Buying a business can be an excellent investment, allowing you to rapidly grow your own business by acquisition or generate income by purchasing an already existing organisation and bypassing the years it usually takes to build from the ground up.
Despite these benefits, buying a business is not something that should be taken lightly; requiring significant investment and involving many potential pitfalls without adequate research, planning, and expert support.
To help you understand what is involved when buying a business, our guide takes you through the process step by step from initial research to completion.
Before buying a business, it is critical that you spend time thinking about and researching the types of businesses that you want to own.
This is arguably the most important stage as it will generally have the greatest impact on the business you end up buying and can be the difference between success and failure.
Factors that you should consider when researching opportunities include:
- Reason for purchase – Are you looking to grow your existing business by acquisition, embark on a new business venture or buy into an already successful business to generate income?
- Sector – Is the sector stagnant or growing, how competitive is the sector, is the sector new or established and do you have any experience in the sector?
- Management Requirements – Are you prepared to take on a full time management role or would you prefer a more hands-off role with an experienced management team already in place?
- Price – What is your budget, how will you fund the purchase of the business and how long will it take you to raise funds?
- Staff – Are you prepared to become an employer of a large team or would you prefer to buy into a business with just a few members of staff?
- Location – How far would you consider commuting or relocating in order to effectively run the business?
- Exit Strategy – How will you exit the business and when, will you hold it for several years or look to flip it for a quicker turnaround? Being clear on your exit strategy from day 1 will help ensure you choose the right business for you.
Considering all these factors will help you to develop a requirement list of the type of business you are looking to purchase, this will enable you to quickly screen future opportunities to see if they are right for you.
Once you have a list of requirements, you can start searching for opportunities that meet these criteria.
Technology has made it easier than ever to search for available businesses for sale, but online platforms often have 1000s of listings making it difficult to find the right ones.
In order to find the perfect business, it’s best to use several channels. The best places to look for businesses for sale include:
- Business Brokers – A business broker can help to find high quality opportunities including those that are not advertised anywhere else.
- Dedicated Broker Websites – Most business brokers will advertise a list of businesses they currently have on their books.
- Business Networking Groups – Local business people are often well connected and can inform others of your requirements.
- Social Media – Social media is becoming a viable platform for finding opportunities, just be mindful that many are low quality.
- Online Marketplaces – Dedicated online business brokering marketplaces allow you to search through 1000s of opportunities.
To find out more about the benefits and drawbacks of these platforms, take a look at our blog which explains the best places to find businesses for sale.
Once you’ve found an opportunity that appears to meet your requirements, arranging a proper viewing is advisable so you can take a closer look at how the business operates.
Undertaking a formal valuation of the business is an essential step in buying a business which ensures the price the buyer is asking reflects the actual value of the business.
A professional valuation which can be carried out by a business broker takes into consideration factors such as asset valuation, staff, location, earnings multiples, growth and much more to calculate an accurate figure.
Having an independent valuation can allow you to negotiate on price and a seller is much more likely to take your offer seriously when you are equipped with this.
Businesses often sell for six-figure sums and few people have this available within their bank account or existing cash flow. Therefore, most will rely on some form of external funding.
Once you have identified a business opportunity and had it independently valued, researching your finance options to raise funds when required ensures there are no long delays during the purchase.
Traditional bank loans are the most common way to raise funds to buy a business, offering lower interest rates and predictable monthly payments but coming with rigid lending criteria.
Some entrepreneurs may explore alternative financing options such as bridging loans, peer-to-peer lending and vendor finance which generally provide faster approval at a higher interest rate.
To find out more about the methods of funding your business purchase, take a look at our blog post on how to raise funds to buy a business.
Negotiations & Deal Structuring
When it comes to getting the best deal on a business, the area most entrepreneurs fail to properly capitalise on is negotiations.
The negotiation table is your opportunity to set your terms out and get a better deal before making a formal offer, but it can be overwhelming without a professional such as a business broker by your side.
As well as the price of the business, other points of discussion during negotiations can include the payment structure, whether the existing owner will stay on board for a handover period, what will happen to existing staff, how long the property is leased for and much more.
If you are going it alone, read our blog post on getting a great deal when buying a business which includes several negotiation tactics.
Post-negotiation, deal structuring is an essential step when buying a business which is essentially a binding agreement between the two parties, ensuring the deal goes ahead on terms that are agreed on mutually.
Structuring the deal properly ensures that both parties are in agreement which reduces the chances of the deal falling through. The most common types of deal structure include:
- Asset Sale – The buyer acquires some or all of the assets.
- Share sale – The business is transferred in its entirety to the new owner.
- Merger – Two businesses become one new entity.
To find out more about deal structuring, take a look at our guide to deal structuring when buying or selling a business.
Completion is perhaps the most complex and important stage of buying a business and so professional help is highly recommended.
Once a deal has been agreed in principle, a business broker will put together a Heads of Terms Document (HOTs) which both parties will sign off, this is not legally binding but is the beginning of the formal legal process.
This document is then sent to a lawyer who will create a Share Purchase Agreement (SPA), this document is legally binding and is where due diligence will be carried out to allow the buyer to ask more questions and ensure they are 100% happy with the business and the terms of the deal. At this stage, there may be some re-negotiations.
Once the SPA is signed off by both parties, a completion date will be agreed upon. On this date, the buyer will transfer payment to their solicitor who will then pass this on to the seller’s solicitor who will do the same with the shares. At this point, the new owner legally owns the business.
Following this, there is generally a handover period where the new owner is given access to bank accounts, passwords, door codes, marketing materials and other essential information needed to manage the business.
Whilst some may feel this is a stage they can do alone, it is highly risky without the help of a professional such as a business broker and a lawyer who help to ensure any risk involved is mitigated.
Expert Guidance from Bristol Business Brokers
Buying a business can be an excellent way to grow your own business or generate wealth, but it can be costly without proper planning and understanding of the process involved.
A business broker can help you every step of the way in buying a business, from researching initial opportunities that meet your ambitions and valuing the business right through to negotiating your terms and completing the purchase.