BUYING AN EXISTING BUSINESS: THE FULL GUIDE

BUYING AN EXISTING BUSINESS: THE FULL GUIDE

CONTENT

  1. WHY BUY AN EXISTING BUSINESS?
    2. PLAY ON YOUR STRENGTHS
    3. POSITIVES AND NEGATIVES OF BUYING AN EXISTING BUSINESS
    4. THE INVESTIGATION
    5. INFRASTRUCTURE DETAILS
    6. DIFFERENCES IN PRICE PURCHASE
    7. BEING FLEXIBLE IN NEGOTIATION
    8. BUSINESS BROKERS
    8.1 WHAT IS A BUSINESS BROKER AND ARE THEY
    WORTH EMPLOYING?
    8.2 GET TO GRIPS WITH THE CHALLENGES
    8.3 WILL THEY ASSIST YOU?
    8.4 WILL THEY HARM YOU?
    8.5 WHERE TO FIND A BROKER?
    8.6 HIRING THE RIGHT BROKER
    8.7 CHECK THE BROKERS REFERENCES
    8.8 EXCLUSIVITY AGREEMENT WITH A BROKER
    8.9 WHAT COMMISSION TO EXPECT WITH A BROKER
    8.91 WHAT IF THE BROKER IS NOT PERFORMING?
    8.92 AN EXPENSE THAT IS WORTHWHILE
    9. THE DUE DILIGENCE
    9.1 APPROACHING THE DUE DILIGENCE, THE RIGHT WAY
    9.2 HOW LONG TO EXPECT FOR DUE DILIGENCE?
    10. GET YOURSELF PREPARED
    11. SHOULD YOU HIRE PROFESSIONALS?
    12. GET THE BUSINESS SELLER ON YOUR SIDE
    13. WHAT IF YOU FIND UNEXPECTED SURPRISES?
    14. VALUING THE BUSINESS
    14.1 WHAT IS THE TRUE VALUE OF THE BUSINESS?
    14.2 VALUING A BUSINESS, THE TRADITIONAL WAY
    14.3 WHY TRADITIONAL VALUATION METHODS DO NOT ALWAYS, WORK
    14.4 NO TWO BUSINESSES ARE ALIKE
    15. A GOOD BUSINESS VS A CHEAP BUSINESS
    16. WILL THE BUSINESS LAST AS LONG AS YOU NEED?
    17. SOME RESOURCES

WHY BUY AN EXISTING BUSINESS?

When buying a business, the first question would be what type of business to buy. What best fits your skills, knowledge, and budget?

A choice of a franchise, running businesses, start-ups, internet businesses, home-based and dropshipping it does become a touch overwhelming. 

You must take into consideration your lifestyle and the changes that will be required when you buy an existing business. It is no small decision and requires careful consideration before jumping into any new venture.

With any business, you have specific challenges, and you must work within those limits and understand what the company is asking from you before taking any steps.

No matter what type of business you are looking at, all companies will have a history of its performance and how the business performed, this gives you a clearer picture of what to expect.

PLAY ON YOUR STRENGTHS

If a business was not profitable in the past, consider the factors, your strengths may be what is required to turn it from a non-profitable company into a profitable venture.

By understanding the historical data, you can calculate what the previous owners were doing wrong to put it in a negative situation.

POSITIVES AND NEGATIVES OF BUYING AN EXISTING BUSINESS

POSITIVES:

  • The business is ‘up and running’ already
  • It is likely to possess an existing client base
  • You get support from the company owners
  • The business formula is proven and tested
  • Faster growth potential with the brand already established
  • Your chances of success are way higher than starting from scratch

NEGATIVES:

  • A significant investment is typically required to buy
  • Business transfer costs are involved, i.e. solicitors, surveys, accountants, etc
  • Considerable time is necessary to conduct your due diligence
  • May require relocating yourself/family

THE INVESTIGATION

To find the right business, you need to conduct vast and detailed due diligence to establish the current status of the business venture.

You will accumulate this information through the past operation details and accounts available to determine how it measures in value and potential.

