How To Buy A Business In The UK?

Buying a business in the UK is a process that is largely the same no matter what type of business you buy. It’s a multi-step process and at different stages you are likely to need professional help from different experts, even if the purchase process is something you are familiar with.

This article identifies seven key steps for a successful business purchase, and also looks at those vital activities that need to be undertaken once the buying process is complete and you are the new owner of your target business.

Pros and Cons of Buying a Business

If you want to own a small business, you have two options: you can start it from scratch and establish it as a going concern, or you can buy an existing business.

Which is best? That depends on the individual circumstances and aims of the prospective small business owner. Here are some things to consider.

Pros

  • Many small business startups fail to survive the first few years; you can buy one that’s survived that tricky period
  • Systems and procedures will already be in place
  • The business will have established suppliers and customers
  • The experienced staff needed to run the business will be in place
  • Finance might be easier to acquire as the business will have a track record

Cons

  • An existing business can be expensive to acquire – don’t forget there are costs over and above the purchase price
  • If the business has been neglected, additional investment might be needed
  • You will need sufficient working capital to run the business
  • Existing contracts might contain a clause that means they are nullified if the business transfers ownership
  • Staff might be unhappy, either due to low morale or the change of ownership

Steps to Buying a Business

1. Finding a Business to Acquire

Good deal flow is essential if you are to find a good business to buy. The most successful dealmakers have a constant flow of potential deals. Here are three key ways for serious business buyers to generate deal flow.

1. Networking

You can leverage your network in order for them to do some of the work of finding a business for you. You very likely already have a pretty wide network to tap into, including family and friends, social media connections and LinkedIn contacts. Let people know you are interested in buying a business.

2. Listings Websites and Business Brokers

These feel like an easy place to start – and they can be, if you happen upon the right deal. Websites listing businesses for sale offer a range of opportunities and you can filter options, look at basic financial figures and see what the list price is, which helps you decide on an initial offer. Tell a business broker you want to buy a dry-cleaning business, and they’ll say, ‘Okay – here’s six.’

3. Letters

This is the number one method of getting enquiries from people who want to sell their businesses. Define broadly what you are looking for, give the data to a list broker and you will get a targeted list of businesses to approach. Now write to the current owner. Ask them if they are interested in selling their business, because you are interested in buying, and wait to see who gets in touch.

2. Appraising the Business’s Worth

It would be nice if businesses had a book value, like a car. However, value is flexible, and often based more on emotion than logic. If you really want something, you’ll pay more than perhaps you need. If the seller needs a certain sum by a certain date, they might accept less than they otherwise would. That said, let’s aim to apply logic to the process. Here are four key factors that affect business valuation.

1. Historic Financial Performance

What the business has done in the past influences value.

2. Scale

Buying a business that’s achieved £100,000 of revenue isn’t terribly exciting; if it’s achieved £10 million of revenue it’s doing something right.

3. Future Cash Flow

If the future cash flow is predictable, the business is worth more. Recurring revenue adds value.

4. Tangible Assets

Things like plant, machinery and property clearly have value. If a business owns few assets, you are buying its ability to generate profit in the future.

There are other things that influence value too – such as the quality of the clients and the management team, the amount of competition and performance of the sector, and the dependence of the business on the owner – but these four key factors are a good place to start. Thorough due diligence will give you the full picture and your preferred method of valuation will turn that data into a number.

3. Negotiating the Purchase Price

When it comes to business acquisition there are two things to negotiate: price and terms.

With price negotiation, aim to find out what the seller wants. They may be reluctant to say but you can’t guess what they want for the business, they need to tell you the asking price they have in mind. You will know by now what the business is worth to you and you ideally want to pay less than that. If you agree a price at the top end of your scale, you can mitigate that through terms.

You can only buy a business that you can finance. The terms of the deal can be used to make a business more affordable. For example, paying for the business over, say, five years instead of three will bring your repayments down.

If you have cash to put in, you can expand your options. If you have to borrow heavily to finance the purchase, you will usually borrow against assets, then pay from profit. Don’t forget the personal aspect: if you establish a good rapport with the seller that can reduce price and improve terms.

Negotiation is not combat – it’s reaching an agreement. That said, there will always be people you can’t do a deal with and businesses you can’t buy. That’s normal. If it happens, turn your focus to the next attractive target and move on.

4. Drafting a Letter of Intent (LOI)

A letter of intent – or heads of terms – is effectively the framework for the deal.

Heads of terms sets out the key elements of the sales agreement, which helps prevent misunderstandings or disagreements later. It also it makes it easier for solicitors to draft the sale and purchase agreement.

Heads of terms includes:

  • The price, or the mechanism for determining price
  • The terms, or how that price is going to be paid
  • Special conditions, e.g. the lease for the premises, and that there is no material change

Remember that heads of terms doesn’t bind either party to do the deal; people can pull out right up until the last minute.

5. Conducting Thorough Due Diligence

There are three types of due diligence: financial due diligence, legal due diligence, and commercial due diligence.

