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10 Tips on How to Buy a Business

Buying an existing business is one of the safest ways of becoming your own boss. Whilst the success statistics for start-ups aren’t great – more than half fail within the first five years – the prognosis for an established business is far better.

This really isn’t surprising when you consider that included in the price tag of your purchased business will be an established brand, customer base, existing revenue streams, relationships with lenders and suppliers, staff who know the ropes and tried and tested business practices.

What is vitally important is to choose the right business for you. Think about your skills and attributes. There’s no point dreaming of owning a pub if you are an introvert who likes early nights or – conversely – a home-based internet business if you thrive off human interaction!

Once you have established your personal skill set, go ahead and follow these 10 straightforward steps to buy a business:

10 Tips on How to Buy a Business

#1. Choose your business sector

Choosing the right business sector to be in requires detailed research, particularly regarding the industry’s future prospects.

Besides thoroughly evaluating your local rivals, also check out any possible legal concerns and watch out for planned or proposed regulations which could impact upon your anticipated enterprise.

Don’t overlook industry-specific publications (often a source of detailed insider information) and the government’s website is an excellent resource for practical advice.

#2. Identify the business you want to buy

Now that you have researched generic data about your chosen sector, you are ready to seek a business on the open market. You should establish your available budget, decide upon a location and have a clear idea of the scale of operation you want to handle.

Once you have narrowed down your search, also consider the possibility of making an offer for a business that’s not currently on the market. The advantage here is that if you can prompt some initial interest there will be no rival bidders, and you can still appoint a broker to negotiate a mutually acceptable deal.

#3. Do your research

Prior to engaging experts, you can usually conduct your own low-key investigation to check for snags. For example, sampling the business as a customer – as well as meeting customers – can give a unique insight.

Proof of well-organised company financial records can make business financing easier to secure so you may be able to make a gentle request to see these at this early stage. However, bear in mind that the signing of a confidentiality agreement is usually a prerequisite of any such privileged access.

In addition, the potential tax implications of any purchase must always be taken into account.

#4. Start negotiations

At this point, you will have acquired a contextual understanding of your target business and the sector within which it trades. That information will be essential as you enter discussions with the current proprietor.

Following an initial business valuation, early talks will probably focus on the selling price, though your preliminary offers will not become legally binding at this stage. Research the seller well and try to decipher their needs and priorities. This is just as important as knowing your own, so think about what you would do if you were in the other person’s shoes.

If you know who you are dealing with, you can better position your business to attract that buyer and make strategic decisions to maximize your strengths and capitalize on the other party’s weaknesses.
It is also very helpful to mutually agree a planned schedule covering the progress of the sale.

#5. Valuation

A reliable and accurate valuation is essential to any business purchase, and it will be determined by the kind of enterprise which is on offer.

Business assets will often constitute the major component of the valuation, and whilst these material items, such as property and equipment, are easily quantifiable, don’t forget to establish annual turnover, contractual assets and liabilities and existing goodwill as well as profits.

For many industries, specialist accountants are an important safeguard and can save time when specific valuation data must be gathered and analysed.

#6. Heads of Agreement

At this stage, it is common practice to prepare a Heads of Agreement document which is not legally binding.

The purpose of this initiative is to collate all the essential sale elements in one document. This means that suggested arrangements for payment, business confidentiality clauses, and assigned responsibilities can be drawn up at a point in negotiations where neither party is fully committed.

A major function of this agreement is to document a pathway to completion detailing the timetable and deadlines for the remaining phases of the sale.

#7. Due diligence

By now, the final stages of the purchase should be clear to all parties. This is the point at which professionals must formally scrutinise the financial records, commercial practice, and daily routines of the business to be purchased.

Whilst this is no time to cut corners, the legal/accountancy cost of such operations should remain proportionate to the anticipated purchase price.

And be sure that if the due-diligence checks throw up unforeseen and negative financial implications, that you hold your nerve and go back to the negotiating room table.

#8. Final Sale and Purchase Agreement

Based on a satisfactory due-diligence outcome, the signing of a sale and purchase agreement formally completes the acquisition process and translates the informal overview of the Heads of Agreement into a sale contract which is legally binding on all parties.

#9. Payment

A small-business purchase usually requires payment when the final agreement has been completed.

However, large-scale purchases can include financing from an array of sources such as banks, private investors and peer-to-peer loans. With some sale agreements, the vendor may accept just a proportion of the full business valuation in return for a share of future profits.

#10. Completion

With all documents in place, plus signatures on contracts and on the payment agreement, the sale process can finally be deemed complete. Although the processes of a business purchase can seem pretty time-consuming, most determined buyers and sellers reach a positive agreement.

So what are you waiting for?

Images: “Midsection of businessman giving cheque at desk in office/Shutterstock.com

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Faye Ferris is the APAC Sales & Marketing Director for BusinessesForSale.com, the world’s most popular website for buying and selling businesses attracting over 1.5 Million visitors each month. If you are interested contact Faye. http://www.BusinessesForSale.com

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Comments
  • Welcome to Tweak Your Biz Faye and thanks for sharing these tips with our readers. Buying a business is a huge commitment so should be considered and executed very carefully and with lots of advice like this onboard.

  • Peter Watson

    Great tips Faye! I’m sure this info will be very helpful to first time buyers out there.




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