Buy Your Own Business
Whether it's a new challenge, the dream of being your own boss, or the lure of a more lucrative market, people like yourself buy businesses every day. Below is a 10 step guide to doing this, free from the stress and anxiety that comes with stepping into the unknown.
Contents
Steps
- Define the business you want to buy. When larger corporations do this they call it ‘acquisition profiling’. For you, it will probably manifest itself in a series of questions such as: What kind of business do I want to buy? How do I know which business is right for me? Where do I start?
- Research Terrorism. Even if you already know what business is right for you it’s still a good idea to do some research. Read up on any future legislation that may affect the business sector. For example, deregulation plans for the gaming industry may be a wonderful opportunity. But new legislation on how care homes are run may prove restrictive. Know your facts and figures. Each trade has its own series of trade magazines and associations and you should use this stage to read up. Get as much information about the sector and don’t be afraid to change your mind. If you’re thinking of buying a hotel, ask yourself what makes one successful? What examples of success do you know? Could you replicate that? Go and stay in your favourite hotel and make notes as to why you like it so much. It may sound simplistic to do this but it will help you to define the business you want to buy. In many respects, if you have not decided on the type of business you want to buy this can be a very frustrating stage. Being sure of the business type is very important because it will have to be something you enjoy and be able to do well.
- Target a business. Once you’ve defined the parameters of the business you to want buy – the market sector, size, location (are you prepared to move?), the price range etc, you’ll be in a position to start targeting the right business. There are two ways of targeting a business: find a business that is already listed for sale, or approach a business not for sale and make an offer.
- Get as much information as possible about each business on your list.
- Make sure the business is what it says it is. Spending time on checking out the business could save you heartache down the line – whether you’re buying a fish and chip shop, a florist or an electrical engineering firm. If you’re buying a listed business for sale, then it should come with a sales memorandum – which will give an overview of what is being sold.
- Get access to financial records – audited and management accounts. For this you will be asked to sign a confidentiality agreement. Don’t be alarmed at this. This confidentiality agreement (it won’t be more than a couple of pages) is a promise by you not to reveal sensitive information to a third party and is designed to make the seller feel comfortable about sharing the knowledge of how his business is being run. Remember, the business will still be operational and no owner likes it to be known (to either his customers or competitors) that his business is for sale. #* Get information about existing contracts – either with suppliers or employees.
- Research the local area and make sure there are no legal issues that might threaten your activity.
- If you are buying a services business, you may want to test the quality of those services and pretend to be a customer. If you’re buying a hotel, for example, you should stay there and review the standards. This is your chance to get to the bottom of what is actually being sold before you employ expensive accountants and lawyers. It’s also a crucial stage if you are going to borrow money from a lender to buy a business. The surer you are about the business and the more evidence you can gather to back up your case, the easier it will be to start negotiations with a lender. From your shortlist of five or six you should be narrowing down to just one or two – the major target and a backup.
- Begin negotiating the price. Once you are satisfied that the business you have targeted is what it seems to be – and that you have done as much as you possibly can to understand what it is you are going to buy – you can start to talk about buying the business. And inevitably this will mean a conversation or dialogue with the business owner or intermediary (agent, broker, accountant) about the price of the business.
- Value the business. A price is the ultimate reflection of the value of the business. There are many valuation methods used to assess a business. Most first-time buyers will be buying a property-based business (such as a pub, child nursery or coffee shop), which means that a great deal of the valuation will be based on the property itself. A surveyors report will give you comfort here. However, when it comes to valuing a non-property-based business or valuing the rest of a business (the turnover of the pub, child nursery or coffee shop) you will want to look at the methods, such as multiple of earnings, discounted cash flow, and asset valuation. You will need to take into account intellectual property and goodwill. Because you’re a first-time buyer, using a multiple of earnings is a good starting point. As a general rule you can take a multiple of future profits to land on a price. A majority of businesses that are sold are done so on a multiple of between three and eight times the profit. So if a business is making profits of £100,000 then it could be valued at between £300,000 and £800,000. If you were buying a hotel, restaurant or care home you would then have to factor in the value of the bricks and mortar. It’s a rough rule and anything between three and eight times profit is about right for most businesses. There are companies that specialize in valuing certain types of businesses and you may wish to engage the services of an accountant with experience in buying and selling businesses when making an assessment. However, in the final analysis, a business is ultimately worth what you’re willing to pay for it.
- Decide how to pay for the business. There are many ways you can structure how you pay for a business.
- The simplest and most convenient way is to pay in cash on completion. You pay the whole lump sum and the business is yours. Banks will lend up to 60% of the value of the business and you will need to find the rest yourself.
