Have you ever considered buying a business? Whether you are an experienced entrepreneur or just starting out, acquiring a ‘ready-made’ business offers a number of advantages.
For established businesses, buying a second company can help them break into new markets or acquire machinery, skilled workers or innovations that can help their operations grow.
Meanwhile, new entrepreneurs can acquire a ‘turn-key’ business that requires minimal work to start generating profits.
However, the process of buying a business is not without risks, especially at the deal-making stage, so we have put together some quick tips to help.
Research, research, research
Before even approaching another business do as much background research as you can.
Find out exactly who owns it, look into its previous accounts, speak to its suppliers – don’t be afraid to ask questions.
Once you make that initial contact with a seller you will need to obtain as much information as you can from them.
Check to see whether they have recent management accounts you can check and find out if the company has any debts or obligations that could create risk.
Some owners may be selling for retirement, others may think that a new owner could help the business grow, while some may have concerns about the business and are seeking a quick exit. Learning more about the reasons for a sale could alert you to issues within the business.
Be open, be honest
Try and be as transparent as possible with a seller as it encourages them to be honest and open with you as a buyer. Trust is important when securing a deal, as both parties face risk during a transaction.
You should also be honest with yourself and ask whether the deal is suited to your needs and whether any issues can be feasibly fixed.
It sounds a bit clichéd but try to make decisions with your head, not your heart. If you are unsure, why not ask a trusted friend or adviser for their independent opinion?
Not every business is going to be suited to your goals. There are a number of factors that can be difficult to identify at first, but once you open up a dialogue with a seller, you should check:
- Sales revenue or cash flow
- Its ability to be relocated
- Debts and obligations
- Ownership of property and assets
- Rights to patents and intellectual property
- The existing management team.
Draw up heads of terms
If you are serious about purchasing a business create a heads of terms agreement. This should set out the points that have been agreed in principle between parties during the course of negotiations.
Heads of terms provide serious intent and have moral force, but do not legally bind the parties to conclude the deal on those terms or even at all.
Despite this, they are a great first step in setting out the intended purpose of the transaction and the aims of each party.
Make sure you have access to sufficient finance
Once the basic terms of the sale have been agreed you will need to ensure that you have sufficient funding to cover the costs of the transaction.
Few business owners fund the whole of a sale out of their existing personal or business funds.
Instead, many seek out a loan or investment that allows them to access the funds they need.
Of course, this requires lenders and/or investors to sign off the investment in the new business, which can be challenging and take time.
Most lenders and investors will not only want to know about your own financial position but they will also want to know more about the health of the business you are buying so that their money isn’t at risk.
Entrepreneurs should factor this process into the timeline for their transaction and ensure they have the funds they need to complete it.
Don’t be afraid to walk away at any stage
Possibly one of the most important tips is to walk away if the deal isn’t right. Transactions have been known to fail at the last second, perhaps after due diligence uncovers an unexpected issue.
By this stage, both the buyer and seller may be emotionally and financially committed to the deal but that doesn’t mean that it has to go ahead.
Until a final contract is signed and funds are transferred a deal can always be cancelled or, in some cases, renegotiated.
Signing up to a deal that leaves you, your existing business and finances at risk is rarely worth it.
Ask for help
If you haven’t bought a business before, or even if you are an experienced entrepreneur, it pays to seek out help from a professional.
The team at Macalvins can help you to structure a better deal, acquire finance and identify potential risks. For help and advice, please contact us.