Buying a business is a huge step. Assuming you have already found the “right” business, having conducted some initial due diligence and found the business has no major problems, researched the market and competition, and also made contact with the vendor, we would advise the following steps are taken.
Surround yourself with experienced people
You will need an Accountant and a Corporate Solicitor and you should choose advisers with appropriate experience who can communicate with you and that you can communicate with clearly and easily. You may also wish to give your advisers authority to speak to each other directly.
Give your advisers clear instructions as to what you want to achieve and your timescales (although these will depend heavily on the vendor and their own advisers). It is also sensible to agree a fee and the basis upon which this will be calculated as clearly as possible at the outset.
Ensure you are in a position to obtain the necessary funding
If you are going to be using a loan to purchase or put towards purchasing the business it is sensible to have the terms of such loan agreed, at least in principal, before you proceed too far with your offer. You do not want to put yourself in a position where you have agreed specific terms, incurred time and substantial fees, but then you cannot achieve the necessary funding, or are only able to do so on unfavourable terms.
Make a sensible offer
1. Ensure that you take professional and independent advice to help you value the business accurately, do not rely on the vendor’s figures or those of their own advisers which may be drafted to put emphasis on the positives.
2. Assess where savings can be made and where there is scope to increase profits.
3. Consider the risks which may be increased if your offer is worth more than the assets of the business, or if the business relies on a small number of clients who may object to a change of ownership.
4. Calculate your initial offer and decide how much (if any) you are prepared to increase it. Consider the vendor’s objectives and any competitor bidders.
5. Make your offer using a concise letter headed ‘Subject to contract’ setting out the key terms of the offer that you are making.
Enter into Heads of Terms
As soon as the offer is accepted you should enter into a Heads of Terms/Heads of Agreement with the vendor which will set out the main terms of your proposed purchase. This document should:
- Specify what you have agreed to buy and the structure of the proposed acquisition e.g. whether you intend to buy the shares of the business as a whole, or cherry pick certain assets (your advisers should be able to give you further advice on this).
- Specify the payment structure and what this is based on. It may relate to assets in the business or profit figures in the next audited accounts and you may wish too make full payment upfront or defer payments over a period of time. This can get complicated and, again, your advisers will play an important part.
- Agree a period of exclusivity whereby the vendor will be prevented from speaking to other potential buyers regarding selling the business to them. The exclusivity period should give you a fair amount of time in which to undertake full due diligence and agree the legal documentation without having to worry that someone else will ‘pip you to the post’ resulting in the time and costs that you have incurred being wasted. In return it is likely that the vendor will expect you to enter into obligations of confidentiality.
- List any preconditions you have which the business must meet for you to proceed with your purchase.
- Specify which warranties (statements of truth about the business) and indemnities (commitments to provide reimbursement for specified losses) will be provided by the vendor.
Undertake further due diligence
After signing the Heads of Terms a further, more detailed examination of the business should be carried out. This is your opportunity to learn all that you can about the business before finally committing to buying it. You will need to analyse historical information and trends, sales growth, profit margins, and overheads and check for inconsistencies in the financial projections. As well as financials you will need to consider marketing, employees, contracts, clients, competition, suppliers, and legal issues e.g. does the business actually own the key assets it uses, is there any past or present litigation, or is the business subject to any onerous contractual obligations. Your advisers should be able to provide you with/help you prepare appropriate financial/legal due diligence questionnaires.
Final negotiations
Depending on what the due diligence brings up you may wish to adjust your offer. It is likely you will have established a relationship with the vendor by this time and you should therefore try to be reasonable and carefully explain the reasons for your request.
Complete the ‘legals’
There will be a number of legal documents that will need to be prepared, negotiated, and agreed before you can formally complete your acquisition. The purchase agreement will be the most important agreement setting out the agreed terms of the deal but, depending on the structure of the deal, other documents will be required. Your advisers will guide you on the documentation but you should make sure that your instructions to them are clear to ensure that what you sign up to accurately reflects what you think you have agreed. Ideally a completion meeting will take place at which the various parties can meet, agree any outstanding issues, sign the paperwork and formally complete the acquisition, however, if this is not possible, completion can take place remotely.
Following completion
This is an important time during which you should:-
- Quickly and positively announce the change of ownership in the manner which you have agreed with the vendor.
- Meet with employees to establish their trust, ensure they are not left concerned by the changes, and that they remain motivated. Depending on the size of the business there may be specific legal consultation obligations with employees.
- Write to important clients doing whatever you need to in order to secure the relationship.
Call us if you are hoping to buy a business, we can help you with any questions you have.
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