Buying a business

Small Business Owner Or Worker6Valuing a business

It can be difficult to value a business. There will be a number of components making up the final price, including the profit the business is currently making and, if the business itself is expanding, whether it is attracting more interest. You will need up-to-date audited accounts, which are done by independent accountants and can be obtained by contacting them with the seller’s knowledge.

When initially viewing and valuing, you will probably have to be discreet, as the current owner may not want staff to know they are planning to sell at this stage.

Funding the purchase

A business purchase can be funded in a number of ways:

  1. your own money
  2. entering into a partnership - each partner owns a share of the business and funds are pooled collectively

The amount you can borrow will depend on various factors including credit score and cost of the business. A lender will assess you as a business owner and whether the business is a sound investment and will usually require:

  • details of the business/sales particulars
  • accounts for the last three years
  • financial projections - if no accounts are available
  • details of your personal assets and liabilities

Making a formal offer

Once you have the funding in place and know how much the business is worth, you can make an offer to the seller. You should make a formal offer in writing. The phrase 'subject to contract' should appear at the top of your letter and be included in all subsequent letters.This will show the seller that you do intend to enter into an agreement.It also protects you because the seller cannot hold you to something you may have written in a letter even though you later change your mind.

Heads of agreement

The purpose of heads of agreement is to prevent misunderstandings between you and the seller when it comes to completing a deal. It outlines how the purchase will take place. It is not the contract of sale. It is agreed by both of you and the seller and may include:

  • a period of exclusivity to prevent the seller from talking to another prospective buyer
  • confidentiality terms
  • a clause to allow you to recover costs should the seller pull out of the deal 

Some of the information in the heads of agreement, such as purchase price, the completion date or whether you actually have to complete the deal are not legally binding. You can still choose to not continue with the deal, even if you have signed the heads of agreement as you can insert a clause which will protect your buying rights.

Due diligence

Once the seller accepts your offer, you will be given some time to look at the business' accounts and records. This is known as due diligence, which should give you a realistic picture of how the business is performing now and how it is likely to perform in the future. It should also highlight any issues or problems which might need sorting out.You have a legal obligation to ensure that proper due diligence is carried out. Due diligence operates in two stages:

  1. initial due diligence – this allows you to take a look at the business with more of an in depth analysis, however you will not be given all the details of the business such as insurance.
  2. ongoing due diligence – this is where you are able to look at more in depth details of the business which includes the business financial details and client lists.

There are three types of due diligence

  • legal due diligence – ensuring that the seller has a legal title to sell, the ownership of all the assets and any regulatory and litigation issues
  • financial due diligence - making sure the accounts add up
  • commercial due diligence - establishing the business' place in the marketplace and who the competitors are.

You must also make sure the corporate legal documentation covers:

  • employment terms and conditions
  • outstanding litigation
  • major contracts and orders
  • IT systems and other technology
  • environmental issues
  • commercial management including customer service, research and development, and marketing
  • information from external sources such as the landlord, tax office or bank.

You must draft a contract for the full transaction timeframe, from the beginning to the end of the transferring of the business.

You should ask the seller to take the business off the market during your investigation. If the seller agrees, they may ask for a downpayment as security. The investigation period is negotiable but most small businesses will require at least three to four weeks.

You may find it easier to carry out due diligence if you ask accountants and solicitors to help you identify risk areas. If the business you are buying is a company, you can also obtain copies of the company accounts, the annual return and other key documents from Companies House.

If you are also planning to buy the business premises, you may want to arrange an independent survey and valuation, even if a lender is carrying out their own survey and valuation.

Sale and purchase agreement

Once the above stages are complete, you can now focus on the sale and purchase agreement. This will contain the terms and conditions of the acquisition of the business and the rights and obligations of the parties involved. Once this has been drafted you are ready to complete the sale.

Completion of sale

To complete the purchase, you need to:

  • verify financial statements
  • transfer leases
  • transfer contracts and licences
  • transfer funds to purchase
  • transfer existing or obtain new VAT registration

Verification of financial statements

You must request audited financial statements signed by a certified public accountant. The audited statements provide initial verification, but you also have to ask for bank statements to match deposits, cancelled cheques and payments against the statements. This prevents the seller from hiding expenses and making the business seem more profitable than it really is. You should also compare the business’ tax returns against the financial statements, as well as the seller's personal tax returns if the business is a sole proprietorship.

Transfer of leases

Depending on your requirements, you should arrange with the seller for the transfer of the lease for the business premises. Otherwise you will only own the business without owning the respective site and may have to be pay rent. The seller must obtain permission from the landlord in order to transfer the lease.

Transfer of contract and licences

You should arrange for any contracts or licenses which the seller may have in his name to be transferred to you.

Transfer of VAT registration

You can transfer a VAT registration from one business to another. You can apply to do this:

  • online - through your VAT online account
  • by post - using form VAT68

You and the seller both need to tell HM Revenue and Customs (HMRC). The seller should cancel any Direct Debits on their VAT.

You can also opt to obtain a new VAT registration, apply online or by post using a form on the HMRC website.

Looking after existing employees

When you buy the business as a going concern, all existing employees automatically start working for you as the new owner under their same terms and conditions as before.

If you decide you need to employ fewer staff and have to make staff redundant, an employee might claim unfair dismissal or unfair selection for redundancy. As the new employer you should inform and consult all employees, including employee representatives, who may be affected.

But, as the new employer, you do not have to take over rights and obligations relating to employees' occupational pension schemes put in place by the previous owner. However, if you do not provide comparable pensions arrangements, you could face a claim for unfair dismissal.

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