A Guide to Buying a Business

Embarking on a journey to buying a business is a bold and transformative move that demands much more than just an entrepreneurial spirit. Buying a business requires meticulous planning, a thorough strategy, and an understanding of other intricacies that arise when acquiring an existing company - which is why following a comprehensive guide is useful. Between 2022 and 2023, the total business population increased by 46,000. Buying a business can be both exciting and daunting, and the financial aspect is a very important part to consider. We have compiled a list of everything you need to know when considering buying a business.

Our guide will help you:

• Consider your reason for buying a business
• Review your financial position
• Understand why the business is for sale
• Investigate more into the business
• Question how long is left on the commercial lease
• Consider the legal requirements and due diligence considerations
• Keep things confidential
• Know when to walk away

Consider your reason for buying a business

Whether you’re interested in entering a new type of industry, would like to expand your business portfolio, or would simply like to capitalise on an existing business, the whole reason you are buying a company is what will guide you throughout the rest of your journey. Take the time to acknowledge why exactly you are interested in the business before reviewing your financial position.

Review your financial position

You know why you want to buy a business - so how is your financial position looking? Reviewing your financial status is a fundamental part of the process. It will help you with informed decision-making and mitigate any financial risks that may arise when acquiring the business. It is important to ask yourself:

• Do I have the capacity to be able to run a new business / expand your existing business?
• Am I in a financially stable position to buy a business?
• How will I fund the purchase?

Consider your finance needs early

Ensuring you have a means to fund the purchase is important to consider at this stage, as if there are no avenues available to you, it will save you wasting time on the next steps. Similarly, if there is a shortfall, either in terms of the capital you already have available, or the amount of finance you feel you will be able to raise, then you will need to have a strategy in place to fill that gap. Identifying any gaps and devising a well thought out strategy before reaching out to a finance broker or lender will show good business sense and helps demonstrate your awareness of the need to reduce risks for lenders.

Perform thorough due diligence before making an offer, or applying for finance

After you have carefully planned if and how you will financially be able to purchase the business, you will need to conduct thorough due diligence in order to move forward. Market research is a critical step because it will provide you with the information needed to understand the target market, your competitors and any other valuable insights into the industry.

Your research should include:

Industry & Competitor Analysis

Understand the overall health, trends and growth prospects of this industry. Identify the market leaders and any other businesses you may be competing against, notifying their strengths and weaknesses and any other challenges this particular industry may face that may impact the business.

Market Trends

Examine what the current trends are in the market of the business you are buying, what the customers’ preferences are, and their consumer behaviour to find ways to further grow the company.

Financial Performance

Review the history of the business’s finances. Analyse their revenue, expenses and profit margins. Does the business have a burden of existing debts or poor financial health which you will be inheriting? This isn’t always a bad thing as indeed, struggling businesses are generally more affordable, but it should never come as a surprise!

Customer & Supplier Loyalty

Gather customer and supplier feedback. Read their reviews and recognise any potential issues or concerns that the customers may have with the services the business provides. Similarly, don’t assume that you will automatically retain access to the same suppliers at the same rates. Sometime, especially if you merge a business in with an existing business, you may need to reapply or renegotiate terms with suppliers.

Future Growth Opportunities

Identify the potential areas in which you could grow and expand the business, assessing the scalability of the company and its ability to adapt to market trends.

Understand why the business is for sale

Before taking ownership, gain the clarity you need by getting a logical explanation of why the owner is selling the business. This information will give you an insight into the motivation behind the current owner and can impact your decision to go ahead with the acquisition; helping you anticipate any unique challenges or opportunities associated with the business.

Investigate more into the business

Once you know the incentive of why the seller is looking to sell their business, you can deepen your research into the company and contemplate more factors that may influence your considerations about buying the company. It is advised that you speak to a professional business broker and potentially a chartered surveyor in order to find out how much the organisation is valued for, assessing its location and the condition of the building (where the business owns the property they are in).

Take time to talk to the staff. Get to understand their perspective of the company, their well-being under the organisation, and if they are aware of the acquisition. You can also gain a deeper understanding of what the customer/client base is like by talking to your (potentially future) staff.

