The Complete Guide to Buying a Business17 Oct 2020
Buying a business can be a great way to bypass some of the years of hard work that go into building a venture. Yet, it's by no means plain sailing, and it's only likely to prove a shortcut to success if you get everything right. While buying an established business does require some time and effort, it also means you'll need to have access to substantial funds, so there are risks.
None of that is to say you shouldn't seriously consider buying a business. Buy right, and you're likely to purchase an existing, healthy customer base – which also means a proven product or service. Existing employees can be worth their weight in gold when you are buying an ongoing service, but it's essential to approach that process in the right way. If you follow the appropriate steps and consider the right questions to ask when buying a business, it can turn out to be a wise move.
At Accounts and Legal, we have a unique business model which allows us to offer accounting services and legal advice under one roof. This is particularly useful when going through the process of preparing to sell your company, or if you’re considering buying a business in the UK - both of which we are experienced in and passionate about.
In this guide, we're going to look at what you need to consider when purchasing an established company. If you’d like some friendly advice on buying or selling a business, or if you’d like a business valuation, get in touch with our team today.
Questions you should ask when buying a business
So, what are the questions you should ask when buying a business? And how do you determine you're not being misled? Buying a business is a considerable commitment to make. It's going to pay to draw up a list of what you need in order to be comfortable with any potential deal and then stick with that.
Why are you selling the business?
You wouldn't even consider buying a second-hand car without asking a version of this particular question – yet, many business buyers either skirt around or entirely fail to come out with it. The fact is, it's a reasonable question to ask, and you can tell a lot about the seller and the business when you do.
If anything, hearing a plausible, logical reason for the sale will set you up to have more confidence as you move forward. The worst case is that you hear terrible things or don't get a good feeling about the deal, and there are plenty more fish in the sea. People have all sorts of legitimate reasons for selling up. You're entitled to ask as many questions as you like when you're a potential buyer, so don't be shy about starting with this question.
Is this a financially viable business?
Again, this may seem like an obvious question to ask, but it's a great way to gauge how genuine a seller is. If there are problems, even the most brazen of vendors can get twitchy at this point. Watch out for vagueness or irritation, and if you smell a rat, further investigation is definitely required.
Who are the customers, and are they loyal to the current ownership?
A significant part of the value in any business is in its client base. You'll need to find out if that client base suits your experience, skills, and knowledge. Avoid taking on customers that are a complete change for you. Try and stick to what you know. This question is about worth, but it's also related to whether the business is a good match for you, and that's very important for the future and success.
You'll also want to be sure you're buying all of that client base. Changing ownership is one thing, but building up customers from scratch is quite another entirely. If some of the customers are going to move with the existing owner, that could be a deal-breaker. You'll need to ascertain precisely what the situation is before you can either establish a valuation or proceed with the deal.
How did you arrive at your current asking price?
This is another question that can seem slightly obvious when written down, but it's vitally important to ask. Sellers are often emotionally attached to their business, but that's pretty much irrelevant when placing an accurate and fair value on it.
If the business hasn’t been valued by a professional, get some facts about how they arrived at their valuation. Although it's not necessarily a deal-breaker if that got influenced by their attachment, you'll get a good idea about what you need to do in order to proceed realistically.
Can I access the accounts and other important records connected with the business?
Any business you intend to buy needs to have the appropriate paperwork available. Tax records, supplier documents, and invoices have to be present if you are ever going to be able to assess things accurately.
If they're not, it's time to walk away. Without records, you can't arrive at an assessment of either the worth or viability of a going concern. The correct documentation is also essential for making sure everything is legal and above board.
Does your business have any employees, and do they know about the potential sale?
Employees can be a mine of information, help, and comfort when you take on an existing business – or they can be a thorn in your side. If the company has employees, there are legal obligations to consider, but you'll also want to gauge if they're happy about the sale too.
Ideally, it's great to be looking at a business where the workers are kept informed about the sale and looked after suitably. That's an excellent place to take over, and infinitely better than the prospect of a disgruntled workforce – which can be a mammoth problem in itself to overcome.
Communicating with existing staff is probably the best, if not the only way, to keep them on your side and working for you. Ask the question and then act promptly and accordingly, or you could affect the value of the business significantly.
How long is left on your commercial lease?
