buying a business

Take five guide - buying a business

Buying a business can enable you to expand into a new market that is complementary to your own, or simply boost your existing business by acquiring a competitor. If you’ve identified a great opportunity, here’s a guide to the process.

1. Valuation and funding

Your accountant and other professional advisers can assist you in valuing the business you intend to buy, but matters to consider will include the business’ trading history, current performance and future projections as well as cashflow, debts and working capital requirements. Don’t forget to consider intangible assets such as the company’s goodwill and any intellectual property.

Having arrived at a headline figure of what you are willing to pay, you need to consider how you are going to fund the transaction. If you are not relying on your own resources, lenders will require details of the business you wish to buy, plus financial information such as accounts and financial projections. They will also require sufficient security for their lending.


2. Agree heads of terms

The crucial initial stage will be to sign heads of terms outlining the main terms of the transaction. Heads of terms are generally not legally binding, but are a helpful to record the parties’ agreement on key issues.

Having reached this point the seller may agree to an exclusivity period during which they will not engage with other prospective buyers about a sale, giving you the opportunity to conduct your due diligence on the business and generally conclude the transaction.


3. Due diligence and disclosure

Once your offer has been accepted, you will gain full access the business' books and records. This is known as the due diligence exercise and your accountants and lawyers will lead this process to help you identify any areas of risk.

Through thorough due diligence, a clear picture should emerge of the business’ current performance, together with a realistic view of its future potential. Due diligence should uncover any issues or problems that might require protection from the seller under the sale agreement or in some cases lead to a renegotiation of the purchase price. Find out more about due diligence in our Take 5 guide to due diligence for buyers here <link>

A disclosure letter enables the seller to make disclosures against the warranties it is giving in the sale agreement to highlight any unusual or onerous elements of the business. If the seller does not make adequate disclosures, you may be able to recoup some of the purchase price paid by way of a breach of warranty claim. No matter how thoroughly you approach your due diligence, the disclosure letter is likely to raise additional questions and issues that may require negotiation with the seller.


4. Negotiate the sale agreement

There are two principal methods of buying a business – an asset sale or a share sale. There are advantages and disadvantages to each. A share sale is usually more tax-efficient for the seller, whereas a buyer may prefer an asset sale so that it can cherry pick which assets to take on and which to leave behind.

In each case you as the buyer will be responsible for the preparation of the first draft of the purchase agreement. In the case of an asset sale, there will be additional matters to resolve including the assignment or novation of customer contracts, obtaining landlord consent and assigning leases for the business premises and dealing with legislation that protects the rights of employees.

The purchase agreement will contain protection for you as the buyer in the form of warranties and indemnities, informed by the due diligence process. As a buyer you will also require the inclusion of restrictive covenants to protect the value of the business you are buying. As part of a share purchase a tax covenant will provide you with protection for any tax liabilities that predate completion.


5. Completion accounts and finalising the sale

Completion accounts provide a mechanism to adjust the purchase price by reference to the business’ exact financial position at completion. The principles on which such accounts are to be prepared are crucial and will be incorporated in the sale agreement.

There may be a myriad of other issues to consider along the way. For example, if you are buying part of a business, there might need to be a restructuring exercise, such as transferring part of it into a subsidiary company, before the purchase can take place. Additionally, you may need to consider if there is to be a split exchange and completion, for example where consent from a regulator or key customer needs to be obtained, or where there are competition law issues to be resolved.


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