Question how long is left on the commercial lease

When viewing this business it is also important to acknowledge the tenure, whether it is a freehold or leasehold and how that may impact the business both short and long term.

A freehold agreement gives you exclusive ownership of that property. While a freehold gives you full control over the building, builds equity, and enables financial stability, beware of the fact you will have to cover ongoing maintenance costs, repairs and any economic factors.

In a leasehold agreement, the landlord gives the tenant the right to occupy and use the premises for business purposes over an agreed length of time. The agreement is between the landlord and tenant, outlining rent payments, maintenance obligations and any other conditions about the property. Its benefits include cost predictability, less responsibility when it comes to maintenance and repair, as well as the ability to relocate to adapt to market conditions. However, keep in mind that it would be harder to build equity and your rent prices may increase which may affect your short-term cash flow.

Consider any regulatory or legal requirements

Acquiring a business can be a complex legal process to try and navigate through. Therefore, obtaining professional legal advice from a corporate lawyer can guarantee a smooth and legally compliant transaction.

While you are seeking professional expertise, allow yourself to perform due diligence checks, such as:

• Accounts receivable: ensure that if you do acquire this business, you are clear from the beginning about any outstanding invoices and who is accountable for actioning them.
• Suspicious sellers: if your seller is not sharing the financial information that you need it can seriously impact the purchase of the business. Be prepared to walk away if they are refusing to disclose important information.
• Badly-maintained property: if the premises, equipment or resources are in poor condition, it may provoke a warning sign of business neglect, and you may need to invest in better equipment.
• Business credibility: reviews say everything you need to know about a business. A collection of bad reviews will make it more difficult to turn around and ensure customers can trust your organisation.
• The happiness of staff: be confident that your staff are satisfied with their place of work. A high turnover of employees results in significant costs with recruitment and training new employees; not to mention customer impact and how it would affect your organisation’s reputation.
• Business credit rating: take a look at the business’s credit rating to give you more insight into the management of the company.

Keeping things confidential

It is important to keep your intricate and financial conversations, research and any discussions with the seller confidential. If it became known to staff, customers or competitors, it could cause concerns about the future of a business that may panic customers or suppliers, damaging the business that you do not even own yet. Establish a confidential relationship by using a non-disclosure agreement (NDA) for any sensitive information.

Determine or obtain a valuation for the business

Valuing an existing business can be a challenge as so many factors can influence it. In simple terms, a business value might be calculated purely on the value of assets such as stock, premises, vehicles, which are daily easy to put a value on. However, more abstract or subjective considerations can also have an impact. For example, does the company own any intellectual property which perhaps hasn’t yet been commercially exploited or fully realised; what is the approximate value of the existing customer order book, and how might this change as a result of you purchasing the business.

Our recommendation would be to always seek professional advice when venturing into business acquisitions as the insight of a professional could significantly save you money in the long run and prevent you paying over the odd.

All looking good? Now it’s time to get your finance confirmed

As you will have already evaluated your ability to finance the business in principle, now you need to get all of your ducks in a row and secure any additional funding prior to making an offer. The most embarrassing and unprofessional approach would be to make an offer, have it accepted, and then having to reveal you can’t get the necessary finance!

At Union Business Finance, we provide business acquisition loans which can often be secured against the business which you are purchasing which helps first time business owners, plus minimise risks on your existing business for buy-outs, and this will usually be capped at 90% of the acquired business value.

Know when to walk away

Buying a business is a decision not to be taken lightly. It can have financial complications and additionally impact the livelihood of staff both within the business being purchased and potentially your existing business (if applicable). After all the work you’ve put into researching the purchase, you may feel you’ve invested so much that you feel you have no option than to commit fully.

However, if something does not appear how it should, or if the finances just don’t add up, do not be scared to walk away.

Find out how much you could borrow with a business acquisition loan

Acquiring a business can be a complicated and overwhelming process. That’s why our team of trusted professionals is here to help you make it as straightforward as possible, finding the best possible financial solution for you.

To find out how much you could borrow with a business acquisition loan, contact us.