Buying a small business can be a great opportunity or first step into the world of business without starting from scratch, but there are a few things you need to know before you seal the deal.
Every day in the UK, there are small business owners who are ready to retire or want to change focus, giving aspiring individuals a chance to buy an established business with an existing customer base.
Buying an existing small business is a serious investment. It comes with many benefits but it is not without risk. To prepare you for the journey, the small business accountants at Tax Agility aim to discuss the following issues in this article:
- Advantages of buying a small business
- Disadvantages of buying a small business
- Assessing your strengths and requirements
- Finding a business for sale
- Valuing a business
- Conducting due diligence
- Making an offer
- Signing a contract
Advantages of buying a small business
Buying an existing small business has many benefits, particularly if it has been well-managed. In general, the benefits include:
- It is easier to secure finance when buying an established small business as lenders see less risk in existing businesses which have already generated income versus start-ups.
- An existing business tends to have a healthy customer base and strong relationships with suppliers, along with equipment, stock, a working website and even intellectual property.
- It is highly likely the existing business has staff with experience that they can share them with the new owner.
- As the business is not starting from scratch, it also means it has cash flow.
Disadvantages of buying a small business
- You will need to invest a significant sum of money to purchase an existing profitable small business. You will also need to spend on professional services including due diligence experts, lawyers and accountants.
- You will inherit any issues the business has, anything from old equipment or an outdated website to quality problems. You are likely to invest a lot more to fix these issues.
- The business situation may change, e.g the original owner might have purchased products from his family members at a discount and this situation is likely to change once you take over.
Assessing your strengths and requirements
Before you decide to buy a business, it is worth taking some time to assess your strengths and know what the business is likely to require of you. Ask yourself these questions:
- How much money are you ready to invest?
- Where will you get the money from? Our post titled “The complete guide to business funding” may make a good read.
- What are your goals?
- Do you have a preferred industry?
- Do you have a preferred business model?
- Are you mentally and physically prepared to work long hours to make the business succeed?
Finding a business for sale
Once you know that you are ready to purchase an existing small business, the next step is to visit a business broker and see what is available. Small business accountants like us may also help, as we work with businesses across London and our clients tend to let us know if they are planning to sell their business. Alternatively, you can find out from real estate agency listings, trade journals or even newspapers.
Research is key when you are looking to buy a small business. Our advice to aspiring individuals is not to take the seller’s word on everything that they say, but do your own research. Find out who their competitors are, talk to their customers and look through online reviews, talk to suppliers, research market trends, or even try out the business’s products or services.
Valuing a business
Nobody wants to overpay for a business, so it is important to find out what you are actually getting as part of the sale.
Generally, business experts value how much a business is worth based on its net worth (meaning the difference between its assets and liabilities), plus its potential to generate future earnings. In this day and age, factors such as a business’ social media reach may also be considered.
Conducting due diligence
In our opinion, due diligence is perhaps the most important process when you are ready to acquire an existing small business. Due diligence helps to give a true value of a business and identifies the associated risks.
Due diligence means you (the buyer) will investigate, test and verify the various claims made by the seller. Due diligence is done to protect the business interests of the investigating party, to ensure that claims are genuine, and to assess financial matters of the other party (such as assets, financial performances and pre-existing debts). To put it simply, due diligence is a way of ensuring that there are no nasty surprises waiting for you following the transaction.
Due diligence covers every business aspect including financial, taxes, intellectual property, licenses and permits, employees, employee benefits, environmental issues, material contracts, customer information, insurance, litigation, among others. Financial due diligence is best performed by chartered accountants, as it can cover anything from income statements, credit history, stock, to payment records.
Making an offer
If you are happy with the business and everything you have seen and reviewed thus far, it is time to make an offer. Unless the seller is desperate due to ill health or other factors, this negotiation process is likely to take a while so be patient.
Your offer should almost always be lower than the asking amount, then expect the seller to provide you with a counter-offer. Eventually, after many rounds of negotiation, you will either make an agreement by meeting at a middle ground, or either you or seller will decide not to go through with the purchase. One word of advice is, you should not get pulled past the value you can afford to pay.
Signing a contract
By now, you should have a solicitor working with you to draft up a purchase contract. It is increasingly common to include contingencies in the contract. For example, the purchase is subject to finance approval by a bank, or the contract bans the seller from opening a competing business in the same area for a period of time.
Tax Agility helps businesses get up and running in no time at all
At Tax Agility, our chartered accountants are small business specialists. We work with many small businesses in and around the London area to provide them with the expert advice they need to make good business decisions, along with accounting and tax services to keep their finances in check.
We work with small businesses at different stages of maturity from start-ups to long-established companies, including small businesses that have brand new owners in place. We provide vital consultancy services to potential buyers of small businesses – from business valuation to careful examination of financial records – to uncover any potential red flags buyers should know about before agreeing to a transaction.
After the deal is done, Tax Agility’s specialists can prepare annual business plans, provide forecasts, deliver projections and perform vital account management. We will also help sort out your tax situation, provide payroll services and offer VAT advice.
Our comprehensive service is tailored to suit the bespoke accountancy and financial needs of small business owners. To find out more about how we can help you as you look to take over a pre-existing small business, simply call us on 020 8108 0090 or use our online form to get in touch today.
This article was updated on 25/09/19.
If you liked this post, you might also enjoy:
- The complete guide to business funding
- Small Business: 5 ways to get new customers
- Five ways to improve your company’s cash flow
This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.