How to Buy a Business
Have you ever wondered how to buy a business?
Buying a business means that part of the initial hard work of setting up the business is done. However, it’s essential to research before you look at purchasing a company.
It’s also likely that – unless you have put money aside, you’ll need to apply for a loan to cover the cost associated with a business acquisition.
There is plenty of information you must consider before making this significant investment – it’s not as simple as finding a business and buying it.
You must undertake thorough research and complete due diligence before proceeding any further. Here are our recommendations.
Understand the business buying process
Many people choose to purchase an established business rather than start their own for numerous reasons, including the established infrastructure and ongoing cash flow.
This is similar to those who choose to buy into a franchise that already has suppliers and processes in place.
If you’re considering purchasing a business, it’s essential that you talk to your broker to understand the payment process and what type of loan you may be eligible for to fund your purchase.
Research, research, research
This stage is crucial.
Do some research on why you want to purchase a particular business.
You’ll need to investigate everything you can about the company at this stage.
Some questions to consider include the following:
- What’s your knowledge of the industry?
- Where is the business located?
- Do you have a business plan (long and short-term)?
- Do your skill sets, and know-how give you a competitive edge in the industry?
- Have you conducted market research to see if the industry is growing or shrinking?
Completing a SWOT analysis is another crucial step to help you find your ideal business.
A SWOT analysis evaluates the strengths, weaknesses, opportunities, and threats of a business acquisition.
It’s essential to speak to your accountant at this stage to understand the best tax structure and implications for the business.
How to approach
So, you’ve worked with a broker to find a suitable business to buy – what’s next? Your approach should have been carefully considered.
First, you’ll need to verify the state of the company.
This means checking that the business is what the current owner says it is, the recorded sales are accurate and that their employees are aware and happy about a change in management.
Getting a feel for whether existing customers will stay loyal is also essential – you don’t want to buy a business with an extensive database only for them to leave or follow the previous owner.
Investigate closely if the processes are sound and documented, and if the cash flow is sustainable.
The buying process
Once you’ve decided to progress with the buying process, formally register your interest in buying the business with the existing owner’s business adviser.
They usually have a business adviser (like a broker) to assist them with selling their business.
Then, you’ll need to analyse the seller’s intent. Ask the following questions:
- Does the owner need to sell, and are there time constraints?
Is the owner selling just the trading part of the business or a company that holds both assets (such as a building) and trading parts?
- What’s the primary motivation for selling? Is it purely financial, or is there an unrevealed reason (such as a competitor starting nearby, hidden debt, etc.)?
Once you’ve discovered the seller’s intent, you’ll better be able to negotiate a deal.
Do your due diligence
Before you rush into buying a business, it’s crucial you do your due diligence first.
Sometimes, not everything is sunshine and rainbows, so if the company being sold sounds too good to be true, ask yourself why the owner would be selling it?
In saying this, there are plenty of great business deals going around but understand and research before signing anything or making an offer.
As the seller’s pure intention is to sell the business, they may quickly skim over the company’s weak points or create short-term gains to give a favourable impression of the business.
Investigate thoroughly before showing your interest.
Your due diligence should also include the following:
- The legal ownership of all key assets.
- Past, current, or pending lawsuits.
- All contractual obligations (e.g., employment or supplier issues).
- Whether a change of ownership will negatively impact the business (e.g., losing suppliers or customers).
Completing due diligence can help you make an informed decision about the business purchase, the right price to pay and how it should be handled.
Immerse yourself in the business
Immersing yourself in the business means getting a feel for it. To do this, you might want to do the following:
- Research the market and main competitors.
- Consider the risks associated with the business’s future trading and with the industry as a whole.
- Talk to customers and others involved, such as staff and suppliers, to better understand the company.
- Try to gain as much knowledge about a business as possible before showing any interest.
- If location plays a significant part, stand outside (out of sight) and estimate the sales activity.
- Visit the company at different times (both announced and unannounced) to get a more comprehensive view of the business.
The next steps
There is still plenty more to do before you put in an initial offer.
Talking to an Inovayt financial adviser will help you to understand the process better. Some other things your financial advisor may help you to do include:
- Speaking to industry experts to assess the future business viability of your acquisition.
- Analyse historical results and trends such as sales growth, profit margins, overheads, etc.
- Check for inconsistencies such as a change in accounting policy, the business’s financial projections (measured against the results you’ve seen), if the sales forecast is achievable and if it reflects the outlook for the industry and economy.
- Check the finances for the most recent audit, stock levels, significant debt and the accounting system in place.
- Make your offer.
How do I fund the purchase of a business?
How you pay for your new business will depend on the seller’s preferences. As many sellers prefer a lump sum, you may need to consider the appropriate finance options.
These may include:
The first option is a standard business loan.
This can be secured or unsecured against an asset (usually a residential or commercial property), and your financial position will help a lender to determine how much you can borrow.
Lenders want to know how the business intends to use the borrowed monies, so business owners must clearly outline how the funds will be spent.
Both unsecured and secured lending will require the company to meet certain turnover and profitability criteria.
Vendor finance occurs when the person selling a business also funds part of the purchase price.
The buyer pays an initial amount upon settlement, and the balance (including interest) is met over an agreed period with regular repayments.
Using vendor finance in the sale of a business can present various risks but also give both parties opportunities.
Vendor finance may be used if the purchaser is having problems getting a bank to finance the purchase of the business.
While these loans are not always the most favourable option for the seller, sometimes this type of funding allows them to get the price they want.
Buying an existing business is a big deal and a financial goal for many; it takes a lot of planning and preparation to ensure you’re getting the best deal for your needs.
If you’re considering purchasing a business, or want more information on how to buy a business, get in touch with an Inovayt commercial finance broker today to discuss your requirements.