Buying a business can be a great way to make a profit, spend an investment or simply enter a new industry without having to do the difficult part of building and fighting to make your own way.
In some cases, buying a business can also help you out by absorbing your competitors, leaving you with a greater share of the market and more resources for your customers.
Think of that as the Disney method, where they acquire any studio that runs against them.
Whatever the reason, if you’re thinking of buying a business, there are some steps and information that you should know first. It’s not as easy as just putting money down on the table and walking away – there’s quite a bit of red tapes and legalities that you need to know.
But that’s what we’re here for, to get you started on the process and allow you to become one step closer to your goal. So, without further ado, here’s everything you need to know about how to buy a business in the UK.
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Stop and think: do you really want to buy?
Before you get caught up in the legalities of buying and jumping through the red tape in order to buy a business, you need to stop and carefully consider the following question: do you really want to buy this business?
Don’t get us wrong, we know the benefits that can come from buying a business. It can turn investment money into an ongoing source of income, gather increased profits for your existing business or allow you to work in the industry or field of your choosing without the hard years of work starting a business from scratch.
But, it has to be said that not all business acquisitions work out. In some cases, you could buy a business to find out that it’s not as profitable as you think, or that it’s on the decline.
Or you could spend your investment on something that doesn’t give you the same about of return, meaning you’ll have been better off investing it elsewhere.
For example, Quaker Oats once bought Snapple, for $1.7 billion. The idea was that Quaker Oats would use all their supermarket connections and relationships to market the teas and juices that Snapple sold to small markets.
But it didn’t work and a little over 2 years later, they sold Snapple for a mere $300 million. That was roughly a loss of 1.6 million for each day they owned Snapple. Ouch.
Okay, you’re not playing with the same level of investment as these mega-corporation acquisitions. But the lesson still stands. Before you enter into this process make sure you’re double, triple, and extra sure that you want to buy a business.
Do your research
The key difference between making a good investment and a bad one is research. If Quaker Oats had properly researched Snapple’s market, they wouldn’t have made such a bad investment.
To make sure that buying the business you have an eye on is a good call, you’re going to have to do some thorough research. And when we say thorough, we mean it.
Although you’ll be using this research to make sure there’s no rot hiding underneath the floorboards. But more importantly, this research will focus on the current financial situation of the business and your plan for it once acquired.
In many ways, this process is like creating a regular business plan. You’ll be looking at:
- Your business objectives and goals;
- Your employees and business structure;
- Your products and how you market them;
- Your customers, competitors, and industry;
- Your financial information and forecasting.
The important thing to remember here is that you’re not just looking at the past performance of a business, but also planning on how you can ensure future success.
For more information on what you should be looking for, take a look at our guide on how to write a business plan.
What else do you need to look for when buying a business?
There are also some other things that you should consider when looking at how to buy a business in the UK.
Their existing clients and contracts
Typically, when a business is purchased they are under obligation to honour these contracts. Do you have room for this in your plan or are you prepared to renegotiate them?
Their existing staff
When you buy a business, you’ll be under obligation to have them on the side when the purchase is made. Of course, there’s nothing stopping you from making staffing changes in the future, but while the deal is being done you will more than likely have to take on the new staff.
How long the purchase will take
Buying a business isn’t a straightforward process and it could take months for the deal to go through. Have you got the time to follow through on this deal? What will happen if it takes longer than expected?
Having a solicitor or a business broker on hand will be able to handle some of these questions for you and help you navigate this process.
Do you need the full upfront payment to buy a business?
Like buying a house or a car, you don’t always need to have the entire asking price in hand to buy. To help raise the funds, you can turn to a lender for the capital to buy, which you’ll then pay back on the terms that you agree.
In order to get an agreement with a lender, you’ll need the following details:
- details of the business and the terms of the sale;
- accounts for the last three years, or financial projections if this information isn’t available;
- details of your personal assets and liabilities.
In some cases, you may also be able to provide finance against the assets of the company you’re about to buy, as you’ll be the owner when the sale goes through.
This is only applicable for some companies though and you must require detailed records about all assets and any liabilities.
Like getting a mortgage on a house, a lender needs to check whether your investment is a good one and that you’ll be able to make back payments with a financially successful business. Lenders want to give you money to make successful businesses so that they get a return on their investment.
If buying the business is a risk, you may struggle to get the capital from the lender. For the best financial advice, including how to get a lender to approve your application, you should talk to an accountant.
