Buying a business can be an extremely exciting time! You’ve been looking for something to buy, you want something that is actively trading, making a profit and now you’ve found it.
What’s the next step?
You’ll no doubt be starting to think about offers, heads of terms, financing, appointing solicitors etc
As part of this process, it’s always important to take a breath and start to plan for how you approach it and consider what are the key steps/questions to ask yourself.
What are you buying?
One of the most overlooked steps in buying a business is establishing what you are buying. Are you buying a limited company and buying the shares from the owners, or are you buying certain assets from the company?
The answer to that question has significant differences for you (and the vendor).
If you are buying the shares from the owners, then you are buying all of the assets and all of the liabilities of the company. Additionally you are then responsible for the previous actions of the company (prior to your involvement). As part of the due diligence and legal process any risks should be mitigated/reduced but ultimately if any problems arise, the starting point will be for you to deal with it.
Whilst buying the shares carries some risk, the company’s position with its customers, suppliers etc hasn’t changed whereas if you are buying certain assets from the company, you’ll need to set your own company up and then novate any contracts over. You need to consider if it's a new company, will it get the same credit terms etc?
The tax position can be quite different under both scenarios, if you buy the shares then any tax relief is likely to be deferred until you sell the business whereas if you buy some of the assets, you may get tax relief earlier.
Deciding what to buy is a case of looking at all of the pros and cons and getting a balanced decision. Having said that, sometimes a vendor may take the position that they are only selling the shares.
Due diligence
Part of the buying process is to carry out due diligence. This is effectively looking into the business and understanding what the risks are, and checking that the company’s books and accounts accurately reflect your understanding (and reality).
Once you understand any risks or uncertainties, you have the option to negotiate the price, walk away or accept the risks and continue but safe in the knowledge that you can be better prepared for what might come your way.
Having a good solicitor who can guide you through the Sale and Purchase agreement is important and also having an Accountant who can guide you through the financial side is equally important.
If a vendor isn’t willing to provide sufficient information to carry out due diligence, it would be worth understanding why.
Planning for post acquisition
We tend to find that looking at the post acquisition period needs plenty of thought. Whilst the due diligence position looks at the history of the business, how do we know what the future looks like.
Part of the due diligence process will consider whether the business is in decline, growing etc but it is important to consider what your objectives are.
Do you want to expand it? Do you want to downsize it, focus on the profitable work rather than looking at turnover alone?
Forecasting will be a key part, preparing cashflow forecasts, and profitability projections will mean that you can see how your plans will work. It will also help you understand if there are any gaps in your expectations and finances.
It will also help you look at any areas which may need further investment, refocusing etc.
The typical areas we see as problems for business in the post acquisition period is:
• Staff
• Financing
• Premises
Have you met the staff? Are there any key staff that the business needs to retain? What is their notice period? Is the company paying staff well (or too much…..) Are there any staff which might need to go, what is their redundancy entitlement?
Financing; do the forecasts show that whilst you have enough money to buy the business, does it have enough working capital in the early months/years? What if the customers don’t pay as quickly as expected?
Are the premises from which the business trades big enough? What is the position on the lease, will you need to extend it? Do the premises give the right impression for your plans?
Moving premises can be costly and so again it is worth factoring the time and effort as well as cost into your plans.
If you are looking at buying a business, please get in touch and we can help you through the process.
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