Purchasing a business can be a complicated process. Here are our top 10 tips when buying a business.
1. Make sure you know exactly what you are buying
It may seem like obvious advice but the due diligence procedure, where the business is examined in detail, is often the most crucial part of a purchase transaction. It is vital that you and your legal and accounting advisors examine the various aspects of the business including its accounts, commercial contracts, employee details, premises and other liabilities.
Due diligence should also reveal how successful the business has been to date and its future potential. A forensic approach to due diligence before you buy can mean you avoid any nasty surprises after completion.
2. Share or asset sale
It is important to distinguish at the outset whether you will be buying the company that owns and runs the business (by share sale) or the assets of the business only.
A share sale in some ways can be more complicated than purchasing the assets and it should be entered into with caution as you will be purchasing a company “warts and all”. If the purchased company has hidden liabilities these will transfer to you on the purchase. A share sale will also usually require the seller to provide you with carefully considered warranties in the purchase agreement.
If on the other hand you are simply purchasing the assets, you will be able to pick and choose the parts of the business you want to acquire or avoid as the case may be.
3. Professional support
You should speak to an accountant or financial advisor to give you specialist advice on the accounting and financial aspects of the business. The results of the accounting due diligence may reveal whether you are paying too much for the business. It’s too late to take a careful look at the financials of the business after you purchase.
Warranties are rather like enforceable promises and as mentioned above, as part of buying a business it is essential to ask the seller to give you warranties that protect you against any hidden problems that were not disclosed to you before the purchase completed.
5. Key assets of the business
One thing that due diligence will pick up is whether the key assets of the business will pass to you on purchase. It might be the case that key contracts with suppliers will not pass to you as part of the sale if the seller wishes to continue with them. Before the purchase all the contracts of the business should be examined closely.
6. Why is the business being sold?
Before entering into negotiations with the seller you should ask the question: why does the current owner want to sell? The seller’s reasons may be benign, but equally there could be serious problems with the business. It is important therefore to carry out a thorough financial and legal due diligence exercise on the business.
7. Get your advisory team in place
Our dedicated Corporate team at Bowling & Co Solicitors are proficient and highly experienced in business purchases of all shapes, sizes and sectors as well as mergers and acquisitions. You will also need to think about contacting your:-
- Broker; and
8. Pay attention
You should stay focused on your target business and be aware of any changes throughout the transaction, if circumstances change you may be able to use this to your advantage and negotiate a better deal for yourself.
The procedure of buying a business can be time consuming, stressful and expensive. Before you begin the process you should try and agree a period of exclusivity with the seller to prevent other bidders acquiring or offering to acquire your target business and ensure that the seller is fully committed to the transaction.
10. Keep an open mind
Many deals have become unnecessarily delayed or abandoned by overly stubborn negotiators on either side of a transaction. Try to keep a cool head and remain pragmatic throughout.
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