What to think about before buying a business
If you are considering buying a business, it is likely that you will have already made a number of important decisions, and one may have been deciding whether it's better to buy a business or start a new one.
Obvious advantages of buying a business as a going concern include the fact that you will be buying a business with a known and proven track record. It is likely that you will bring some new ideas on how to make the business even more successful than it is already; and you will almost certainly have discovered that most successful businesses that are purchased, continue to thrive for many years. However enthusiastic you might feel, there are some fundamental issues that you should consider before you finalise your purchase and here we will summarise some of the more important ones.
Do your research thoroughly
You will be investing your money, so it is very important that you thoroughly understand what it is you will be investing in. This includes the people, the accounts and the current business plan.
- Make sure that you meet as many of the staff as you can. Talk to them individually and find out what they feel about the business and its future. Are they happy and motivated? What problems have they experienced in the past and anticipate in the future.
- Go through the business plan thoroughly. Does it make sense? Is there a realistic plan for growth? Are there any skeletons in the cupboard? Check it through with your accountant or experts in similar business niches.
- Check the accounts and ensure that you understand how the business is performing and all the financial outputs and inputs. What are the debts and what is the relationship with suppliers and customers? Are there any potential cash flow issues?
Are you paying the right price for the business or is there any space for negotiation? These are some of the factors you will need to investigate thoroughly:
- Check how the business is valued. Is your investment structured or valued in ways that are relevant to the market? What is the potential market and what are the opportunities for growth? Carry out a detailed SWOT (strengths, weaknesses, opportunities and threats) to identify where the business is positioned in its sector.
- What will be your role in the business? Will you simply be an investor or will you have a position on the board? What do you expect will be the return on your investment?
Heads of Terms of Agreement
Once you have made the decision to go ahead, the first formal stage is agreeing the Heads of Terms or memoranda of understanding. This sets out what you have agreed in principal regarding your purchase and indicates that you intend to progress your purchase though it's not, at this stage, legally binding.
Essentially it will state:
- That the seller will not enter into negotiations with another party regarding the sale for a specified “exclusivity period”
- Who will bear the costs of proceeding with the potential sale
- The currently agreed price subject to due diligence and other factors
- The time to completion
It is essential that you complete due diligence before completing your purchase. This involves carefully checking all of the company’s records including the statutory financial statements; management accounts; analyses and budgets; contracts with employees; dealings with customers and suppliers and just about everything else that relates to the running of the business. The elements of due diligence include commercial due diligence and legal due diligence.
- Commercial due diligence includes: assessing the businesses market position along with how it related to the competition; the commercial risk posed by any reliance on key employees, key customers and key suppliers; the status of plant, equipment and property.
- Legal due diligence is necessary in order to establish amongst other issues: the title an ownership of the business assets; the legal status of the seller and whether all required insurances and licences are in place. It is also necessary that the business has complied with statutory and regulatory requirements.
There are many other issues to consider too. For instance you will need to find the most tax efficient way to structure the purchase; you will need to establish the implications of any shareholders agreements; and landlords agreements and leases.
Following due diligence you might wish to renegotiate the purchase price and mitigate any identified risks, for instance by putting in place certain warranties.
As you will have discovered, buying a business can be a complex process with many commercial and legal implications. Specialist help is available and it is imperative that you should make use of it; you will certainly need a good accountant and an experienced business solicitor.