Buying a Business
The process of buying a business is often long and complex, from finding the right one to working out all the details required for a smooth transfer of ownership.
Below you will find some helpful information as you consider which business might be right for you.
1. Identify the industry
- Step one of business acquisition is defining the type of enterprise you're looking for.
- This will begin with a general decision of which industry to move into. You’ll need to research the mid-to-long-term prospects of the sector before moving forward.
- Pay specific attention to legal concerns, changes in regulations, and look at local competition within the industry.
- Trade magazines and newsletters are a good start – they provide expert opinion on the prospects of your chosen business.
2. Target the business
- With broad marketplace knowledge now at your disposal, the next logical move is to target a suitable, specific business.
- Have in mind an ideal budget, size, location and annual turnover and, most importantly - whether you feel you can make a success of it. Now to find one which matches these expectations.
- Think about businesses that are not actively seeking a buyer, as well as those advertised for sale. Every enterprise has its price and tabling an unsolicited offer may convince the owners that the time is right to sell.
- You will also beat competitive bidders to the negotiating room this way.
- Don't promise a deal that you cannot deliver, simply to open negotiations. A professional broker can be instructed to begin talks discreetly on your behalf and help draw up mutually agreeable terms.
3. Research
- Before you bring in the experts you can undertake a little investigating of your own.
- Pose as a customer to experience the service first-hand, whilst also working with the company to look through its finances.
- This position of trust and privilege cannot be abused, and you will most likely need to sign a confidentiality agreement before you can get access to sensitive company data.
4. Open negotiations
- At this point in the acquisition, you will have a more detailed picture of both the target business and the industry within which it operates.
- With your clearer understanding of its business activities, you can begin to talk directly to the current owners and work together to build a deal that will satisfy all parties.
- One of the first points of negotiation will be price, after a preliminary valuation. At this point, you do not have to worry whether your initial offers are legally binding - they are not.
- Spend time formulating a plan to work towards so that everyone is pulling in the same direction.
5. Evaluate
- The valuation stage of buying a business is perhaps the most vital to ensuring a successful purchase.
- The approach you use will differ depending on the type of concern that you are buying. Assets will often make up the bulk of any valuation: value from property and real estate to machinery and equipment.
- However, whilst these can be relatively easy to appraise, you shouldn't overlook the importance of turnover, profitability, and ongoing contracts as a way of informing your offer.
- A specialist accountant may be brought in, and they will often provide expertise within a certain field or industry that can help inform your offer.
6. Heads of Agreement
- The Heads of Agreement, though not a legally binding document, is nevertheless an important and useful stage in the negotiations process. It essentially condenses the key elements of a sale into a single document.
- Payment, responsibilities, periods of confidentiality will all be set down in the heads of agreement at a point in the negotiations when each party is still free to walk away from the proceedings.
- Most importantly, the Heads of Agreement will act as a timetable towards completion: explaining to each party the time-scale and deadlines for every step of the deal, from financing to the release of payments.
7. Due Diligence
- By this point in the buying process, you will be intimately familiar with all aspects of the sale and you should have a detailed understanding of how the rest of the process should unfold.
- Having already undertaken your own, informal due diligence in the early stages of the purchase, you can now look to bring in the professionals who will offer a more thorough analysis of the target business' accounts, practices and day-to-day operations.
- Although you don’t want to take risks by cutting costs at this important stage, remember to stay in budget and keep your outgoings to a sensible ratio of the overall purchase.
8. Sale & Purchase Agreement
- The completion of your sale and purchase agreement will mark the closing stage of the acquisition process.
- Whereas the Heads of Agreement sets out in broad, non-legally binding terms an overview of the purchase, your Sale and Purchase agreement will give both parties their legal obligations for the sale.
9. Pay
- You will have a different set of options for paying for your new acquisition, depending on the size and scale of your purchase.
- A larger merger of multinational interests may involve complex financing from multiple sources. For a smaller scale buy-out, the most common method is a straightforward payment on completion agreement.
- Financing can come from private means, angel investors, banks, loans companies, or peer-to-peer lending platforms.
- Sometimes, the current owners may relinquish full control of their business at sale but take only a percentage of the full value on completion, in return for ongoing shares in company profits.
10. Completion
- With the final documents completed, contracts signed and payment agreement in place, you have completed your newest business acquisition.
- Although this ten-step process may at times seem slow and the workload insurmountable, everything will fall into place with time. Even the hardest negotiations can find a positive resolution.
Congratulations: the business is yours!
Ready to buy a business?
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