Buying a business can be a great way to enter a market or accelerate your growth, but it's important to be diligent ahead of any business purchase. This article outlines what to consider when buying a business in the UK, and the steps to take to ensure you negotiate the best deal.
When to buy a business
“There isn’t necessarily a right time to buy a company,” explains James Kaberry, Founder of business fund SME Capital. “Most of the cases we see happen at opportunistic points in time. Some are generational, a parent handing down to their children, for example, and some are management buy-outs (MBOs). Or, you have a core business and then look to buy more to bolt on and find synergies.”
The latter describes horizontal integration, that is, buying similar businesses to your own to increase your overall market share.
The process of buying a business
Whatever type of business you’re thinking of buying, it's important to be aware that the process is often lengthy and time-consuming. According to Kaberry, even straightforward business purchases will take a minimum of three to six months.
James Barnes, CEO of digital services provider StatusCake, explains why buying an online business, in his case an MBO, can be a drawn-out process. “Arranging finance can be a full-time job; particularly in smaller companies where you may not have a full-time finance director; if at all,” he says.
If you are committed to a purchase, below are some of the typical steps to take.
1. Seek the best advice
Advice is essential, particularly from experts in market understanding, legal matters, and finance. Kaberry is a keen believer in the importance of debt advisors for understanding optimal financing methods to buy a small business, and structuring deals.
He also advises to utilise industry contacts and your professional network to gain insight into business purchases. Expertise from past investors can be priceless when contemplating acquiring a business.
2. Viewing and valuation
When contemplating buying a business, thoroughly inspect everything like you would when buying a house. Check the electricals, assets, financial orderliness, and filing systems. Use these details to assess the potential purchase.
The business's physical state might affect its worth, along with crucial financial metrics such as: gross income over time, profitability, external market factors, intangible and tangible assets and liabilities as well as workforce condition.
Also, be aware that when you inherit a business, its revenue may have slowed down while it was changing hands. Having a plan in place to revive a newly purchased business is vital.
3. How will you finance?
If buying a business outright is financially challenging, exploring financing options could be useful.
Beyond traditional bank loans, non-banking companies also offer finance for SMEs and MBOs. Additional alternatives can involve venture capitalists, seller financing, business grants, crowdfunding, or goodwill loans from personal connections.
Barnes underlines the importance of mutual trust when seeking financing.
“I had one [investor] who agreed to lend the money but then at the last minute also decided they wanted 30% of the equity, and for us to pay all kinds of ongoing fees," he says.
"One of the most important things you need to consider [in an investor] is trust. You need to like the finance house you work with and trust them. It needs to work both ways.”
4. Explore all legal considerations
Doing your ‘due diligence’ is key. This means exploring the company's legal, financial, and operational situation. Does the business need to comply with regulations? In which case, are all licenses and permits up to date? Employment law regarding existing employees is also a consideration. Check any contracts are as they should be. Taking legal advice is essential, even if it can prolong the process.
5. Formal offer and negotiation
Once you’re happy with your research, and you've secured some form of financing, it’s time to put the deal on paper and present a sale and purchase agreement (SPA), which is a legal contract that outlines the terms and conditions of a business transaction, typically for buying or selling a company or its assets.
Presenting an offer may just be the start of a broader negotiation process, and Kaberry advises against getting tangled up in protracted discussions about the numbers.
"Don’t present the SPA and then let it go back and forth hundreds of times. That becomes costly and delays the process. The simplest route is to get everyone [around] the table and clarify the terms," he says.
6. Close the deal
After buying a business, a transition period begins, involving the sharing of crucial documents and information. This includes verifying financial papers, transferring leases, contracts, finances and VAT registration. Ensure that all business records listed with Companies House are current.
Once the deal is closed, it’s also important to consider how you’ll manage ongoing business expenditures. Consider the American Express® Business Gold Card, which comes with payment terms of up to 54 days¹. Longer payment terms give you more time to manage your cash flow. What’s more, for every full and eligible £1 you spend, you’ll earn 1 Membership Rewards® point. Points can be redeemed with thousands of online retailers across tech and travel to help get your business off the ground².
How to negotiate the best deal when buying a business
Understanding whether or not you're getting a good deal comes down to understanding what the company owns that is of value, and how the wider market is performing.
Understand the sector, product, or service
Whether you already run a similar business or have experience working in the sector, these will both be advantages when it comes to buying a new business. Buying into an industry where you have no knowledge is risky as you can't be sure you're getting a good deal, or if the company is likely to thrive under your management.
Follow market trends
It's important to consider the state of the market you're buying into. Simply, are the long-term projections for your market of choice looking positive, or negative?
For example, says Kaberry, petrol stations used to be a good option but today, margins are very slim. This is in part due to increased competition, fluctuating fuel prices and rising operating costs. This underlines the importance of understanding the possible future direction of the sector. For example, how might AI impact service-based industries over the coming years?
Show the value of intangible assets
Brick and mortar, inventory, and manufactured products are all tangible assets and have a defined value, so are easier for banks to lend against. Certain businesses whose assets are primarily intangible may struggle more if they pursue traditional investment avenues [1].
“High street and regular finance are often off limits to many software companies,” Barnes notes. “It’s quite simply a lack of understanding. I spent many months going through the processes with a well-known UK bank but they simply couldn’t get their heads around us not having assets." Clearly defining your proposition to a lender is key³.
1. The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.
2. Membership Rewards points are earned on every full £1 spent and charged, per transaction. Terms and conditions apply.
3. The information provided in this article is for informational purposes only and does not constitute financial advice. Always consult a qualified professional before making financial decisions. We are not liable for any actions taken based on this information
Sources
[1] Imperial College London, The rise of the intangible economy: how capitalism without capital is fostering inequality
