The business landscape, particularly in a post-Covid world, has changed to the point where much traditional buying advice no longer applies.
The metrics by which we measure a business’ value have changed, as has the wider market, and most importantly, the habits of the consumer. That isn’t to say there aren’t a few certified pearls of wisdom that still ring true even today. In this Hilton Smythe Guide to Buying a Business, we’ll discuss some of the crucial tips – and pitfalls – to be mindful of when getting started in the process.
Ask Yourself Why
The first tip is more to do with framing the purchase, ensuring that you, as the buyer, are fully prepared for the reality of taking on a new business and everything that it may entail.
First and foremost, you should be asking yourself why you want to buy any given business. The answer should never be because you think doing so would be easier than starting up your own company from scratch. True, when starting your own business, getting through the developmental phase, to the point where you can finally start to make some real money can be a trial in of itself. Many people underestimate how complicated buying a business can be. There are certain advantages that come with buying an established business, such as transferring over existing intellectual property and having a built-in customer base. However, plenty of hard work still needs to be done before and after the point of purchase. With that said, if you think you’re in for an easy ride by buying an existing business, you may find yourself feeling unprepared and overwrought. There’s no denying that the success of some businesses has been built on the personal network and reputation of the original owner and may be the only reason it has stayed alive.
Patience and Research
Without the support of a broker, finding a high-potential business for sale is a full-time job in of itself. Even with the support of a broker, finding the right business can take many months and sometimes years. Given the length of time (along with the inevitable knockbacks) it may take to secure a suitable investment, a buyer’s commitment must be there – hence why we advise people to ask themselves why they want to buy. Should a particularly long period of time pass before finding a business, or should a buyer be too invested in their current job, it’s very easy to become impatient, jumping on an opportunity just because they want to get a deal made quickly. At which point, it would be easy to become biased and neglect some warning signs you would otherwise identify. Fundamentally, it’s better to have no deal than a bad deal. As such, buyers should also be prepared to go back to square one if what seemed like a promising business, turn out to be otherwise.
It’s crucial to undergo as much research as you can, not only to uncover the key credentials of a business, but to find the answers to any troubling questions that appear. For example, if the seller is in a hurry to sell, it’s important to find out why – there may be some hidden troubles, such as debt, a sharp decline in profits, or even insurance issues.
It can’t be stressed enough that it’s essential a buyer is able to understand the complete financial history before buying a committing to a business. Some people in the industry may refer to the process of acquiring the financial history ‘due diligence’, but you’re best off considering it ‘doing the bare minimum’. You may not be able to source the key financial documents until the negotiation stage of a sale, but when possible, we recommend checking the financial statements of any potential business for at least the past 5 years. This includes documents such as the current balance sheet, profit, and loss statements, tax returns (for income, unemployment, and sales tax, audited financial statements, accounts payable and receivable, and more.
Moreover, a business sale may include physical assets such as equipment and inventory. It’s important that you are able to check whether any equipment is in good working order and whether it has been covered by a PUWER assessment (the Provision and Use of Work Equipment Regulations). However, it’s worth noting that PUWER belongs to EU regulations and following Brexit, the UKCA (UK Conformity Assessed) may already have begun replacing the CE mark. If some equipment is being leased, you should check the terms of the lease, and make sure you have the right to take it over. In addition, you should ensure that the inventory is up to date and marketable – there’s no point paying good money for obsolete goods.
Your research should also cover the customer base – you should be looking into both its size and how much of it is made up of repeat custom. Is the location reflective of local demand and does it provide enough scope for enough customers?
What is the current situation regarding employees? If you’re taking on the current staff (which will often be laid out in the terms of the deal), a strong team is invaluable. For example, experienced employees can help smooth the transition between owners, while also helping you learn about the market that you’ll be operating in. On this matter, it’s imperative that you are fully versed in the state of a particular market, including any competitors and how your chosen business compares.
Understand the Business Model
It may sound obvious, but many issues arise when buyers lose grasp of the key elements of the company’s business model. Simply, the seller will often try to make the business look attractive, glossing over any issues. For example, it’s essential to iron out why any given business’ profit margins might be higher than the industry average, or why they have been increasing. This may mean delving the broader industry picture or financial history of the business. It’s therefore important to fully understand the financial landscape of the business so that you can confidently understand its cash flow and why it may have a competitive advantage – here’s when you’ll try to identify its unique assets.
Negotiations are About Listening Well
When you’re at the point when you’ve decided to move forward with a business and you think you have a good idea of what the business is worth, it’s time to negotiate the price. You’ll typically do this by making an offer, which can either be in writing or made verbally. If the offer amount is close to what the seller is willing to sell for, they will start negotiating with you.
As with most business transactions, you can expect to go back and forth, negotiating different purchase prices and terms before a deal is made. However, these terms can be changed later if you find something during due diligence that changes the outlook of the business.
During negotiations, listening is paramount when understanding the motivations and emotions of the seller. Listening well isn’t just about paying attention to any leverage that could get you a better deal, but about fully understanding the landscape that the business is sitting in, including whether any troubling factors have brought it to the point of sale. Understandably, business owners have strong emotional attachments to the companies they have built. Typically, they will be concerned about the future of a company under new ownership. For this reason, when meeting the seller for the first time, make it very clear that you are listening to and understanding what they have to say. You should leave any meeting with a clear understanding of their motivation to sell, the fundamentals of their business, any concerns they may have, and should be aware of any blind spots they haven’t covered. This is also the time for humility. If you attempt to grandstand, telling the owner about the list of changes you plan to make, you’re going to risk alienating them to the point where they withhold information or even withdraw from the sale.
As part of the negotiation process, you’ll also agree whether to purchase the assets of the business, or to make it a stock sale. Typically, a stock sale is preferred by most sellers for tax purposes. In this type of sale, you’ll be agreeing to take on any outstanding legal liability due to the fact that company’s operations will continue as is, just with a new owner. Some sellers may even give you a discount on the purchase price a buyer agrees to a stock sale.
Good impressions also matter when it comes to acquiring finance. This means that if you waste a lender’s time by approaching them unprepared, you’ll already be starting things on the wrong foot. Before approaching a lender, you should make sure to have copies of the business’ details sales particulars, the accounts for the last three years, any financial projections (particularly if no accounts are available), along with details of your personal assets and liabilities.
Finally, when you have a general idea of the terms and structure of the business purchase, you’ll submit a letter of intent. Here, you will outline everything you’ve previously negotiated, including the purchase price, and states your intent to buy the business. However, it’s worth noting that it is a non-binding agreement, merely a way to furthers the business acquisition process. Crucially, the letter should give you the exclusive rights to buy the business for a set period of time.
Tying it All Together
It’s without any agenda that we say that there’s a lot to consider when buying a business without any professional support. Not only is the process going to a long and arduous one, but you’ll be also on your own at every point of the process: from sourcing viable businesses, conducting the right sort of research, during the negotiations and due diligence, when acquiring finance and when closing the deal. At Hilton Smythe, we’re proud to be award-wining business brokers, with a long track record of bridging the gap between buyers and sellers. However, we also have a specialist financing team who can help you to meet your corporate financing needs. As we have access to many lenders, we can find finance deals that are especially suited to meeting your requirements. For businesses of all sizes, we can provide tailor-made, independent and stress-free solutions for a range of commercial finance challenges. As such, we’re uniquely equipped to provide a joined-up approach when supporting prospective business buyers – the same people who helped you find a business will help you secure it. Not only will we stand by you at the point of enquiry, but provide our insight and support during the negotiations, the acquisition of finance and the closure of any deal.
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