the business buying process with Jonathan Jay

Buying a Business Process: A Step-by-Step Guide

There are two ways people become business owners: they start a business or buy a business. If you want to avoid the risks inherent in start-ups, the smart way to proceed is to buy an existing business.

When you make a business purchase, you acquire the assets, including any intellectual property and licences owned, plus the customer base, contracts, and existing employees. You have everything needed to operate that business from the moment you step through the door as the new owner. It might be one of the most exciting things you’ve done.

That said, there are many things to take into account when navigating the business purchase process. The business might not be as represented by the current owner. They might be so focused on making a business sale that they fudge certain issues. You might be surprised to find they genuinely don’t know the figures relating to their own business. Also, business owners have a tendency to value their companies at more than their true worth.

None of those things are reasons not to buy an existing business. Rather, they are reasons to get to grips with the process, put together a plan, and take professional advice where needed. With preparation and strategy, you can make sure you buy the right business for you, at the right price and on the right terms, and start your exciting new career as an entrepreneur on the best possible footing. The rewards, both financial and personal, can be life-changing.

Step 1: Define Your Objectives

Steven Covey recommends you begin with the end in mind, and that’s a good approach to take regarding business mergers and acquisitions.

When you start to define your business acquisition objectives, there are a number of areas you could focus on. Here, we’re going to concentrate on two: what you hope to get out of owning a business, and what that business should look like.

What you want to get out of owning a business

Goals here may be financial or personal. Financial goals are arguably the easiest to set: you want to earn a certain amount of money. Success might be measured by, for example, being mortgage-free, having an amount of money in savings, achieving a particular lifestyle. That’s up to you. It depends on your personal circumstances and current aspirations.

The second is your feeling of personal accomplishment and success – what it is that really makes you happy? And high up on that list, possibly at number one, might simply be to be a business owner, or entrepreneur.

What the business should look like

You know how much money you want to make; the business you buy is what allows you to achieve that. It might be the first in a group or the only one you purchase, but it should get your feet on the right path.

Factors influencing what the right business should look like include the sector you are in and the nature of the business, plus size and profitability.

Say your sector is dental health; your business might be a dental surgery, an equipment supply business, or a consumables supply business. Size and profitability are generally related.

Get clarity on the type of business you are looking to buy. Do something every day that moves you closer to your goals.

As Jonathan Jay says, ‘This single-minded focus will help you be successful faster than those people who have a different plan every day about a different thing, don’t know where they’re going, don’t know what they’re buying.’

Step 2: Conduct Thorough Research

Aim to get a good understanding of the sector you are interested in. Do some market research around the industry and market conditions, but don’t get bogged down in this. You want an overview. Find out how profitable similar businesses to the type of business you are looking to buy are, and what they ultimately sell for. If it isn’t what you’d hoped, take a step back and redefine your ideal business or look at a new sector.

Next, you want to identify businesses that fit your requirements. Four good ways to find businesses for sale are:

  1. Networking – put the word out to your existing network and your extended network.
  2. Business brokers – once you have credibility, brokers can be a good source of deals (but may not be the best option for your first deal).
  3. Social media – leverage posts and groups on LinkedIn and Facebook.
  4. Letters – letters are the number one method of getting enquiries from people who want to sell their business. Use a mailing house to generate a list of possibles.

At this stage, don’t whittle your options down too much. The key to finding good deals is to have a good-sized pool to fish in.

I want to give you access to my complete Business Buying Toolkit so you can discover:

Step 3: Initial Contact

The first step to really sounding out a potential deal and deciding if it’s worth pursuing further is the discovery call. Expect it to take around half an hour.

The purpose of the call is threefold. We want to discover:

  1. Exactly what is for sale. For example, is there equipment, machinery or property attached to the business?
  2. Whether a deal is likely. The key thing here is, does the deal seem financeable?
  3. The seller’s motivation. Are they looking to retire, move to a new area or country, start a different business? These things can all be useful to know.

If you decide the business isn’t for you, tell them and move on. If you want to pursue it further, you probably want to set up a face-to-face meeting, have a look at the business, sign an NDA so you can see financials, and move things on to heads of terms (also known as a letter of intent, or LOI). Once that has been signed, you have exclusivity for a period of time and you don’t to worry about other prospective buyers beating you to the finish line.