The due diligence is more substantial to determine with an existing business or franchise as you will have all the documents and history to scrutinise.

INFRASTRUCTURE DETAILS

An existing business has the infrastructure established, such as the brand, the online operations, the suppliers, the customers, equipment and above all the knowledge from the relevant owner.

DIFFERENCES IN PRICE PURCHASE

Depending on how you view this, buying an existing business does not necessarily mean that it will cost more.

In many cases, it can be less costly than a start-up. Think of what it would cost to get a start-up business in the position of a successful existing venture, Consider the start-up costs, building the brand, conducting the marketing, growing the customer base, years of finding the right suppliers, years of time and research you put in. 

Also, years of building the brand in a location or multiple locations are hard to do with a start-up.

When you factor all this in an existing business can be a more viable option.

With a franchise, an honest Master Franchiser will do demographic studies on population, drive-by traffic, potential customer base and an entire series of studies which will indicate that “theoretically’ the business should have best. However, the sole thing they cannot guarantee either by law or is whether or not; you’ll achieve success. 

BEING FLEXIBLE IN NEGOTIATION

You will have the flexibility in negotiating the price of an existing business and doing so based on thoroughly knowing its current state and history. So due diligence is probably the most critical factor when buying an existing enterprise.

BUSINESS BROKERS

WHAT IS A BUSINESS BROKER AND ARE THEY WORTH EMPLOYING?

A business broker is a medium between the buyer and seller of an existing business. 

They specialise in businesses. The standards to become a business broker varies from country to country, and their training, history, speciality, and area of experience and expertise need to be taken into account and checked.

You can find some that are self-employed, and others are brokerage firms who work on a set commission. It is frugal to negotiate your costs beforehand when using a broker. 

In a nutshell, you should hire a broker! However, you must employ the right broker. 

A broker can provide you with the expertise in finding and have access to businesses on sale that you would never be able to locate on your own. 

They will narrow the look for you to companies that suit your criteria and that they can assist you to avoid tons of wasted time. 

The one thing that brokers cannot do regardless of how good they are will be to seek out a business that is right for you. Often this is something that only you will do. 

Brokers like to work with knowledgeable buyers, and if they need to spend their time educating you, then they are spending extra time on the job.

They will be an efficient tool for you to use if you will provide them with a clear mandate of what exactly you seek.

Explain what you want, what your strengths and weaknesses are and your knowledge and skills.

GET TO GRIPS WITH THE CHALLENGES

Ninety per cent of the potential buyers that brokers work with never buy a business. While this is often a part of the danger involved in their chosen profession, this does not mean you waste their time. 

Accordingly, they will be somewhat hesitant when working with new clients until you demonstrate your sincerity and commitment to purchasing a business. 

There’s little question that if you are a significant and educated buyer, then an honest broker will go above and beyond the decision of duty to service your needs. 

Appreciate their time and understand they are making a living from this. 

If at any time you opt to drop out of the hunt to shop for a business, then let them know immediately. 

If at all you feel they are not putting in the effort in finding you the right business than find another broker.

WILL THEY ASSIST YOU?

There are two significant ways in which a broker can assist you. 

First, they will provide you with listings and knowledge on businesses that are available for sale that you would not be able to find on your own. 

In other words, they need the database from which you will search. 

Secondly, they will mediate negotiations between the seller and the buyer. Allowing the buyer to give honest opinions, especially bad views, without feeling uncomfortable in face to face with the seller.

By letting the broker deliver your bad opinions, you’ll maintain the integrity of your relationship and keep yourself in a third-party position when tough re-negotiations are needed.

The rationale is needing the seller on your side to complete the deal and after-sale support. 

WILL THEY HARM YOU?

If you employ the wrong broker, they will hurt you significantly. 

They are going to be a monumental waste of your time. Especially if they are working on both sides, negotiating for the buyer and the seller. Always remember the broker is ‘supposed’ to be working for your interests.

The danger of this is that they may hide crucial facts about the business to sell at a higher price than wouldn’t otherwise sell for.

Not being upfront with all the facts is the most significant danger a buyer faces.

