Top 10 Things to Consider When Buying a Business

Recently, I have been helping a young entrepreneur to buy a new business and thought to share my top ten things to consider when buying a business. 

1.   Funding sources – Have you got the funds to invest in buying the business? If you do not have the funds, could you afford to borrow? Would buying the business with the borrowed funds make a sound investment and enable you to repay both the loan and interest?

2.   Motivation and purpose – Be clear on why you want to buy a business. What is your motivation for buying an existing business? Be clear about what you are getting for your money. Is it a share of an existing business or are you buying just the business assets? Is it value for money? Is there an alternative means of getting the same? E.g. Could you build the same business from scratch at perhaps a lower cost? If you didn’t buy that business, what could you do with the money?

3.   Ownership structure of new business – What legal structure is your new business going to take? It could be a company, or you could run it as a sole trader or in be partnership. Choose a structure that is most appropriate for the type of business given the risks involved, level of turnover and profitability.

4.   Your experience in the industry – What experience have you got in that industry? If you do not have much experience, could you afford to hire an industry expert to help you run and manage the business or are you willing to learn and acquire new knowledge in the new industry? To run a successful business, you require specialist industry knowledge in order to be more effective and make a profit.

5.   Time scales and availability – Buying a business can be a lengthy process, requiring detailed negotiations and reference to multiple documents. There will be legal contracts exchanged so the finer details and the terms and conditions attached to the deal must be well understood before making a commitment to buy. It is important that you allow enough time for the negotiation process and to deal with any unexpected discoveries.

6.   Commercial Due Diligence – This is perhaps the most important aspect before buying a business. You should undertake thorough due diligence to satisfy yourself that the business is viable. Commercial due diligence is a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential. You should review the financial accounts including the Profit and Loss account and Balance Sheet for at least the last 3 years. You should verify the assets and liabilities of the business and understand what will be passed on to you and what will not. You should review contacts with all stakeholders e.g. customers, suppliers and employees and understand your obligations to them when you buy the business. The seller should provide you with a buyer’s pack containing information about how the business is valued and what is included and what is not included. The seller is under no obligation to disclose matters they do not consider material to the sale, but legally they cannot give false or misleading information, so be sure to ask as many questions as possible. It is your responsibility to satisfy yourself as to the value of the business before entering into any contracts, so do take the time and if necessary seek professional advice to make sure this is done right.

7.   Risk Register – After the commercial due diligence exercise, you should prepare a risk register showing areas of uncertainty in the business. Against each risk, there should be an action to mitigate the risk and reduce the likelihood and impact of each risk. E.g. What if you lost 25% of the customers? How will you ensure that the customers continue to visit your business?

8.   Business plan – this is where you plan the future of your new business and decide how you will develop and improve it. What products and services are you offering? Are you targeting the right customers? Who are your competitors? What are your strengths, weaknesses, opportunities and threats? What will your strategy for growth be? What will your internal management structures look like? What is the projected financial plan? Will you be profitable? What is your expected rate of return? It is important to have a business plan that you can implement once you have bought the business. Furthermore, this exercise helps to highlight any areas you should be asking for additional information from the sellers before it is too late.

9.   Tax implications of buying a business – you should plan for tax when buying a new business. The scope of taxes will differ depending on each business e.g. If buying shares and the value is over £1,000, stamp duty will be payable; if buying a property, then Stamp Duty Land Tax will be payable. If buying a company, the purchaser would also acquire the inherent tax liabilities both known and unknown. It is therefore important to carry out a tax due diligence review to cover amongst other things, corporation tax, PAYE and National Insurance and VAT. Your circumstances will determine which taxes are applicable.

10.   Professional advice – it is important to seek professional advice when buying a business. A good accountant will make the necessary checks and inquiries so that you are armed with full and complete information when making your decision to buy. A good solicitor will draft the contracts and obtain warranties and indemnities from the seller to reduce your risk exposure. A surveyor may be needed if you are buying a building or signing certain types of leases. Again, your circumstances will determine what professional help you need.