Can you buy a business from a sole trader?
The answer to this one is a little mixed. You can’t buy a business from a sole trader in the traditional sense, because they are the business.
However, a sole trader can sell all of the assets of the business, or form a limited company in order to sell everything. Feeling a little unsure on company types? Discover all the different UK company structures explained here.
Consider other buying models
When it comes to buying a business in the UK, there’s not one straightforward modal that you can follow.
You can choose to buy the company on your own, taking over ownership and the daily running of the company. You could, as a business, choose to merge or acquire the company into your own, combining assets for a greater boost to your own company.
In addition to these, you could also consider forming a co-op or franchising.
A co-op, as it sounds, means buying a business as part of a cooperative partnership. This is a good idea if you’re low on funds or need an extra boost to raise capital, or if you have someone in mind that can bring something special to the relationship.
This could be existing relationships with industry contacts, experience running a business, or even particular assets that you lack.
However, forming a co-operative does mean that you have another voice (or more) to contend with. All decisions that you make have to be agreed upon by the whole group, and similarly, all profits that are made are also shared.
Franchising is something that is typically associated with restaurants but can provide a good modal in certain use cases. Basically, franchising is a right to sell or trade a business’ goods and services, as long as you adhere to strict rules and guidelines.
For example, one of the biggest franchises in the UK is McDonald’s. You can buy a McDonald’s restaurant, which gives you access to sell McDonald’s foods and goods. But you must sell them according to their rules – and of course, pay them for the ingredients and supplies to do so. You can’t make any changes to the menu, the uniform, or staff working conditions, despite ‘owning’ that McDonald’s.
You’re then responsible for the success of that particular chain and get access to those profits only – not the billions the brand makes annually.
Can you invest in a business without running it?
You can absolutely invest in a business without taking over the day-to-day running of it. The easiest and most straightforward way to do this is by buying shares in a limited company.
As a shareholder, you’ll get a piece of the company profits and will be allowed to vote in company decisions, giving you a say in the bigger picture moments to help drive the success of the company.
The number of votes and profits that you will earn depends on the number of shares that you own.
The more you own, the more of the company that is ‘yours’. If you’re not interested in running a company but are thinking about investing for financial gain, it could be a good idea to create a portfolio of non-majority shares in a limited company.
Like any financial decision, you need to speak to an accountant for the best advice according to your unique situation.
Can you buy a business from a family member?
Yes, you can buy a business from a family member just like anyone else. But if you have a family member who’s thinking of selling because of retirement or other reasons, family succession planning may be a better option than selling, depending on who you are selling to.
A succession plan is a plan for what happens if you, or a partner, leaves the business. It helps translate ownership (or leadership positions for larger businesses) from one party to another while outlining to all employees a clear path of the change and what is going to happen next.
If you want to leave the business to your next of kin, an heir succession plan could be the answer you’re looking for. In order to have this plan, you need to:
- Clearly outline who takes over the business and provides instructions for the takeover. This is particularly important if you have multiple family members who are eligible to take over and may fight over the position.
- Define any structural changes to the business in the event of your heir taking over.
- Outline day-to-day responsibilities and processes in the event of the takeover, ensuring the business is ran smoothly through the change.
More information on family succession can be found here.
Negotiating the sale and providing due diligence
If you’re ready to go ahead with buying an existing business in the UK, then you need to make an offer.
Once this is made, you will enter the negotiation phase. If you’ve ever bought a house, this won’t feel unfamiliar to you. During this phase, you and the business will try to agree on a price and the particular terms of the sale.
If you require it, you could also use this phase to get more acquainted with the day-to-day running of the company before you take over.
Then when you’re ready, you need to complete the sale.
However, there’s one step that you must complete before any sales are final. This is due diligence.
This is where your offer and terms are given to your solicitor and/or account, who will conduct their own research to make sure that this agreement is the best for you and that you’re paying the right value for the purchase.
Once they’ve agreed, you’re free to make the purchase and the transfer process can begin.
How to buy a business in the UK in a nutshell
There’s no one singular way to buy a business in the UK. But generally speaking, the steps involved consist of:
- Fully researching and evaluating a business;
- Raising funding or capital;
- Sending and negotiating an offer;
- Taking due diligence and having the legalities checked;
- Signing on the dotted line.
The most important factor to take away from this guide is that you should never rush into a decision. Always do your research and consult advice from your solicitor and accountant to make sure that this is the best investment for you.