How to buy a business: a 4-step guide

Buying a business is a big step. If all goes to plan, it can fast track you to running a successful company with a team of employees that already know their roles. But it comes with complexities at every stage that you need to be prepared for.

Read on to understand the four key stages of buying a business.

Buying a business in 4 steps

There are multiple stages to buying a business, and some businesses are more complicated to purchase than others, so there’s no one-size-fits-all approach. But there are a few key steps that should apply across most business acquisitions:

Research
Valuation
Due diligence
Offer, negotiation, completion

At this stage, it’s a good idea to think about whether buying a business is right for you, or if you should start your own business from scratch.

And it’s important to note that buying a business is complex and you should seek support from a legal professional, like a solicitor or business broker, if you’re unsure of anything.

1. Do your research before buying a business

The first step when you’re thinking about buying a business is research. Even if you’re buying a business you know well, or are an expert in your industry – take the time to look into the finer details.

For example, you’re interested in buying a pub after years of working in the industry. You’ve looked on sites like Christie or Rightbiz and found a pub for sale that looks perfect.

At this stage, it could be a good idea to pause and think about a few different things:

assess the location – what’s the foot traffic like on weeknights? What’s the competition like in the area?
understand its reputation – use customer reviews and sites like Glassdoor to understand the business’s reputation because it’ll be your job to maintain or improve it
research market conditions – look into how the economy and current taxes like alcohol duty are affecting the industry. This’ll help you understand how profitable the business is

The more in-depth phase of research is completing your due diligence, which we’ll cover later on.

2. How to value a business

Valuing a business isn’t straightforward – it involves accessing information that you’ll need to get from the current business owner. And then there are intangible assets that don’t have a clear cut value but are important to most businesses.

A business broker or accountant should be able to advise you on the aspects of a business that have a clear value. Here are some examples of what would be considered in the valuation:

the business’s past and present performance
future forecasts or a business plan
the current financial situation – debt, expenses, cashflow, assets

But intangible assets are harder to value as they don’t have a typical price. Again, a business broker should be able to give you a more accurate valuation of these assets:

reputation and brand value
intellectual property
customer relationships and contracts
software and technology
employee skills and expertise
benchmarking (the going-rate for similar businesses)

3. Due diligence when buying a business

There are processes and regulations that need to be followed when buying a business – this is where professional support is important. With your solicitor or business broker, you’ll complete your due diligence checks on the business you want to buy. This will help to make sure everything is legally compliant.

When buying a business, due diligence is usually separated into three categories:

Legal – checking that the current business owner can legally sell and is the owner of the business’s assets
Financial – checking the books to see that everything is in order and there’s no hidden debts or financial issues
Commercial – understanding the economic and regulatory environment of the business

Questions to ask when buying a business

Lots of questions will naturally get answered throughout the process of buying a business. But there are some useful questions you can ask that could give you valuable insight:

why are you selling? Understanding why they no longer want to run the business is important. There’s a difference between someone wanting a change of career and being under financial pressure
who are your main competitors? While you can figure out some of this yourself, it’s interesting to get the business owner’s perspective
did you start the business yourself? If they started the business from scratch or bought it and are now selling, are two very different scenarios. Understanding this will help you understand their connection to the business, which will help during negotiations

4. Offer, negotiation, and completion

If you have your finances sorted, whether you’re a cash buyer or have taken out a business loan, you’re ready to make an offer.

When you’re at the point of making an offer, you’ll usually have been in regular contact with the current business owner. So you can call or meet them in person, but you’ll generally want to make sure that you follow up any correspondence in writing.

A solicitor or business broker can advise you on the wording of the offer as well as help you negotiate and complete the deal.

When it comes to negotiating, the final price and payment terms of the deal are the areas you’ll focus on. But you can also agree to an overlap period where you can see how the business operates before completing.

Then to officially complete the deal, you need to complete these tasks:

verify financial statements
transfer contracts, finances, and leases
transfer or set up new VAT registration

The pros and cons of buying a business

If you’re still weighing up your options, here are the pros and cons of buying a business.

The pros:

existing foundations – the main benefit to buying a business is that you inherit an existing structure that you can start working with straight away. In some cases, you can have a premises, customer base, staff, and an operational structure from day one
business model – you’ll typically have a view of the financial history of the business, so you understand what business model has been working and what hasn’t. Saving you from making similar mistakes yourself
reduced risk – while it isn’t risk-free, buying an existing business that has a track record of success should mean there’s less risk of the business struggling

The cons:

upfront costs – buying a business is unlikely to be cheap. You’re paying for all of the time and money that’s already been put into the business and sometimes it can take some time to see a return on your investment
lack of flexibility – it can be difficult to make big changes in a pre-existing business. You’ll likely have less flexibility and need to work within the parameters of your new business
inheriting problems – when you buy a business, you inherit the good and the bad. This is what makes doing your research so crucial

Are you thinking about buying a business? Tell us how you’re finding the process in the comments.

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