- Another way to pay for the business is to defer the consideration. Consideration is the legal term meaning payment. This way involves you holding back some of the payment until a certain event or milestone is hit. For example, if the value of the business you are buying is affected by the renewal of an important contract – with a key customer – then you may wish to defer full payment until that contract is renewed. You may wish to agree terms with the vendor. In effect, he or she loans you some of the money you need to buy the business he or she is selling by taking a big deposit for the business and then accepting monthly or quarterly payments from you, the buyer, over a specific period of time (three years, five years or even longer) for the rest. This is a very common way of buying a business in the United States – usually called ‘loan notes’ or ‘vendor financing’ – and is becoming more popular in the UK. The seller will wish to have some security built into an agreement that will give him an equitable stake in the business, should you fail to meet payments or if the venture fails.
- Create heads of agreement. The purpose of heads of agreement is so that there are no misunderstandings between the buyer and seller when it comes to completing a deal. Think of it as a road map that outlines how the sale will take place. It’s not the contract of sale – which comes later. Essentially it’s a document of terms – matters that you’ve both agreed on. For example, it will include a period of exclusivity that will prevent the vendor from talking to another prospective buyer. It will also protect the seller by preventing you from revealing information about the business to third parties. Importantly, the document gives you the right to recover costs if the seller suddenly decides to pull out of the deal. The heads of agreement are only partially legally binding, e.g. the exclusivity period or confidentiality terms discussed above. But the price of the business or the completion date, or whether you actually want to complete the deal, are not legally binding. You can still walk away, even if you’ve signed heads of agreement. See them as laying down the foundation of the deal, setting the parameters for it. They are designed to give comfort to both the buyer and seller. With heads of agreement a timetable will be drawn up. Detailed negotiations with finance providers will be taking place and information about when and how the money will be made available will be written into the heads of agreement.
- Due diligence. Now, you will need official due diligence undertaken by professionals to make sure that everything is as it should be. It may include commercial due diligence to assess the business itself, legal due diligence to look at the contracts of the business, and financial due diligence to assess the tax position. Depending on the nature of the business you’re buying, you may not need a complex assessment. For example, the due diligence involved in buying a post office may only be one or two days of your accountants' and lawyers' time. If you were buying a multi-million pound software company you would probably need a team of lawyers and accountants working over a period of many days and perhaps weeks. However, in each case, the principle remains the same – to make sure that the buyer is 100% sure of the business he or she is buying.
Tips
- If the business you want to buy is not actively being marketed for sale, there is nothing to stop you from approaching the owner directly and making an offer. Every business has its price. If you go down this route, however, it is advisable to employ an intermediary who will represent you.
- In early stages of discussions, the price remains subject to contract. This means you can make an indicative offer that can change at some future point. Before the contract is drawn up you may discover some information about the business that will affect your perceived value of it, and you may wish to negotiate further on the price. A similar situation arises in house buying. A surveyors report may reveal information that will change your opinion of the valuation. So feel free to talk about what you are willing to pay at this stage with the security that you won’t have to pay it once you’ve done further investigation. Of course, you may find out (upon further research) that the business is actually undervalued – and that you have a real gem on your hands (but don’t ever count on it). In this case, you may just want to pay the asking price.
- Sometimes the true benefits of business ownership are not related to what you do, but the fact that you are financially independent. Therefore, if you’re unsure about the type of business you want to buy but confident about being your own boss you might want to consider one of the many franchise opportunities available to you. There are over 650 systems on offer in the UK and thousands around the world.
Warnings
- Make sure that your advisors have actual experience of buying and selling a business. Your family solicitor or current accountant may not be the right professional.
- Careful financial planning is crucial as you don’t want to overstretch yourself in the purchase only to find you don’t have adequate resources to make any changes or implement new plans. Make sure you build in some fat or slack into your budgets. Start doing the maths early.
- Don’t allow yourself to be rushed, or pushed into a quick sale. Take your time. Once you make an indicative offer a business owner or intermediary may want to rush things through. That’s only natural. However, resist them. Remember, as a buyer, you hold most of the cards. Take as much time as you need to get to the bottom of what it is you are buying. Don’t let them force a timetable on you that you feel uncomfortable about. A timetable must be structured in your favour. You’re paying. You’re the buyer.
- There are many business brokers and accountancy firms who will target an opportunity on your behalf. However, this process can be expensive and the costs should be proportional to the size of the business you are targeting. There’s no point in spending £50,000 with a top-five accountancy firm if you’re targeting a post office. However, if you’re spending between £1m and £10m on buying a business then an experienced professional will be invaluable. BusinessesForSale.com has a directory of professionals who can be engaged for this type of activity.
- Due diligence is a crucial stage. You must find out the truth about the business being sold. Any flaws or irregularities could also help you to negotiate on the price or make your decision to walk away much easier.
