Business Purchase
Buying a Business
Buying a business can be a great opportunity for the seasoned entrepreneur and newcomer alike. An established business will, naturally, have an established customer base and brand, allowing you to strengthen the position of any other business you own or diversify into new markets. For the newcomer with money, it offers an easier way into business than going it alone.
Although purchasing a business can be an exciting proposition, it is not something without its challenges. In this article, we are going to outline the basic process of buying a business.
Negotiation
Before making any offer, make sure you do your research. To help you focus, you might want to do an assessment on the basis of a SWOT (strengths, weaknesses, opportunities, threats) analysis in order to figure out whether the business you intend to buy is a good deal or not, the realities of the market in which it operates and, if applicable, how the business will fit in with any other businesses you own.
If after your preliminary research you are convinced that the business is one for you, consult relevant professional advisers to find out what will be involved in buying the particular business . Solicitors will help you draft and negotiate any initial offers and help you understand the business’s current rights and obligations. Valuers will help you make sure that the business is really worth the asking price and give you scope for negotiation. Accountants will help you understand the business’s financial position, where the business might go in the future and how you can structure the purchase.
If you do consult professional advice, make sure that anyone you deal with is properly covered by indemnity insurance so you can be properly compensated in the event your adviser is negligent.
Coming to an agreement
When making an initial offer, you should take into account the strength of the seller’s position, the amount of interest in the business, its estimated value and your own and the seller’s forecasts.
If the seller accepts your offer, both parties should agree on a ‘heads of terms’ agreement, which will set out the main terms of the transaction, including what it is you are agreeing to buy, the price, whether the price will vary according to future performance and the method of payment.
It is wise to fully consider what it is you exactly want to buy in order to be certain of your future liabilities and tax obligations. If the business is a limited company, you could opt to buy the shares, but you have to remember you will take on the business’s liabilities by doing this. For this reason, purchasing assets is often simpler and less risky.
If possible, a term regarding exclusivity should be included so as to give you time to finalise the deal and prevent the seller from deciding to accept other offers. If the seller breaks an exclusivity clause, you will have a claim against them. Naturally, whether you can agree to an exclusivity clauses depends on relative strength of your mutual positions.
Due diligence
After finalising a heads of terms agreement, it is essential to carry out thorough due diligence. This will help you understand the exact state of the business, what it owns, it’s current and potential liabilities and whether its potential matches your initial research.
If you are satisfied that the business is for you, you should make sure that your solicitor includes warranties in any final agreement you sign and try to negotiate appropriate indemnities for any foreseeable losses.
Please bear in mind that this article is only intended to give a basic overview of what is involved in buying a business and whilst we hope it is of some use to readers contemplating the purchase of a business, we must stress it is not a substitute for professional legal advice.