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Acquiring another business has many advantages. It can increase your customer base, geographical reach and portfolio of products and services. It can also help you to diversify into other areas.
Advantages of buying a business
The great thing about buying an existing concern is that much of the foundation of the business will have been laid down already. It will have a set of existing processes, customers, partners and employees, and if you choose well, it will have a proven track record in business too.
This may make it easier for you to get finance, particularly if the business can show proven growth. In addition, there may be existing employees whose experience you can draw on.
Disadvantages of buying a business
The financial commitment is one major disadvantage to buying a business. The cost can include a significant investment up front, and you will also have to pay the professional fees of solicitors, surveyors and accountants.
And it may not end there. The business may have been neglected, in which case it could need significant further investment on top of the purchase price in order to survive.
There may be a deeper reason why the owner is selling up and you could face discontented staff or underlying problems within the firm or the industry itself.
7 Steps to buying a business
- The Professionals. Professional help from a solicitor and an accountant can assist in the purchasing process. You may also need to engage a surveyor, and perhaps a business broker, who will get a commission from the sale of a business. These professionals can guide you through the negotiation, valuation and purchasing process.
- Research. The next step is to research the sector you're interested in - and the best time to buy. You should shortlist two or three businesses, and prepare to approach them.
- Viewing and valuation. A discreet meeting with the owners will tell you more about the business, in a way that will not alert staff to a possible sale. Be thorough in your research and record your key findings. Valuation is not an exact science, but professional services firms can help you to value the business as accurately as possible.
- Finance. Arrange your finance, giving your lenders the details they need. These tend to include the details of the business and any sales particulars - the accounts for the last three years or financial projections plus details of your personal assets and liabilities.
- The offer. You can make your initial offer by phone, followed up in writing, and your letter should be headed 'subject to contract'. Include this phrase in all written communication.
- Negotiation and due diligence. The next thing to do is negotiate an overlap period, so you have time to become familiar with the business before taking it over. Together with your solicitor you also need to verify the information you based your offer on. There will be a period when you can look into the business's books and ask questions, and this is called due diligence.
- Completion. The deal will reach completion only once you've agreed the price and terms of sale, and the seller has met certain conditions of sale. These include verifying their financial statements and transferring leases, contracts, licences and finance.
Direct Line for Business insurance policyholders have access to free 24-hour legal advice helplines to help you out with any business problem or question.
Related information:
Expanding your business - business expansion needs careful planning - read up on how to do it profitably and avoid common pitfalls.
Writing business contracts - how to prepare supplier, customer and employee contracts.
Business structure - getting a structure in place for your business is important - even if you work on your own or have only a few employees.
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