Buying a Business: A Comprehensive Guide
Buying an existing business may be preferable to starting your own from scratch for a number of reasons. These include the business having an existing:
- Track record
- Team of employees
However, there are many considerations and potential pitfalls with buying an existing business. The most important way to avoid these is to obtain professional advice from solicitors and accountants.
It is crucial in ensuring the process goes smoothly. Here at Eric Robinson Solicitors, we are experienced commercial law experts who will enable you to make sense of the complexities surrounding business law and practice.
Businesses can be put up for sale for a variety of reasons. Some are innocuous like the owner retiring, some are more ominous like lawsuits, operational and financial struggles.
Therefore it is imperative to be cautious, conduct thorough due diligence (more on this later), and consider how much money will realistically be needed to inject life back into a neglected business in order to avoid an unexpectedly costly investment.
Finding The Right Business
It is also important that buyers choose the business that is right for their own experience, skills, budget and commitment.
There are many ways of searching for businesses to buy including online sites as well as trade journals or newspapers with business listings.
Factors to look out for include:
- The physical state of any premises
- The financial state of the business
In narrowing down your options, a thorough understanding of different industries and current markets is useful so it is sensible to obtain advice, market appraisals and analysis of business trends from specialists to guide you towards a shortlist.
Once you have a shortlist, make sure to conduct thorough research into each option.
This will typically involve:
- Market research: ensure the business has a carefully thought out position in the market, with demand for its products and services, a target audience and already loyal customer base.
- Competition: ensure the business is capable of demanding enough attention amongst any competitions and that competitors aren’t significantly further ahead in innovation or popularity.
- Viewing the business: make sure to be discreet to avoid arousing suspicion in case the current owner has not made it known that they are selling, but visiting the business will allow you to see the state of the premises and get a sense of the business functionality and atmosphere.
- Speak to the current owner: ask about the existing business’s successes, failures, challenges and future opportunities, whilst they will be keen to present a rosy picture, you may still be able to gain some useful insight.
- Visiting ‘in-cognito’: it can be helpful to use the business as a customer, and ask friends and family to do the same to have an authentic experience.
Obtaining a business valuation
The seller will usually have had their business valued but it can be helpful to obtain your own that you can trust and thoroughly understand. A valuation will be made up of:
- The historical performance of the business
- Its current performance including sales, turnover and profit
- The business plan including any future projections
- Its current financial situation including cash flow, debts, expenses and assets
- Why the business is being sold
- Any outstanding legal issues
To guarantee a trustworthy interpretation, speak to us Eric Robinson Solicitors. We have a long track record of working closely with accountants to establish the financial position of the business you are looking to buy as well as advising on all stages of the business buying process.
For smaller business purchases, you may be financing the purchase entirely yourself or with money from family, though be cautious of the tax you will pay on any gifts of this kind.
More frequently, buyers will finance their purchase through debt financing. In order to obtain a loan, you will need to compile a lot of information for the lender, typically: details about the business; accounts for the last 3 years at least; financial projections.
After a formal offer has been given and accepted, you will be given the opportunity to look into the businesses’ books and records in-depth covering legal, financial and commercial issues.
An experienced solicitor can help you identify risk areas and will look into issues which arise from due diligence. They can obtain necessary records from and act as intermediaries between external sources like landlords and banks; can raise detailed questions with the seller’s solicitor; and deal with the property changing hands by organising inspections or searches and transferring the lease.
The involvement of a solicitor is also crucial for drawing up a contract that is most importantly, correct. Large amounts of money are being transferred, so small mistakes can be detrimental.
Secondly, a solicitor has the expertise to ensure your contract is watertight and looks out for your best interests even after the contract has been passed back and forth between yours and the seller’s solicitors with amendments being made.
Inclusions such as restraint of trade clauses can protect your investment. A restraint of trade clause will prevent the seller setting up a business in competition with yours.
Completion is when the sale and purchase go through and the business transfers from the seller to the buyer. Final sign-off will be required on multiple pieces of paperwork including: sale of business contract; deed of assignment of goodwill; licence to assign; authorised guarantee agreement; any novations; and transfer deeds for legal transfer of freehold or leasehold property. This paperwork will then be exchanged.
Your solicitor will manage this process and ensure it all goes smoothly.
How Eric Robinson Solicitors can help
If you are thinking about buying, selling, or merging a business, speak to Eric Robinson about how we can help. Our specialist commercial law team can advise you on the processes involved and help you avoid the pitfalls of what is often a complex process.