Buying a Business: The Ultimate Guide

Buying a business is a huge decision and requires a significant investment of time and money. Substantial funds are often required to purchase a business so it’s important that you conduct thorough research into the business to ensure it’s worth the time and money. While purchasing an existing business can feel like an easy route to success, this will only occur if you get everything right. You’ll need to keep its current staff and customers happy and make sure that you have the business’s values at heart.

At Legal Clarity we will support you in making the right decision on whether to purchase or walk away from a deal. This guide will explore everything you need to know.

The pros of buying an existing business

• It’s an established brand - Established brands have often already built an existing public reputation and goodwill. This means they’ve already done a lot of the hard work in creating a loyal customer base and if you’re interested in purchasing them then it’s likely that their reputation already attracted you to the business. This helps you avoid the painful process of having to create a strong brand reputation from scratch. However, it does mean that hard work needs to be put in to maintain or enhance the brand.
• A loyal customer base - Loyal customer bases allow new owners to benefit from the existing cash flow and profits. This provides stability for new business owners. 
• A strong workforce - Staff are often the key to a successful business. When transitioning you need to make sure the process is managed appropriately and carefully to ensure staff aren’t unsettled and concerned. This will help you retain staff and maintain a happy and successful business.
• Trusted suppliers - There is no reason why any pre-existing strong and trusted supplier relationships should change once a business has been acquired, meaning you don’t necessarily need to spend time searching for new ones.

The cons of buying an existing business

• The cost of purchasing a business - Buying a business can be expensive, especially if it ticks all the right boxes. You’ll need to expect to pay premium prices for high performing businesses. As a result, you’ll need to make the decision on whether you want to pay a high price for a well established business or pay less for a business that needs work.
• Historic issues - Businesses aren’t always perfect, meaning you may need to tackle historic issues. This could include things like existing debts, ongoing legal battles or high staff turnover.
• Businesses can be scared of change - When companies feel as though what they’re doing is working, they’re likely to not want to change their approach. A businesses’ suppliers, customers and staff are also likely to be apprehensive about any changes to the business, especially ownership.

Questions to ask when buying a business

When looking at buying an existing business, it’s important that you ask a range of questions to ensure you know what you’re getting into. You can ask questions like:

Why are you selling the business?

Asking this question will ensure that you fully understand why the business is being sold, if there are any issues and if this is a business you want to purchase. This will either give you the confidence to buy the business or if you decide not to go ahead with the purchase there are plenty more businesses you can choose from.

Is this a financially viable business?

This is a great way to see if you’re dealing with a genuine seller or not. If you find the seller is in a rush to sell without a clear reason or vague in their responses, you may want to think twice about acquiring from them. 

Who are your existing customers and are they loyal to the current ownership?

When you understand the business’s current customer base, it allows you to understand whether your skills, knowledge and expertise match the needs of the business. This gives you the confidence needed to drive the business forward to success.  

How did you decide on your current asking price?

Asking how the seller landed on their asking price will help you understand whether they’re asking for a fair price or not. Of course, all businesses want to get the highest price possible, causing them to inflate prices even if the business isn’t worth it.

Can I have access to accounts and any other important records connected to the business?

When considering buying a business it’s important to have access to crucial paperwork. This should include:

• Management accounts and all relevant historic and current financial information..
• Tax records.
• Supplier arrangements. 
• Customer lists.
• Sales forecasts and business projections.

Without this information you can’t make an accurate assessment of the business and make sure everything is above board and viable. If the business won’t or can’t provide access to this it’s wise to walk away from any sort of transaction unless you are paying a bargain price which may be worth the risk. 

Does the target business have any employees and are they aware of the sale?

This is important to know and staff can help you learn an abundance of important information about the business. Ideally you’ll want to be purchasing a business where the employees have been informed of the sales process along the way. This should help the transition period run smoothly. Under TUPE (see below) there is an obligation on the Seller to inform the staff of the proposed sale.

How long is left on your lease?

You’ll want to understand how long the business has the right to occupy its current location and when the lease ends so that you can be prepared to sign a new lease or to start looking for a new location. You are very likely to require the landlord's consent to occupy and take over the lease. This may add considerable costs to the initial purchase of the business. 

Do I have to keep staff when buying a business?

When a business is bought (as opposed to a company share purchase) it’s usually expected that any existing staff will remain with the business and the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) regulations apply.  Under TUPE, all the employees (and their employment rights) of the business transfer from the current employer (seller) to the new employer (buyer). 

If you don’t want to keep any staff you will need to agree a settlement with any relevant employee, otherwise any dismissal could be unfair. This can leave you vulnerable to legal action for breaching employment law. To avoid this you should seek legal advice throughout the entire process. 

What is due diligence?

Due diligence typically occurs once the intent to buy and the preliminary price has been confirmed. Exclusivity and confidentiality (NDA) agreements are often then signed and the seller will grant you access to its confidential business information and financial records.

Due diligence should form the backbone of your business evaluation and research and will help you measure the worth of the business. It’ll also help you understand whether you need to walk away from the business transaction at an early stage without wasting too much time and cash. 

During this process, you’ll want the seller to provide documentation quickly so that you can:

• Look over its accounts and financials. 
• Review all key commercial contracts.
• Understand the arrangements with customers.
• Determine where the ‘value’ is in the business.
• Get an accurate measure of stock and/or work in progress.
• Understand the condition and value of its assets. 

Once due diligence is completed you should have a reasonably good understanding of how well the business is doing and how it’s likely to perform in the future.  

What to look for when buying a business?

While there are many benefits to buying a business, it’s important that you take notice of any signs of issues. You should:

• Keep an eye on the debtor book and ensure that you understand who is responsible for any outstanding invoices and when they will be paid. 
• Look out for sellers who are refusing to disclose or aren’t readily open about finances or other crucial aspects of their business.
• Look out for customer numbers or turnover falling off in recent months. It’s also a good idea to understand who those customers are. 
• Keep an eye on online customer reviews as this will give you an insight into how the business is performing. 
• Understand staff satisfaction levels. Unhappy staff can massively affect the value of a business.
• Check the business's credit rating, as it’ll help you understand the value of the deal and how well current management or ownership is running the business. 

How to finance purchasing a business 

A lot of the time people don’t have the money to buy a business with cash. Luckily there are a number of ways you can finance a purchase like this:

Bank loans and Asset finance

Obtaining a loan from the bank or a funder is one of the most common ways a business is bought. Having a strong credit score is crucial to getting a reasonable interest rate, even in today’s market. You’ll want to discuss your options with reputable funders and you will need a business plan, the ability to offer security and detailed financials to help you secure the loan. 

Seller financing 

Seller financing involves the seller of the business receiving some or all of the purchase price for their business on a deferred basis. This can sometimes be in conjunction with the buyer also obtaining a bank loan. The buyer will pay the balance of the purchase price in a series of instalments over time. This is a more flexible finance option and allows both parties to negotiate how the repayment works and whether any interest applies. However, it is best to discuss this with an expert to ensure you’re getting the best deal.

Venture capital 

Venture capital firms typically invest in high-growth businesses, however it does mean a percentage of your company’s shareholding will need to be sacrificed to them. This can be an ideal option for companies with fast growth and high forecasts. 

Private equity 

Private equity firms often take a significant percentage of the equity in your company and require a degree of control as to how  your business is run. They invest in companies to help them grow and then sell them after their value has increased. 

If you’re looking for support in buying a business or want any further advice, get in touch with Legal Clarity to see how we can help you purchase a business.