August 15th, 2015.
A Guide to Buying a Business: Things to Consider Before You Buy
Are you an entrepreneur or perhaps just someone with big aspirations? Then buying a well-established company may make great business sense.
But if you’ve never made this kind of purchase before it can be a little confusing. So, here’s how to buy an existing business and things you should consider when doing so:
Why Buy an Existing Business?
Buying a company can be a great way of getting into the business world quickly, but are you sure this is the right thing for you? Here are a few of the advantages and disadvantages of buying a pre-established business:
Advantages of Buying a Business
• The business is already running, meaning you don’t have to handle the difficult (and costly) start-up phase.
• As the company is already established it should be easier to obtain finance.
• The company’s market will already be established, as will customers and its reputation, which you can build upon.
• There will be a business plan and marketing strategy in place.
Disadvantages of Buying a Business
• An established business may be more expensive to buy than setting one up from scratch.
• You might have to honour existing agreements or contracts.
• When you take on a business you also adopt the staff, who may need winning over.
• There may be a hidden reason why the owner is selling, meaning you’ll have to fix it.
What is it Worth? How to Value a Business to Buy?
Valuing a business can be tricky. You can read a little more about it in our post about selling a business.
There are several different ways in which you can evaluate a company. This is usually left to an accountant or financial broker who specialises in this kind of thing. Things a financial professional will look at include:
• The business’ financial history
• Current performance
• Future projections
• Any business debts
• Any litigation
• Contracts that haven’t come into force yet
• Tangible and intangible assets
These checks don’t finish once an offer has been accepted. A short period of time is given after a purchase for its new owner to access the business books and records. This is called ‘due diligence’.
This provides detailed information on the business’ performance and will highlight any issues which may make the company less desirable. This is an exclusivity period where you can back out of a purchase for any reason.
The Buying Process and Other Things to Consider
The buying process can be complex and professional help at this time is invaluable. But here are a few top tips that may help:
Fail to prepare and prepare to fail – An organised approach is the way forward when making such a huge purchase.
Research, research, research – Make sure you’ve done your research before you sign anything. Not only do you need to know the business inside-out, but the buyer’s market and industry too.
Discretion is key – The current owner may not want their staff or clients to know they are selling until the process is complete. Put it in writing – Follow up any phone conversations or meetings with a synopsis in writing as evidence of communication. And make sure the words ‘subject to contract’ detail any mention of an offer.
Thinking of buying an existing company and need help assessing your finance options? Well, we’re here to help. Call us on 02920 766 565 today to speak to one of our trained financial brokers.