Often this is precisely why you want to control the negotiations and use them appropriately; otherwise, you may end up in a bad position.

WHERE TO FIND A BROKER?

The search engines are obvious and the fastest way of finding a broker. 

Make sure you conduct your due diligence on them. Check the broker’s reputation on places like trust pilot, google and yell.

Also, if you are conscious of any business that has recently changed ownership, call the new owner and ask them for a recommendation. 

Speak to lawyers, accountants, friends, family, businesses associate and ask them if they will suggest anyone. 

Don’t just take anyone’s word for it make sure you conduct your due diligence on the broker.

HIRING THE RIGHT BROKER

It is advisable to meet the broker and discuss the key elements you are looking for. Discuss your budget, your skills, knowledge, and experiences. Try and give them as much information as possible.

If you decide to go with a brokerage firm, get them to offer you a choice of a few brokers to find the right one for you. Decide if the broker understands you and what you want.

Do not just settle on the first one you approach. Talk to a few brokers to determine who you can work with and always remember they will be working on your behalf.

Use the internet to find a broker, call, and email if they don’t get back to you in a day. Ditch them!

Ask to meet face to face, get them to come to your designated place, and at a time you decide, test their commitment. It is critical to find a broker that is willing to go the extra mile.

CHECK THE BROKERS REFERENCES

Find some clients they have brokered for before and talk to the buyers and sellers. Remember you are potentially spending a lot of money and maybe your life savings and doing this is not out of place, so don’t be shy. Check four or five of their previous clients.

Always expect they are going to provide clients that they have had success with and have a good relationship with so try to get some additional ones yourself.

Ask the clients the brokers strengths and weaknesses, and if they would use them in the future.

Do your due diligence online, check feedback and trust /review sites such as yell, trust pilot, google etc. 

Never use the services of a broker without checking them out.

If a broker has a problem with you doing this, ditch them!

EXCLUSIVITY AGREEMENT WITH A BROKER

Some brokers will ask for an exclusivity agreement; this is not out of place and is a common practice. Tell them you don’t have a problem with that as long as they conduct quality work.

Sometimes an initial application fee is required, again it is not uncommon; they typically do this to test your seriousness in this venture. A broker can do hundreds of hours of work and want people who are serious and committed.

You may be expected to sign confidentiality agreements with the broker and businesses.

WHAT COMMISSION TO EXPECT WITH A BROKER

The seller is responsible for paying their commission

Typically, this is 10% of the sale price of the business. The contract will be between the seller and the broker.

In some case, a broker may ask the seller for a commission, this is an uncommon practice so consider carefully before signing any agreement as a buyer.

Always remember the seller has calculated the price of the business to pay the broker.

WHAT IF THE BROKER IS NOT PERFORMING?

If a broker is not putting in the effort you expect, let them know. Tell them you are not happy with the service provided and that they should perform, or you will find another broker.

If you do decide to leave and get another broker then remember they are entitled to any commission of a business, they have shown you.

So, let the brokers know and make an agreement on how much each broker will get in commission.

AN EXPENSE THAT IS WORTHWHILE

The brokers earn a handsome commission, but if they do the job right, they are saving you time and money as well as finding a reliable business for you. So they are entitled to it.

When meeting a broker for lunch or coffee, pay the bill as that shows your appreciation for their work.

It is also the right thing to do. 

Remember the broker is working hard for you, and a little appreciation goes a long way in getting the broker to go the extra mile.

THE DUE DILIGENCE

Due diligence is conducted by accessing all the documents and accounts of a business to determine its viability and potential success in the future.

Inexperienced people have a notion that just looking at the financials of the business is enough due diligence. To a certain extent, this is true, but you must go much deeper than this to establish the status of a business.

You want to be sure the financials align with what you have been told but what then. If they align with what you have been told that does not give you the full picture, yes it confirms the data and the past success of the business but will not help you determine its future potential, market and industry.

APPROACHING THE DUE DILIGENCE, THE RIGHT WAY

You must determine what is wrong with the business. Verify and re-verify the numbers. You are also at the same time trying to disprove what the seller has told you, scrutinising in micro detail every aspect.