  • Financial due diligence is conducted by an accountant and is a thorough investigation of the numbers. Financial statements, including the balance sheet, profit and loss statement and cash flow statement, will be looked at, as will financial projections. Liabilities and tax returns will be scrutinised.
  • Legal due diligence is conducted by a lawyer who looks at contracts and other legal aspects, like the shareholding, any intellectual property, trademarks, etc. The first thing they do is make sure the person selling the business has the legal right to do so.
  • Commercial due diligence is often done in-house. It’s a thorough understanding of how the business works, how it delivers its products and services, current contracts, customer base and so on.

Due diligence is quite negative – it looks for faults. It’s normal for the price and terms to be renegotiated based on what surfaces during due diligence. People are more open to changes in terms rather than price.

You will learn to evaluate things realistically and fairly. No business is perfect and every deal will have risk. You have to balance risk and reward.

6. Securing Financing

There’s a variety of financing options and funding methods available for business acquisition; here are four options.

Asset finance – borrowing against the assets in the business that you are buying. The assets lenders allow use of for business finance include:

  • Fixed assets – things that are purchased for long-term use
  • Items with serial numbers
  • Items with a resale value
  • Items that are substantial and robust

Invoice discounting – this is an advance against the business-to-business debtors. The debtors need to be good quality and paying within credit terms.

Cash flow financing – borrowing against future strong cash flows. Recurring revenue is preferred.

Seller financing – you agree to buy the business on a deferred basis, up to 100%, although it’s likely most business owners will ask for a payment upfront. Typically, this is for smaller deals. The seller gets what they want over time.

7. Completing the Transaction

Everything that has been agreed will be written up in an agreement. That will be either an SPA (sale, or share purchase agreement) or APA (asset purchase agreement). The key points are: warranties; indemnities; non-compete clause; non-solicitation clause; price and terms; and completion accounts.

Make sure everything has been sorted out with regard to the property. Leases can take a long time to complete and you can’t access the premises without one.

Make sure all Companies House paperwork is completed.

Set the completion date for documents to be signed and transfers to be completed, but be prepared for things to not go smoothly; last-minute hitches are normal and the deal could still fall through.

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

What To Do After Buying A Business?

Check Existing Practices and Processes

As part of your due diligence you will have got to grips with contracts, and gained an understanding of key customers, suppliers and staff. Now you need to get to know people and dig deeper into how things work in practice.

The seller should be able to introduce you to, for example, your main suppliers and biggest customers. You should also look closely at payment terms for both debtors and creditors and see where changes might be made.

Look at workflow and processes. Is everything efficient? Could improvements be made?

This is your chance to overhaul the business – but remember that people are often resistant to change and you don’t want to trigger a mass exodus of staff. Work collaboratively and move at a reasonable pace.

Meet Current Staff

It’s essential you hold a staff meeting. Existing employees don’t want to be the last people to know their workplace has changed hands. Aim to tell everyone at the same time, so if it’s a multi-site operation consider using, say, Zoom.

It’s a good idea to have a professional HR person on your team to handle things. If there’s bad news, like job cuts, tell people up front and put it in writing, too. TUPE – the Transfer of Undertakings (Protection of Employment) Regulations 2006 – governs the transfer of employment. This is applicable whether you buy shares or assets, and it’s important that you get this right. Taking professional advice is prudent.

Set up one-to-one meetings with key staff. You don’t want to lose them, so offering reassurance is important. Ask them what they would change – they have a lot of knowledge about the business and can provide good insights.

CASE STUDY

He says: ‘I asked them three questions: If this was your business, what should we stop doing? What should we start doing? And if money was no object, what would you want to do?’

Based on their answers, he produced a to-do list for each person.

Three months later, James shared with his team that over one hundred things, including ideas, suggestions, and improvements, had been achieved.

Understand Company Culture

The culture of a company might be described as ‘the way we do things around here’. Some environments are healthy and others can be toxic. Make sure the way things are done is fair and ethical, that people have achievable goals, well-being and work-life balance are supported, and people are listened to.

This isn’t just a matter of paying lip service or skating just the right side of legal requirements; staff deserve a good work environment. When people leave the premises they talk about where they work, and it’s much better to have happy staff talking positively about work than people telling the world how awful their job – and your company – is.

Monitor

Set and monitor KPIs (key performance indicators), encourage feedback from customers, review policies and procedures, and conduct staff appraisals – and let the appraisee talk more than the appraiser.

These are all good indicators of how things are going in the business, and allow you to take targeted action if something could be improved.

Conclusion

Buying the right business can be a complex exercise. There are many things to take into account, starting with your own desires, goals and intentions. Many new business buyers lack focus; they don’t know how to start or which direction to go in, they get disheartened, and some give up.

What you need to become an accomplished acquisition entrepreneur is a goal to work towards and 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.

Free Business Buying Toolkit

Simply enter your email and I’ll give you access to all the resources you need to discover how to source, fund and close a deal for your first business within 100 days – with my Business Buying Toolkit

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