Considerations When Buying a Business

From deciding whether to buy assets or shares to negotiating a letter of intent, there are numerous different things to consider when buying a business. Buying a business can be an exciting time for anyone, and can be a great financial move for those who want to hit the ground running with their business.

Purchasing a business that is already in operation will mean that the buyer will already have an immediate cash flow and a reputation, which can make it easier to attract certain investors. However, making this type of purchase can come with its negatives. Therefore, it’s vital to take great care and consideration when deciding whether to buy a particular business, and the nature of this purchase deal.

Below is a list of some of the main things buyers should consider before going ahead with the purchase of a business:

  • Why the business is being sold.
  • Price of the business.
  • The letter of intent.
  • Deciding on assets or shares.

By exploring these areas of the business purchase in thorough detail, buyers could help to ensure that they make a purchase that’s best for both themselves and the business.

Why the Business is Being Sold

One of the main factors to consider when considering a business for sale is the health of the business in question, and further why it’s being sold in the first place. By asking the owner why they are choosing to sell, buyers can better understand both the intentions of the seller and thereby the dynamics of the business.

Finding out the exact reasons of why the business is being sold and the sellers intentions with this transaction can also help to prevent buyers from making poor purchasing decisions. It can help buyers to better gauge the value of the business, and thereby their future success in running it.

Price of the Business

Following on from why the business is being sold in the first place, another important consideration to take into account is the price of the business, and whether this corresponds with its actual value. Finding out the reasons why the business is being sold is one of the many ways in which buyers can investigate the true value of it. Other ways that this price can be checked include the following:

  • View the business to get a feel for its ethos an productivity.
  • Analyse all physical assets; property, stock etc.
  • Analyse all intangible assets of the business; reputation, intellectual property etc.
  • Get the business valued independently.

The Letter of Intent

A vital aspect of the purchasing process that the buyer will have to take into account is the letter of intent. This is a document that will sketch out the fundamentals of a deal with the seller, and is typically subject to contract. This letter of intent will typically be drawn up after a while of negotiations, and is a way of making sure that everyone involved is in agreement.

It’s therefore important to read through the letter of intent thoroughly before signing it off, checking that all the details negotiated are included, thereby helping to ensure that everyone is on the same page. Once this has been signed, it might be good to also consider a closing checklist, helping in the organisation and documentation of the sale.

Deciding on Assets or Shares

There are different ways in which people can buy a business, two of the main options being to purchase either assets or shares. Both of these two options have their pros and cons, and it’s vital for a buyer to weight these up in order to make an informed choice on the way they want to buy a business.

Buying assets – buying the assets of a business means that the buyer will not be purchasing the company, but rather the assets that it holds. This can mean that the buyer won’t be liable for debts or other types of claims made against the business, however they will not have “ownership” over the business’s existing customers.

Buying shares –buyers who purchase the shares of a business will by law be an owner of the company for their particular share (whether this is a percentage of the overall company or the whole thing). One downside to this type of purchase is that it means the buyer will be liable for claims made against the business, including any debts.