That is just the start of the due diligence. The due diligence should go much further than this. We are looking at whether the future of the business industry is bright.

You must investigate much further than just the financials.

To do so, you want to investigate much more than the financial aspect. Yes, the business accounts will tell you it’s past and give you a glimpse of the future but consider the fact that the past is finished.

You must thoroughly investigate the business’s employees, contracts, suppliers, marketing, competition, technology, systems, legal, corporate standing and processes etc.

You would like to finish the Due diligence period knowing what you’re stepping into, what must be fixed, what the prices how to repair issues and analyse if you have the skills, knowledge, experience and passion for improving the business.

You also want to conduct a market review and understand if the industry is a growing market, declining or steady and what is out there in technology or equipment to increase sales and profits.

HOW LONG TO EXPECT FOR DUE DILIGENCE?

It is in the interest of the seller and broker to keep the due diligence time as short as possible.

It is not unheard of where a vendor has limited this to just a week!

Unless you already have an intimate understanding of a specific business, it is impossible and extremely reckless to expect to get all the information you require in this time.

It is not enough time for you to understand a business and the market in a week and you will likely be buying a business ‘blind’ and overpaying for a business.

Ideally, you would want to have at least one month to conduct due diligence for the smaller businesses and more for the larger ones. Remember, due diligence goes far beyond just the financials.

You need to make it clear to the seller that you will require this amount of time to conduct a thorough investigation. Be clear and let them know what research you will be doing. Let them know you are not going to waste their time, and you are a serious buyer.

If they don’t allow you the time you need, walk away. If the vendor has nothing to hide, they will likely invite you with the agreed time scale.

GET YOURSELF PREPARED

You need to start your preparations the moment you find a business that is of interest. Map out exactly what you want to investigate, getting the documentation you need and any professionals you will want to hire to help you.

Write down your plan, make a list of all the financials and other documents you want to review. Keep detailed “to do” lists, by each sector of the company (i.e. Financials, Employees, Sales, Contracts, etc.). Keep your accountant, solicitor, and any other professional informed you anticipate beginning the Due Diligence. 

Assemble lists of the materials you’ll need from the business and never start the Due Diligence until you’ve received all of the supporting documents that you will need from the vendor.

You want to be very pedantic with all this. Remember, one mistake can cost you a lot of money.

SHOULD YOU HIRE PROFESSIONALS?

Absolutely and without question, you must hire an accountant for this exercise. Albeit you’re an expert in this area, get an accountant to run the numbers and verify all of the financials.

There is much investigate and using professionals to conduct certain parts such as an accountant for the financials and a solicitor for any legal issues is a prudent move.

GET THE BUSINESS SELLER ON YOUR SIDE

Make sure the vendor is on your side and has informed the employees and people associated with the company to provide you with any documents you need.

Don’t let the vendor “think” that you are snooping; make it clear that you are snooping!

You must have access to anything you need without barriers.

WHAT IF YOU FIND UNEXPECTED SURPRISES?

When’ you discover surprises as you will! And if you do not, you have not looked hard enough, when you do, investigate each one thoroughly.

Don’t get bogged down and make a fuss with minor issues as they are just part of any business no matter how successful.

A couple of issues does not suggest that the business is terrible. You want to weigh the impact against the longer-term viability of the company. 

Remember your goal is to find out what you will be stepping into and what impact the issues will have on the business in the long run and how they can or if they can be managed. You need to weigh this up in judging the viability.

You then have the choice to put these issues to the vendor and discuss what you think the impact will be and be able to re-negotiate the original price.

If you discover something detrimental to the business, and cannot be resolved, its time to walk away!

Don’t discuss your findings with anyone except your accountant or other advisors. Not the vendor, not your broker, not the workers. nobody. It’s not their business!

VALUING THE BUSINESS

One of the most worrying concerns to a buyer would be the possibility of overpaying for a business.

If the due diligence is done correctly, then this should not be much of a problem.

