Deciding to purchase a business

A decision to purchase a business should result from a careful consideration of what it is you want to ultimately achieve and what will be involved in pursuing that goal Depending on the circumstances, you may have extensive or little experience in business purchases. There are a number of factors to take into account as part of your decision making process and some of these are set out below.

What business?

Obviously you need to be looking at the type of business that you want to purchase and are prepared to commit to. There is little point going into something of this nature with a half-hearted attitude as it is unlikely to be a successful venture or something that you will enjoy.

Research the market and identify those businesses you are interested in. Know what products and services are provided, where the business operates, what size the business is, how many employees there are, what the competition is like, what finances are available and what the customer base is, etc. Look inside and outside (for example, economy, market and ability to raise finance) the business and take account of why the business is being sold. Also carry out a thorough due diligence exercise so you know as much as possible about the business you are intending to purchase and what you may be getting yourself into. Do not be afraid to ask questions and keep asking them.

Can you afford it?

Finance will play a key part in your decision. It is imperative to have a detailed budget – know what you can afford and do not over-stretch yourself. You will need to know what funding options are available and ensure you do not simply focus on the purchase price. There are many other financial matters to consider – you will need to meet the cost of the acquisition itself (legal, accountancy taxation, valuation advice, etc) and repayment costs of any funding taken on as part of the transaction. Further, there is likely to be additional investment required as well as payment of wages, supplier costs, equipment repairs and maintenance and other business expenses. Those may be payable before you have even seen any return on your investment.

Take proper financial and taxation advice and keep some funds available for unexpected items – no matter how thorough a budget may be, there are usually unknowns which will have to be dealt with. Above all, do not expose yourself to unnecessary risk.

Planning & Timings

Planning well in advance and having a clear strategy will benefit you throughout the transaction. Recognise that it will take time to not only find the right business for you but also to go through the sale and purchase process to get things right. Do not rush a decision and look to purchase something that you do not really want just because it may be available sooner than something else. The purchase will be a huge decision, an emotional journey and something that you do not want to regret. It is also likely to involve considerable expense and wasting time and money is not going to be to your benefit.

Reasons for purchase and expectations

Consider your current circumstances and look at the reasons why you are considering the purchase. It could be that there is an opportunity to exploit, a business to save, a business that needs investment to grow, a competitor to take over or other reasons relevant to you and/or your business. These will naturally play a part in your final decision but whatever the position (and as mentioned above) be clear as to what your objectives are and be realistic in your expectations. Know what you are likely to face during the course of the matter and in the future after the purchase has completed. For example, a business in financial difficulties may be an attractive proposition for turnaround and substantial return but beware – they are extremely risky, extensive experience in matters of this nature a pre-requisite, and low costs at the start are likely to become substantial as time moves on!

Impact on you and others

As well as the impact on you, take note of what the effect of any takeover may be for the business, the staff, customers, suppliers, shareholders, contracts, systems, competitors, etc – there will be good and bad points which will all need to be addressed. If the business has been struggling, staff morale may be low, relationships with creditors fractious and reputation in free fall. All these things (and more) should be carefully considered before making your decision.

Legal status and type of business

The business you are looking to acquire may be run by a sole trader, partnership, limited liability partnership or limited company. The legal status will invariably impact on the decision to purchase, the type of purchase and what you actually want to buy. The type of business that you are interested in can also impact on your decision – for example, business may be cyclical in nature in which case a decision to purchase should take into account when the best time for the purchase may be (and what reserves you may need to deal with the quieter times). You should also think about what you may want from the seller – it might be that you need a handover period and/or there is a particular person who you would like to keep on for a time to assist with ongoing operations.

Strengths and weaknesses

Assess your strengths and weaknesses as well as those of the business and those who are involved in it. A successful business requires (amongst other things) good leadership, management, workers, communicators and sales-persons.

Alternative options and own start-ups

A business purchase is not necessarily the answer! It may be that moving to a different business or alternative employment enables you to fulfil your aims. Alternatively if you have a unique idea/product/service and/or want more control, you may wish to consider setting up on your own. Obviously there are advantages and disadvantages involved and these need to be weighed up as part of the decision-making process.  For example, initial costs of a start-up are likely to be less than those associated with
purchasing an existing business and you will be able to set up the systems and operations how you want (as opposed to inheriting something that does not quite work how you would like it to). Financial rewards in the future may also be greater. However, it may be easier to raise finance with an existing business due to the information available, there are existing assets and systems in place with not so many “unknowns”, and there is more likelihood of an income stream from the beginning rather than having to wait for a new start up to develop and establish itself.  Ensure you consider other alternatives as these may actually suit your requirements in preference to a purchase.

Taxation and financial advice

Get advice at the outset on the implications of proceeding down particular routes regarding the purchase and how best to structure the deal to achieve a favourable position, or at least ensure that the interests of the buyer and seller will be balanced. Changing the structure during the course of the sale will not only add time and costs and cause unnecessary delays, but also potentially deter the other party from proceeding.

Conclusions

Ultimately, it will be your decision whether to purchase. The above only represents a general overview of possible factors that are taken into account during the decision making process – obviously there may be many more that influence you. What is important, however, is that you consider your options and work out which route is best for you. You will then be well prepared for the way forward.

Please note that the information in this article is not designed to provide legal or other advice or create a solicitor - client relationship. No liability is accepted for any loss caused in reliance upon its content and you should not take or refrain from taking action based upon the same.