A Guide to Buying a Business

If you are reading this article it is likely that you are considering buying an already established business as opposed to starting one from scratch. This can seem a daunting process, but it need not be. We have put together this useful guide to assist you with the process.

If you are looking to purchase/invest into a business there are many considerations that you need to take into account. Below we have compiled a check list of issues to assist you. This will ensure that the process is smooth and free of complications.

Research

It is absolutely vital that you research thoroughly the business that you are targeting. This will ensure that you gain an in depth insight into your potential investment. Researching thoroughly in the early stages will assist you greatly further down the line. It will also help you avoid common pitfalls and ultimately will allow you to make an informed decision and a better investment.

  • Meet as many people from the business as you can:

This may seem obvious, but it is important that you meet as many people as possible. Meet with a range of people from within the business. Arrange one-to-one meetings with staff already within the business. This will ensure that you get to know the kind of people in the business. Discuss their experiences and ask for their opinions. By getting to know the people behind the business you will get a better understanding of the business.

  • Scrutinise the business plan

It is always prudent to gain an overview of the business plan. Once you have familiarised yourself with the business plan, discuss it with someone in the industry in order to ascertain whether the business plan of your potential investment/acquisition is feasible and realistically reflects a long term outline for growth. It is important when scrutinising the business plan to analyse where the company sees itself in for example five or ten years down the line.

  • Check the accounts.

In order to gain a thorough understanding of the financial performance of the business it is important to check the accounts. You will need to look at how well the company is doing and also measure that performance against its competitors and the overall market. Ascertain whether there any debts. Determine the cash profit, this is not necessarily the same as reported profit. In order for the most accurate report on the financial health of the business it is vital that the accounts are scrutinised as closely as possible, this will save you from nasty surprises further down the line and ultimately will give you the peace of mind that the business is actually the business you think it is. Analysis of accounts can be technical and complicated, so do ensure that you instruct a professional for help at this stage.

Other points to conduct research upon include: (please note this is by no means an exhaustive list)

    • Financial records
    • Employment contracts
    • Tax compliance
    • Material contracts (customers and suppliers)
    • Employee records
    • Intellectual property
    • Legal compliance
    • Business assets
    • Company records
    • Insurance claims history
    • Security interests over seller or assets

Determine how the business is valued

It is important to ensure that your prospective business is valued adequately this will ensure that you do not pay more than it is worth. A useful starting point here would be to conduct a SWOT Analysis (strengths, weaknesses, opportunities and strengths). This will allow you to determine the competition and your prospective businesses position within the overall market.

Important points to consider when valuing a business include:

  • History
  • People
  • Premises
  • Location
  • Products/Services
  • Turnover
  • Profit
  • Cash flow
  • Debts
  • Costs
  • Assets (including intangible assets such as reputation and intellectual property)
  • Market share/customers
  • Reasons for saleÂ
  • Any relevant legal/regulatory issues

It is also important to look at similar deals undertaken in the same market in order to ascertain whether your investment is structured or valued differently or in similar ways.

Once you have concluded your research and found that there are no major issues and a sale price is agreed, the next step is due diligence. There are three forms of due diligence:

Legal:

This is essentially confirmation that the seller has the right to sell the business and its assets and that it is not facing any action.

Commercial:

Commercial due diligence entails verification of the market positionÂ

Financial:

Financial due diligence will relate to the business books and confirmation that the claims made by the seller are correct.

Due diligence will ultimately determine whether the deal collapses or goes through subject to the buyer having the necessary finance. It is important that at this stage you instruct professionals such as solicitor’s, accountants and business advisers. They are the experts and ultimately they will be better placed to advise you effectively.

When purchasing/investing in a business, there will be a number of legal and taxation implications. Therefore advice from a lawyer and an accountant before signing a contract and throughout the due diligence process will ensure that any legal or financial issues that may arise can be dealt with both effectively and efficiently.

It is also important that you have a plan before entering into a contract. Ensure that the plan includes timelines and a realistic budget.

If you are looking to purchase or invest into a business please contact Lawdit Solicitors, we have a team of specialist solicitors at hand to assist you.

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