This process is likely to be done in stages and take time – but keep pushing forward if it’s a business you want to buy.

Step 4: Due Diligence and Valuation

Once heads of terms has been signed, the due diligence process can begin in earnest. Get your deal team – the experts including your accountant and solicitor who will help you to assess the business and conclude the deal – involved.

The three areas of focus are commercial, financial and legal due diligence.

Aim to confirm that things are what you have been told they are and to unearth anything that has not been disclosed. You need to understand assets and liabilities. Check the financial statements – cash flow, profit and loss and balance sheets. Examine business transactions. Confirm there is working capital in the bank. Make sure the business is on top of its tax returns. Scrutinise contracts and other legal documents. This information will feed into the sales agreement. Use warranties and indemnities to mitigate any risks.

Next, you have to put a fair valuation on the business.

Factors that affect business valuation include:

  • Clients and contracts.
  • Historic financial performance, any recurring revenue, and future cash flow.
  • Tangible and intangible assets.
  • Dependence on the previous owner’s skills.
  • Sector, market and competition.

You will generally use an accepted valuation method – such as net book value or price–earnings ratio, for example – to arrive at a figure.

When it comes to making an offer, Dealmakers recommends that you don’t. Instead, aim to get the seller to tell you what they want or need. For example, if they are moving abroad and need to have achieved a particular sum by a set date, you can use that to your advantage.

If you feel pressured to make an offer, keep it on the low side of your budget without being insulting to the seller.

Step 5: Secure Financing

You have access to a range of funding methods when you buy a small business. Before you approach a third-party lender, make sure you have properly prepared a business plan, including financial statements and forecasts.

High street bank loans generally offer the best interest rates, but the banks have strict lending criteria. Alternative lenders may be more flexible, but their interest rates are generally higher. Assets that have a value on the balance sheet, and/or a good quality business-to-business debtor book can be used to secure funding.

You can also negotiate seller financing, where payment of the full purchase price is deferred and the vendor is paid in set instalments, over time.

Other financing options include borrowing from friends or family, using savings, or even crowdfunding the purchase price. Where other people’s money is involved make sure the terms are recorded formally; don’t just proceed on a handshake.

Step 6: Negotiate and Draft the Purchase Agreement

The sale and purchase agreement might be an asset purchase agreement or a share purchase agreement. Key points include:

  • Warranties, in which the seller states that certain things are true, for example, all customer contracts are for a minimum of twelve months. Those are often linked to a disclosure letter setting out exceptions, for example, apart from one contract, which expires in three months.
  • Indemnities, for example, against tax owed, on a pound-for-pound basis.
  • Non-compete/non-solicit clause, meaning the seller can’t set up as a competitor or poach your staff.
  • Price and terms, what will be paid and how.

Whereas heads of terms isn’t legally binding (for the most part), the sale and purchase agreement is, so let your solicitor draft and review the document.

Step 7: Close the Deal and Transition

Have a plan in place for the period immediately before and after the business transfer, covering what needs to be done, by whom, and when. That includes practical things like reading the utilities meters, checking passwords and codes, and telling the staff and customers. There may also be promotional activities like issuing a press release.

Prior to completion, make sure a final review of all documents and financials is completed. Confirm the cash at bank, make sure your funds will be in place, and make sure there has been no material change to the business.

On completion day:

  • Documents are signed.
  • With some agreements you will need a witness.
  • You may need a solicitor to swear or witness deeds.
  • You need to be available.

And you take ownership of your new business.

Conclusion

There are many moving parts in the business buying process, and often things happen at the same time. For example, you might be negotiating the lease for the premises at the same time due diligence is being conducted and the sale and purchase agreement is being negotiated.

To become an accomplished acquisition entrepreneur, you need focus. You need to be clear on your goals, understand what you are looking to buy, and have a business plan to get you there. That’s where Dealmakers comes in.

Jonathan Jay has helped more than 3,000 people buy successful businesses and become acquisition entrepreneurs, and he has put together the most comprehensive FREE package of business buying resources available today. To get started on your acquisitions journey, download your FREE Business Buying Toolkit now.

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