If there's a lease involved, you have to find out how long it runs for, and factor in the costs if there is only a short term remaining. Those costs are likely to be considerable, so this is a vital part of doing any deal for an existing business. You'll also want to see a copy of the lease as part of the due diligence process.
What is due diligence when buying a business?
Due diligence usually happens once intent to buy has been confirmed, and you've agreed on a preliminary price. The seller should grant you full access to business and management accounts and records at this point.
Buying a business can sometimes be an emotional roller-coaster, but it's essential you remain willing to walk away at any point during the process. Due diligence should form the backbone of your evaluations concerning any business. The only way to really measure the worth of a company is by comparing its assets and liabilities in black and white terms.
Make sure that during due diligence, the seller provides information and documentation promptly. This isn't a time for unnecessary delays. Remember, this is a lot like buying that second-hand car, so you can expect the seller to have prepared everything beforehand, look out for any massaged figures or concealed issues.
As well as poring carefully over the accounts, you'll want to get a measure of stock, the condition and value of any building involved, and pay attention to equipment and tools too. You'll also want to come out of due diligence with a reasonably sound idea of how well the business is doing, and how it will continue to perform. Don't rush this part of the process.
Sellers are often willing to put a sale on hold while you conduct your inquiries, and you'll usually need several weeks to do that properly.
What does leasehold mean when buying a business?
When you buy a freehold business, you get the nuts and bolts, stock, and goodwill associated with the commercial operation, but you also acquire any commercial property or land.
If it's a freehold deal, you get a lot more freedom in terms of developing the facilities and changing things where you see fit. Apart from the considerable differences in the valuation of a leasehold versus a freehold business, leasehold versions can be a lot like renting a house where you have to ask permission before hanging a picture.
However, different leases come with varying terms and conditions, so it's essential you seek professional advice to get a good handle on that. That's not to say no leasehold business is worth buying. Generally, pound-for-pound, leasehold is going to provide a cheaper way to get into running your own show, and it's going to depend a lot on what you can afford.
What to look for when buying a business
Buying a business is an excellent time to keep your eyes open for problems. Sometimes, small things often make a big difference, and tell-tale signs may illustrate where to start looking for more significant issues. The potential rewards when buying a business are substantial, but the scope for underlying trouble is significant too.
Watch out for accounts receivable. Again, that's not necessarily a deal-breaker, but you'll need to be clear from the outset about who's responsible for any outstanding invoices.
Sellers who refuse to disclose or aren't readily open about finances are a giant red flag. Remember, always stay prepared to walk away.
Takings or customer numbers falling off in recent months is not a good sign for buyers. It's also well worth keeping an eye on who those customers are. Too many eggs in one basket is bad news for any business, so you don't want to depend on a small number of clients or revenue streams. Ideally, you want to see a diverse and loyal, ongoing client base.
Poorly maintained premises, tools, or equipment are a warning sign. Maintenance and care for equipment can be an excellent indicator as to the general health of the business, and neglect is never a great sign. Not only that, but it means you're far more likely to require future investment to keep the business running.
In the internet age, customer reviews can provide an eye-opening illustration of how a business performs. They often offer a far more trustworthy account that many buyers will offer.
Unhappy staff can drastically affect the value and viability of a business, as can an ongoing high turnover of employees.
Check out the business's credit rating. That can give you not only a great idea about what the deal is worth but also some real insight into the ownership or management.
Don't forget to bring professional help to the deal
There are times when DIY just doesn't work, and there's no way to break that gently in this case. There are also times when getting the right advice is an excellent investment. Even for the most seasoned of business people, doing everything that's required to value and purchase an ongoing business is basically impossible.
It can be tempting for some to try and keep costs down when looking for a business, but it's never a good move to cut corners. It's far wiser to budget appropriately for the whole process, and having the right legal help is an essential part of that.
The quality of business and legal advice you source might well form the difference between success and failure. Buying a business is not a time to play things by ear, and even the smallest of details can equate to many thousands of pounds in value – or a huge mistake.
Not only that, but it's great to have a voice around that isn't swayed by emotions. For a balanced view and accurate valuation, with a problem-free sale – professional assistance is the only way to go.
Two or more heads are almost always better than one. At Accounts & Legal, we can provide the essential help you'll need to make buying your business or selling a business a success. Please don't hesitate to get in touch with our friendly, knowledgeable team on 0207 043 4000 or email@example.com before you make your next move.