That’s it! You have my top ten things to consider when buying a business. If you found like this article, let me know by giving it a thumb’s up, commenting below and sharing with others. If you think I have missed something or you want to add to the list, leave your comment below. 

8 Key Points To Continuing Your Business Through Covid-19

To feel like you are in control of your business during this pandemic we have chosen 8 things that every business owner should keep on top of.

  • Wellbeing

This is a stressful time and it’s important we look after our mental health as well as offering mental health support to our team.

Some tips for managing your mental wellbeing:

  • Select your information sources carefully.  Access information from official sources when required.
  • Try to maintain your daily routine.  Some adjustments will need to be made but try to keep to your routine as much as possible.
  • Exercise each day.  Go for a walk or run and get some fresh air and sunshine.  Even if you’re self-isolating, you can get outside while maintaining social distancing.
  • Get enough sleep.  Easier said than done at times.  Put technology away earlier and read or listen to an audiobook to help you relax.
  • Maintain a healthy diet.  Eat a range of fresh and nutritious food.  Reach out to your community and swap produce if possible.
  • Stay calm.  Choose a relaxation practice, e.g. yoga, meditation, etc. and commit to doing it daily.
  • Stay connected.  Spend time with your family and keep in contact with friends; call instead of texting.
  • Be positive.  With crisis comes opportunity.  Seek out opportunities and don’t catastrophise.

If you’re struggling to cope and need to speak to someone, you can call Samaritans on 116 123 any time.  In an emergency, dial 999.

  • Personal budget

Review your personal budget and ‘trim the fat’.  Identify areas where you can save money.  Your personal budget doesn’t need to be complex – it could be as simple as totaling your expenditure from the last month or 2 to identify your monthly personal costs.  From there identify where you can make savings e.g. on entertainment, coffee, gifts, and any other unnecessary expenditure.  Every saving you make takes pressure off what the business needs to provide to you.

Don’t cut costs for essential utilities; a strong and reliable internet connection is a must if you’ll be working from home. 

  • Supporting Your Team

Your team members will be worried about job security.  The government has stated that there will be job losses during this time.  Be open with your team.  Share your plan with them and be honest about the potential impact the pandemic will have on your business.  If there are to be job losses, ensure you obtain legal and HR advice on the best way to handle restructuring, stand down, reduced hours, furloughing workers, and redundancy processes.

  • Terms of Trade

Review your Terms of Trade and update the terms to reflect your changing business practices.  Share your updated Terms of Trade with your customers, highlighting key changes.  In particular, review your payment terms and delivery terms.  Remember to enforce your Terms of Trade at this time.  Don’t let customers avoid paying you, as this could have a material impact on the sustainability of your business.

We have a Terms of Trade Template available to help clients develop robust Terms of Trade, please contact us if you need help with this.

  • Offer incentives to retain customers

You customers may be facing job losses or reduced hours and lower income, so they’ll be prioritising where they spend their money.

Consider the types of incentives you can offer customers to keep buying during this period.  Can they spread the cost over a number of weeks or months?  Companies such as Afterpay or Laybuy can enable this.  You may be able to arrange consignment stock at this time, whereby you only pay your supplier once you’ve been paid by your customer.

  • Communicating with key customers

Ensure you regularly communicate with your key customers so they’re aware of what’s happening, particularly if you have an ongoing relationship with them to supply goods or services.  They’re likely being inundated with communication from numerous sources, so keep all communication brief.  Make your communications as personal as you can.

  • Your business

Managing cashflow is essential for a business at all times but becomes even more important during times of crises.  Bear in mind that your customers and suppliers will also be concerned about their cashflow.

Preserving and bringing forward cashflow, and creating a war chest of cash reserves is important right now.

  • Cashflow Forecast and Cashflow Management

The first step to managing your cashflow is to create a Cashflow Forecast.  Projecting your cash position forward gives you the ability to make far more informed decisions.  Your previously prepared Cashflow Forecast will no longer be valid.  We can help you review and update it to reflect the impact that Covid-19 may have on your cashflow.

Some businesses will need to look at their cashflow and their cash burn on a weekly basis.