While many entrepreneurs prefer to start afresh, there are tonnes of benefits to taking over existing companies. Read on to find out why and how to buy a business.
Why buy a business?
Buying a business almost always carries less risk than starting from scratch. Think about it:
- The framework, systems and equipment are already in place. You’ll save weeks of research and trial and error.
- Patents and copyrights can be very valuable.
- Existing staff are skilled and familiar with all parts of the business.
- It’s easier to secure loans and investment with an existing company, because you already have data to work from. Banks are naturally risk averse and would rather work with proven businesses than absolute beginners.
- An established business will come with an existing customer base, and that means turning a profit more quickly than starting from scratch.
What are the risks involved with buying a business?
Of course, there are downsides to buying an existing company. While certainty is helpful, it comes with a price and can be inflexible.
- The cost of buying is usually more than setting up – you’re paying for not just the business and its assets, but any accountants, lawyers and valuation specialists.
- Many businesses are sold because they are failing, or the market is facing challenges.
- Existing employees have a right to remain employed – and they might not be keen on change.
- Tried-and-proven systems and equipment can still be outdated or inefficient.
- A bad reputation is hard to shake.
What type of business should I buy?
The most important thing to look for is an industry that you know and understand. Ideally, you will already have experience in this field or an adjacent one – for example, if your background is in publishing, you might look to buy a small printing press or book-binding studio.
It’s also important to think about the future of the business and how you will keep it up to date. Traditional taxi firms are struggling in the wake of Uber, but others have started specialising in Tesla and electric car rides. Customers are increasingly looking for services that offer an experience or unparalleled convenience; how will you stand out from the crowd?
How to buy a business – in 10 steps
1. Think about working with a broker
A business transfer agent, known as an agent or a broker, is the commercial equivalent of an estate agent. They are specialists in buying and selling businesses. While their work comes with a price – typically 5-10% of the sale – a good agent will be able to sort the wheat from the chaff and make sure that you don’t overlook any part of the process. They might also be able to negotiate a better price than you could alone.
However, there is one big drawback to working with a broker – they are usually hired to sell businesses, so they are working for sellers first and foremost. You will need to think about whether your broker is trustworthy or whether they are pushing you towards businesses that they have a vested interest in.
2. Put together your acquisition team
You’ll need to work closely with a banker, lawyer and accountant – these advisors are essential, especially when it comes to due diligence. They will help you to determine whether a business is being advertised honestly, its fair market price, any black marks (for example bad credit or Trading Standards complaints) and financial health.
3. Cast out your net
There are many places where you can find businesses for sale – websites like Businesses for Sale, Daltons, Rightbiz, Bizdaq and even Gumtree are full of opportunities. If you have your eye on something specific, it’s worth approaching the owner directly – even if they aren’t planning to sell, a decent offer can be persuasive.
If you live in a small community or are interested in a very specific industry, try targeting specialist publications. Local magazines and interest sites are typically very affordable.
4. Narrow it down
You’ll quickly find a plethora of options – so now you need to dig a little deeper. Find out whether the business and owner have a good reputation, and think about whether you can change that.
5. Look over the information memorandum
The information memorandum is the company’s user manual. Traditionally a document of 15-40 pages, but commonly a powerpoint presentation, it outlines everything from premises and equipment to market projections and key business partners. You should sit down with your acquisitions team to review this and highlight points to verify or ask for further information on.
6. Make an offer
Once you’re satisfied with the business, you should make an offer – both the amount you’re willing to pay, and any conditions such as shares, equipment, and the owner being available to consult while you take the reins.
It’s normal to negotiate for a while before coming to an agreement. Use the weapons in your arsenal: perhaps you have lots of cash and don’t need a bank loan, in which case the seller might settle for a lower price upfront.
8. Sign the heads of terms
The heads of terms are a document that isn’t legally binding, but indicates that both parties are interested and provides the guidelines for the deal. Between seller and buyer you’ll agree on the terms. This may take a few drafts before you are both satisfied.
9. Do your due diligence
This is the most important part, and when your acquisition team will really come into their own. Over 60 to 90 days you will go through the business’s paperwork, legal standing, reputation, premises and operations with a fine-toothed comb. Your team will help you to work out whether the seller has been wholly truthful or glossed over any details.
Don’t forget to actually visit any premises and see how they are run, whether customers are happy and how staff behave.
Once you finalise the deal, you’ll find it much more difficult to take the seller up on issues you run into – so be proactive.
10. Finalise the deal
Once you and your team are completely confident, sign the binding contract of sale. Congratulations, and good luck!