What you need to know about buying a business in the UK
The purchase of an existing business can be an exciting venture, but it's not a quick win. Research, dedication, funding, and other essential elements are essential, and that's where Zyla Accountants can help.
Throughout this guide, you will learn about the most important stages of the buying process. Following and understanding it will make you more confident in your decision, so you can pursue your dream of owning your own business.
Start-ups, franchises, and buying an existing business are all routes into business ownership, each with their own strengths and weaknesses. We will explain why you might benefit from buying an existing business in this guide.
A business that is already established has many advantages! Business foundations, loyal customers, marketing and sales strategies, and cashflow that you can improve or grow are all in place. Additionally, funding to purchase a business can be easier to obtain.
It is important to keep in mind that there are disadvantages as well. It's important to understand why the current owner wants to sell the business, for example. In addition to retirement, it may be a liability, such as financial or operational issues or a lawsuit.
In order to ensure a viable and pragmatic decision, thorough research and due diligence are essential.
Getting Started
Follow these steps to determine if you are ready to buy a business:
Are all the documents in order?
Preparation of several documents is necessary before signing a sale contract. Heads of terms often form the basis of sales agreements and are usually drafted by brokers, so they must be correct from the outset. As part of your due diligence on a potential business purchase, it may also be necessary to have a confidentiality agreement in place.
Is your research up to date?
To ensure that the business is what it promises to be, you should conduct due diligence after your documents are in place. Think about why the business is being sold. Is there anything about the business that raises concerns? If there are any disputes involving the business, or if it has proper contracts in place, make sure to check that they won't cause problems in the future.
Have you contacted a professional for assistance?
Check if the valuation is accurate. Is it worth what it claims? For a tax-effective purchase, you will need an accountant to do a proper valuation of the business and advise you on the right structure.
Is a solicitor in place to draft the share purchase agreement?
It is generally the buyer's responsibility to prepare the share purchase agreement that records the terms on which the seller agrees to sell the company, and the buyer agrees to purchase its shares. Several provisions in the contract are complex, and you will need help to ensure that you and the seller are both protected legally.
Has consent been obtained from third parties?
Before a transaction can be completed, third-party consents and/or approvals might need to be transferred to you or obtained. It might be necessary to discharge bank charges if the company has a regulator.
Companies House should be notified.
Once the sale has been completed, you must ensure that it is properly documented, perhaps by lodging transfer documents at Companies House. Other post-completion formalities, such as paying stamp duty and submitting post-completion accounts, may also need to be adhered to.
Raising Finance to Buy the Business
A seller will want evidence from a buyer that they have a realistic financing plan when looking at a business for sale and firming up their interest.
Availability and suitability of your options will depend on your personal circumstances and the nature of the business for sale.
Here are a few types of financing options you may be interested in:
Loans that are secured and unsecured
Financed through debt
Financed by equity
Private equity and venture capital investors (angels)
Family and friends
As soon as you've identified a business that meets your objectives and secured funding, you'll need to make an offer.
Due Diligence Preparation
Having agreed on a price, you and the seller will sign a sales agreement, which cements the provisional agreement and the transaction principles. The buyer can now begin the due diligence process.
The purpose of due diligence is to closely examine the business against claims made by the seller. The deal may need to be renegotiated if you discover previously undisclosed problems.
Unless you have the assistance of an accountant, solicitor, or business broker, you shouldn't attempt this task on your own.
Due diligence involves three main areas: commercial, financial, and legal. Let's review them here:
An assessment of commercial risks
Learn about the market, business processes, and perspectives of employees, customers, and suppliers.
The following elements should be considered:
Trends, size, and growth of the market
Inventory and stock
Customer, supplier, and employee perceptions
A system and a process
The products and services we offer
An analysis of the financial situation
It is crucial to have a clear paper trail when it comes to finances. Financial transactions and processes that haven't been recorded by the current owner could cause problems later.
Take a close look at the following financial information:
Performance of the company in the past, present, and projected future
The business maintainable earnings (BME)
Creditors
Debtors
The salaries and wages of employees
Getting insurance
Providing bonds and guarantees
Taking legal precautions
In addition to arcane terminology and obscure technicalities, the legal side of due diligence can be the most challenging to comprehend.
Legal proceedings are not uncommon in business, and it's not necessarily a red flag if the business has had legal issues in the past. In the event that the seller fails to disclose these issues, alarm bells should ring.
The following elements should be investigated by your legal team:
Names and trademarks of businesses
Risks and claims in the legal system
Liabilities in the past, present, or future
Term of contract
Inventions patented
Warranties and claims
Rights and entitlements of employees
You will be expected to conduct due diligence and discuss the business's history and finances with customers, employees, and suppliers.
You shouldn't hold back. Get everything in writing so you can understand what you're getting into. You should close the deal once you are satisfied with your findings.
Your list of questions may seem endless by now, and you may feel as if you can't possibly ask any more. Do not hesitate to ask for clarification on any matter, big or small, if you have any doubts at all.