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10 tips to consider before buying a business

October 3, 2011

If you’ve decided to buy an existing business rather than starting a completely new venture, here are ten things to consider before taking the plunge:

1) Set your goals

It’s vital to understand exactly why you are looking to buy a business in the first place and set clear and realistic goals for it. You may wish your business to generate you an income every year. Or you may be more interested in something you can scale up and add value to, to sell again down the line.

Having a clear goal in mind will help you more sensibly assess potential purchases, and will also be a useful steer for any sales agents or other professional advisers you might employ to help find you a suitable business.

2) Make sure you’ve picked the right industry

Be careful that you have picked the industry that will help you achieve your goal, rather than being simply drawn to an industry to fulfil an unrealistic childhood dream.

Maybe you’ve always harboured the desire to own a widget factory and noticed there are five such businesses on the market at the moment? Is it the opportunity of a lifetime, or could it be because the market for widgets died a year ago?

The best way to learn more about any given industry is to go and work in it for a while. You may even be able to do this part-time around your existing job.

If you really want to own a restaurant, spending a year working as a waiter in the evenings will be the best way to test your dream. You will gain invaluable inside knowledge which you’ll be able to put into practice in your own restaurant when you get it going.

3) Do your research

A quick Google search will give you dozens of websites and companies that offer businesses for sale. Spend several evenings doing your research here, to see what’s around in your chosen sector and geographical location.

Aim to put together a shortlist of businesses and then target them with even more research. Go through every page of their website; Google their name to see what others think; and track down customers to ask their opinion. You could even pose as a customer yourself to see what the company is actually like.

4) Have an initial viewing

Now is the time to approach the business through their agent and learn more. Remember to stay subjective – just as when you’re buying property, you need to think with your brain not your heart. Listen to your gut feeling and don’t ignore it… buying a bad business is an expensive mistake to make.

Our guide on How to value a small business will give you some help on valuing a business.

Some business owners don’t tell their staff they are selling, so as not to risk them taking their eye off the ball at a time when the performance of the business is under close scrutiny. Comply with these wishes and remember to maintain a friendly, if professional relationship with the seller.

They might be selling you a business they built from scratch and will want to ensure it is going to a safe pair of hands.

5) Do a reality check

Now you have the full information on the business – official and unofficial – you should take a step back and think it through. What warning signs have you seen in the business? No company is perfect, but do you have the skills to fix the problems you have seen? Can your strengths enhance this business?

Be particularly careful if the business appears to be over-reliant on the current business owner or a number of key staff. The business owner cannot be replaced like for like, even by you. And key staff may be the first to leave during a major upheaval – will this business survive without them?

6) Get help

It’s best to get some professional and informal help. Ask your accountant and solicitor to pore over the figures and contracts. It doesn’t matter how much this costs – it’s much better to spend a few thousand and uncover some potential horrors now, than discover them 12 months down the line when it’s too late to do anything about them.

Ask your partner and friends what they think. By this stage you may already be too close to the business to be fully subjective, so people whose opinions you trust may be able to provide a fresh perspective.

7) Get the money sorted out

Just as when you’re buying property, you should have a budget in mind when you start to look for a business to buy.

If you are buying the business with finance, you should make sure you have a general agreement of credit in place before getting into detailed discussions with vendors.

Now you’ve got a specific purchase in mind, get the credit formalised. Lenders will generally look for full details of the business you want to buy, including three years’ accounts and financial projections. They may even ask you to put some personal assets up as a guarantee for the loan.

If you are struggling to secure a bank loan, other sources of finance you could explore include; your pension fund, an existing business or “friends, family and fools”.

8) Make an offer

If you don’t have a solicitor, get one now. Make your initial offer by phone and always follow it up immediately in writing. Use the term ‘subject to contract’ in all communication.

This is the time to request conditions of sale, such that the existing owner stays within the business for a set period during a handover.

9) Negotiate a great deal

Don’t be afraid to push for the deal you want. Not that many businesses have sellers fighting over them, so as someone with cash to splash you are in a strong position.

You and your solicitor will go through a process called due diligence, where you verify the information given by the seller.

Find out why the current owner is selling and leverage it. If they want to retire, are they really going to jeopardise the sale of the business for the sake of a few thousand pounds?

10) Buy the business

Once the lending has been settled, and everything has been transferred to you – congratulations, you just bought a business!

Now the hard work starts!

You have to fit into the business and understand it fully, before you can start to make the changes needed to hit your original goals.