Buying a business in the UK presents many opportunities. The possibility of developing a successful owner-managed business is a driving force in the ambitions of many entrepreneurs. However, achieving that aim doesn’t always mean building a business from scratch.
Buying a business in the UK is an option, for those looking to take their first step into owning and running a Small Medium Enterprise (SME), and those who want to expand their current business operations, or looking to diversify into other business or geographic areas. Whilst it can be more comfortable and quicker than trying to launch an entirely new business, it also needs to be carefully considered – and all the available information scrutinised – to make sure that the business you buy is the right fit, and gives the best chance of successful integration.
So what are the main things you need to know about buying a business in the UK?
Why are you looking at buying a business in the UK?
To decide whether buying a business is the right option for you, you first need to understand the advantages and disadvantages of going down this route, versus setting up a new business.
If you’re buying a business, much of the groundwork involved in the launch and early development is likely to have been done. A market for the product or service should already be established, a customer base – and therefore, a reputation and income stream – will have been built up, and a business plan will be in place. Depending on the size of the business and how long it has been operating, there may also be a team of experienced employees, and any teething problems and development issues are likely to have been identified and addressed.
The fact that the business has all or some of the attributes developed will inevitably increase the value, and you may, therefore, need to pay a higher price to acquire the business to recompense the previous owner for all their efforts in establishing the business.
However, with existing customers come existing contracts, and you may need to honour contracts signed by the previous owner before you get the opportunity to renegotiate them. The same applies to current employees – they will have employment contracts in place which you will need to honour. But it’s not just about what’s written down; if the business has been poorly run, you might be inheriting a disillusioned workforce with very low morale; conversely, if the previous owner had an excellent relationship with the team, they may not be keen to work for a new owner or manager.
Finance will also be an important issue. Buying a business is likely to require a significant up-front investment, along with a budget for professional fees and several months of working capital to support cash flow; that investment may need to be more significant for an under-performing or neglected business. So while it should be easier to obtain finance, as the business will have a proven track record, you will need to be sure that you have access to sufficient funding to buy the business and meet its existing contracts and commitments.
What type of business should you buy?
If you feel that buying rather than building a business offers more benefits than disadvantages, it’s time to think carefully about the type of business you want to buy. While the decision to purchase means that you have a wide range of potential business sectors to explore, it’s worth considering why you want to run a business in the first place. What do you want to achieve, what are your long-term aspirations, and how do they fit with your skills, interests and lifestyle?
You will also need to decide what you are buying if the business is incorporated, are you acquiring the company, a ‘Share purchase’ or will you just purchase the ‘trade and assets’.
There are a number of key differences between the two options mentioned above which Price Bailey is well placed to advise upon.
To help you through this process, try making a list of the most essential points to consider, including:
- Finance – how much do you have to invest?
- Your skills and abilities – what are your specialist skills and strengths, and what sort of role will enable you to use them best?
- Your involvement – it’s not just about money, so how much time do you want to put into the business, and which opportunities will give you the work-life balance you are looking for?
- Rewards – what do you need to earn, to achieve your lifestyle ambitions?
- Your interests – while some people are just looking for a business opportunity to take on, most will want to find a business in a sector which interests or excites them – just as you would if you were launching your own business from scratch.
- Where – unless the business sector you’re interested in is location-specific, don’t restrict your search geographically; a lot of businesses can easily be relocated.
You’ve found the business you want – so how much is it worth?
Having decided that buying a business in the UK is right for you, and worked out what type of business you should take on, you can start to look at the businesses on the market. You can find plenty of businesses for sale online, through a number of different websites, or discuss this with your professional advisor. You can also talk to business and trade associations, other owners in the sector and your professional contacts to see which businesses may be coming onto the market. You may also choose to research an off-market target which fits your criteria and approach them to gauge their appetite for a sale.
Once you’ve found a potential business target, you’ll need to get a much better idea of the value of the business, and again, it’s important to talk to your professional advisers about any valuations. But to give you a better idea, below are some of the things you will need to take into consideration:
- Tangible assets – such as premises, stock, equipment, vehicles and products
- Intangible assets – these could include goodwill, reputation, existing relationships, licences, customer lists, and any patents or intellectual property
- The current performance of the business – sale, turnover and profit, as well as cash flow, debts and expenses
- Previous and future performance – while the current figures can tell you how the business is doing now, by looking at its trading history and future projections, you can determine whether it is moving in the right direction and if there’s an opportunity to improve the performance.
- The workforce – is it a sizeable team, do they have specialist skills, and if so, how much could it cost to replace anyone who decided to leave the business? Ask yourself, is anyone key to the business?
- Is the business involved in any outstanding or significant litigation?
- The market – what competitors are there, and how are they performing?
- The sector – how does this business match up to others that may be for sale in the industry, and are there any significant changes (such as legislation or new technology) which could have a major impact?
- Last, but by no means least, why is the current owner looking to sell? They may be looking to retire or move away, but that can also be the reason given when a business owner decides that the sector – or their business – is facing challenging times, so dig as deep as you can to get to the real reason.
You’ve made an offer – now it’s due diligence time
Having identified the business you want to buy, worked out its value and made an offer that has been accepted, you’ll now have a period (which is negotiable) to carry out due diligence. This is the stage when you as the potential acquirer satisfy yourself with everything you have been told or seen, as well as identifying any issues or problems which require additional guarantees/warranty protection in the sale-purchase agreement.
There are three main types of due diligence:
- Financial due diligence – making sure the numbers are right, and that there are no hidden financial issues.
- Legal due diligence – ensuring that the business can be sold legally, has ownership of all the claimed assets, and is not involved in any undisclosed litigation or claims.
- Commercial due diligence – establishing the position of the business in the market, as well as checking competitors and the regulatory environment.
The due diligence process covers a wide range of issues alongside the financial investigation, including:
- Terms and conditions of employees
- Major contracts and orders
- IT systems and business technology
- Commercial management (such as customer service, marketing etc.)
The amount of due diligence will often depend on how familiar you are with the business and how much you are paying for it.
If due diligence is completed without uncovering any major concerns, (which may require renegotiation) then congratulations – you’re in a position to move ahead with buying a business in the UK.
Alternatives to buying a business in the UK outright?
While the thought of building a business from scratch may deter you from running your own SME, buying a business in the UK outright is not the only alternative route. You could consider investing in an existing business to take a stake in the company. While many of the processes will be the same – identifying, assessing and valuing the opportunities, negotiating a price and carrying out due diligence – you are likely to need additional advice on contracts and accurately valuing your stake in the business, so again it’s important to talk to professional advisers as early as possible.
Another alternative is franchising – which typically involves trading under the brand name of the business offering you the franchise, using a proven business idea and structure, and receiving additional help and support. Established franchises have a lower failure rate than new businesses, but entering into a franchise agreement will mean you have to abide by the franchisor’s terms, and there can be other restrictions on what you can do with the business, for example how you exit the business when the time comes.
If it is the right step for you, what next?
Buying a business in the UK rather than starting your own from scratch can make good business sense. But it doesn’t come without its complications, and as always, research and sound professional advice are key.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.