to consider when buying a business. If you found like this article, let me know by giving it a thumb’s up, commenting below and sharing with others. If you think I have missed something or you want to add to the list, leave your comment below.