Have you ever considered buying a business? Whether you are a practiced entrepreneur or just starting out, acquiring a ‘ready-made’ business does have its pluses.
Buying a second company can help established businesses break into new markets or to acquire machinery, skilled workers or advancements that can aid business growth.
Meanwhile, new entrepreneurs might benefit from acquiring a ‘turn-key’ business that will begin to generate profits with minimal effort.
However, the acquisition process is not without risks, especially at the point the deal is made and so we have compiled some quick tips to help.
Research, research, research
Research and being brave enough to ask the right questions are key to being able to confidently approach a potential acquisition, and to put your best foot forward.
- Who is at the helm of the business? Do customers use the business because of the personal relationships or for the products and services?
- What do the businesses previous year-end accounts and management accounts look like (debts, obligations etc.), and what picture does this paint of its financial standing? Also is there any off balance sheet financing?
- What do its customers and suppliers say?
Once you make that initial contact with a seller you will need to obtain as much information as you can from them.
Some owners may be selling ahead of retirement, others may be eager to secure input from an outsider to help the business grow, while some may have quiet concerns about the business and are seeking a quick exit.
Learning more about the reasons for a sale could give you an early indication of whether the opportunity is one you should pursue or leave well alone.
Be open, be honest
When it comes to acquiring a business, openness and honesty is a two-way street. Try and be as transparent as possible with the seller as it should make them feel inclined to be honest and open with you as a buyer.
A totally risk-free transaction doesn’t exist, and so being able to trust one another is imperative.
You also need to be honest with yourself, about whether the deal is suited to your needs, first and foremost, but also about whether any issues that arise can be feasibly fixed.
Not every business is going to be suited to your objectives. There are a number of factors affecting suitability that can be difficult to identify at first, but once you have an established dialogue with a seller, you should check:
- Sales revenue and cash flow
- Its ability to be relocated if required
- Debts and obligations
- Ownership of property and assets
- Rights to patents and intellectual property
- The existing management team.
It sounds a bit cliché but try to make decisions with your head and not your heart. If you are still a little on the fence, consider turning to a trusted adviser for an independent view on proceedings.
Draw up heads of terms
If you are serious about purchasing a business create a heads of terms agreement. This should set out the points that have been agreed in principle between the two parties, during the course of negotiations.
Whilst not legally binding, heads of terms typically constitute serious intent and have some level of moral force. They are often seen as a worthwhile first step towards setting out the intended purpose of the transaction and the aims of each party. They can sometimes be used to secure a period of exclusivity on purchasing the business while negotiations continue.
Make sure you have access to sufficient finance
Once the basic terms of the sale have been agreed, you will need to ensure that you have sufficient funding to cover the costs associated with the transaction.
Few business owners finance the whole of a sale by way of existing personal or business funds. Instead, many seek out a loan or investment that allows them to access the funds they need. The use of the targets cash reserves can also be factored in to the equation at this point and whether any of the purchase price you are paying the vendor can be deferred; sometimes up to two, three or even four years in some cases.
Of course, this requires lenders and/or investors to sign off the investment in the new business, which isn’t always very quick or straightforward. Do account for this as part of any timeline that you set out for a transaction.
Most lenders and investors will not only want to know about your own financial position, but also about the position of the business; combined, these things indicate just how at risk their money is.
Don’t be afraid to walk away at any stage
If the deal isn’t right for you, don’t be afraid to admit this and to withdraw from the process.
Due diligence has been known to uncover nasty surprises at the eleventh hour and so transactions can fail at any point.
Regardless of how emotionally or financially committed to the deal a party is, the deal does not have to go ahead.
Until a final contract is signed, and funds are transferred, a deal can always be cancelled or, in some cases, renegotiated. Signing up to a deal that leaves you, your existing business and finances at risk is rarely worth it.
How can George Hay help?
If you haven’t bought a business before, or even if you are an experienced entrepreneur, it pays to seek out help from a professional.
Working with a team of chartered accountants and business advisers can help you to structure a better deal, acquire finance and identify potential risks.