The value of a business is subjective; what may be of one value to you may be another value to someone else. You want to judge what the business means to you and what you want to pay for it within your budget. Typically, 2 or 3 times the annum net profit is a good measure to start with.

In time, a good business will always justify the acquisition price, whereas a nasty one might not ever allow you to recover financially.

WHAT IS THE TRUE VALUE OF THE BUSINESS?

In a nutshell, the value must be measured by what you’re getting into return for your money. 

You’ve got to equate the acquisition price against the advantages you’ll derive over the term during which you’ll realistically expect to have the business. 

As an example, you cannot merely measure the acquisition price against the income that you simply will derive from a selected company. How about the enjoyment of being your own boss, a business owner, making your lifestyle better, the satisfaction of running a successful business and the pleasure of changing the lives of your employees.

Perhaps what you can provide for your family, more money, more time etc. These are all things that people put a value on.

Also, you want to think about what you will never have achieved if you do not enter business for yourself and not being able to change the situation you are in. All this is considered in what a good business is worth to you.

Therefore, why shouldn’t you be taking 3-5 years or longer to pay off an honest company? If it gives you so much.

VALUING A BUSINESS, THE TRADITIONAL WAY

Businesses are traditionally valued in two ways value, one of them being asset-based valuation and the other income multiplier.

The asset-based will be dependent on the assets the business owns such as (machinery, equipment, etc.) and you buy the assets accordingly. 

Generally, small business purchases don’t use Asset-Based Valuation Methods to determine the acquisition price. 

For income Based Multiples, a formula is employed that mixes the company’s profits, owner benefits, adds back certain expenses then applies a multiplying factor to the present number to determine a sale price. 

This is often the tactic typically used, and a general understanding of accounting principles is required to form this calculation.

The multiple income-based values are generally 3 times the annual income.

WHY TRADITIONAL VALUATION METHODS DO NOT ALWAYS, WORK

Traditional valuations are subjective. Yes, you have the past financials, and you understand how the business had performed in the historical data.

What if the company had recently hit a multi-million-pound contract with a blue-chip company? You can’t expect the vendor to sell the business at 3 times the historical income. Think about the future of the industry, how the brand will expand with the new contract and potentially bring in other significant contracts. You see how things can get complicated.

Even with asset-based valuation, what if the machinery or technology is outdated and will require a significant injection of finance to upgrade.

You must consider all this when you use a valuation method. Value a business from all directions and include your benefits and balance out what the company is worth to you.

Learn more about business valuation

NO TWO BUSINESSES ARE ALIKE

Just because a similar business has sold for X recently, it does not mean the company you are investigating is worth the same.

You want to explore the situation of the company and even compare things to the business recently sold.

The single time where you will concentrate on an identical business is when investigating a franchise. Even in these situations, there will always be an abundant amount of differences like location, owners, marketing strategies, etc.

Talk to your broker and get him to give you details of similar businesses and what the advantages and disadvantages were compared to the one you are dealing with, getting some ideas on valuations.

A GOOD BUSINESS VS A CHEAP BUSINESS

It is not always about price or cheap. People often make that mistake to find the cheapest possible in the industry. 

The main factor you want is that the business is viable and honest. Does it have potential, will it be successful, how is the brand, how steady are the financials, is it problem-free, does it have the right equipment and are the employees loyal and productive.

Buying a cheap business but with problems will cost you more money in the long run or worse an unsuccessful business. 

There is an excessive amount at stake to shop for something simply because it’s cheap; you want to spend a little more and buy something useful and viable.

If you end up with a business that needs fixing, you will spend your time and money doing that instead of running the business. So be careful, cheap is not always the way to go with buying businesses.

WILL THE BUSINESS LAST AS LONG AS YOU NEED?

If you are over 50, you may only want to work for 10 or 15 years so. If you are in your 30’s it maybe for 30 years so consider how long the business you buy is for and if it will last. 

Is it a business you are willing to spend so many years in. It is essential to think about the business you are buying and if it suits you in every way.

SOME RESOURCES

Legal documents for buying a business can be found here.
Legal commitments when buying an existing business
https://www.gov.uk/transfers-takeovers

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