Buyers Guide to Buying a Business

Posted 5th October 2012

Written by Malcolm Jones

Newtons Buyers Guide to Buying a Business

1. Introduction

1.1  This guide is intended to provide a brief overview of the legal steps involved for buyers of a business based on a straightforward transaction for the purchase of a solvent business run from rented premises.

1.2  Although this guide sets out the various steps in chronological order in practice there will be several matters happening at once.

2. Running a Business

2.1  Once the business has been bought you, the new owner, will of course be running a business.  You need to think about the implications of this- just as much as if you had started a new business from scratch.

2.2  Matters to consider include:

  • the advantages and disadvantages of working for your own business rather than working for someone else;
  • the difference between working in the business and working on the business;
  • whether to trade as a sole trader, a partnership or a limited company.  A company will give you protection if the business does not succeed but you may have to give personal guarantees of the amounts due under the lease of the premises and any bank borrowings;
  • what records need to be kept by the business;
  • the regulations affecting businesses generally and any specific to your sector;
  • the advantages of having a business plan and forecasts of the likely income and expenses of the operation.

3.  Preliminary Matters

3.1  You will have to identify a potential business whether through personal contacts or a business sales agent and then find out as much as possible about that business and, if possible, other similar businesses to give a comparison.  The most important matters you need to consider are likely to be:

  • the true profitability of the business – after allowing for whatever you could earn elsewhere;
  • the commercial and other risks that will lead to future changes in profitability – for better or worse;
  • lifestyle factors as a result of owning the business;
  • the total costs of buying the business and the working capital you will need.  The costs will be the purchase price together with any professional fees you may incur.  However the landlord of the business premises may require you to pay a rent deposit which may be three to six month´s rent dependant on your financial standing.

3.2  Other matters you may want to consider are:

  • what assets are needed in the business and who owns them;
  • whether any third parties need to agree to the change in ownership; this includes any regulator, landlord or franchisor and possibly suppliers and customers who have long term arrangements with the business;
  • the attitude of the staff working in the business to the change of ownership;
  • whether the business can stand-alone without any involvement from the seller who may have given personal guarantees or who may be the business as far as its customers are concerned;
    • two things that can take considerable time to arrange are your VAT registration and opening a new bank account;
    • you will also have to decide who you are going to instruct as your solicitors and accountants.

3.3  Before a seller gives too much information to a prospective buyer, who may be a competitor, the seller may want to obtain a non-disclosure agreement.  If the business looks suitable and a price is agreed heads of terms may give you a clear run for carrying out the work set out below.  However while normal for larger deals both of these are unusual for small businesses.

3.4  If you are borrowing the money then you will want to know the funds will be available at the right time and on what terms.  The seller may also want evidence that you have funds available to pay the purchase price.

4. Asset Sale or Share Sale

4.1  If the business is operated by a limited company there are two ways in which the business can be sold:

  • the buyer can purchase the shares of the company carrying on the business from the shareholders (share sale); or
  • the buyer can purchase the assets of the business from the company carrying on the business (asset sale).