Buying a business – Frequently Asked Questions

Buying a business is a life changing decision and one which raises a lot of concerns and questions in the buyers mind. We have listed below some of the most common questions that people consider (usually in the middle of the night) when buying a business.

Do I really want to buy a business?
Sounds silly but this is an important question, people choose to go into business for many different reasons and you need to be sure of yours. It would pay you to remember your reasons and stay focused on them after you have bought the business. Some of the most common reasons that people buy a business are:

To make money
To have more control of their future
To take advantage of their skills and trades
Not to have a boss
To improve lifestyle

Shall I start a business or buy one?
When you buy a business you do have an idea of what to expect from looking through the business details. Even if the track record is not great you can at least evaluate the business and make your decision. Buying an existing small business usually ensures that there is a demand for the products and services on offer. As the success rate of new start ups is not great, buying an existing business means that it should have passed the danger level. Hopefully this will increase your own chances of success. The main reason that some people choose not to buy an existing business is to avoid paying the premium that most established businesses attract. For experienced operators and entrepreneurs starting a business as opposed to buying one means that they save money on set up costs and are then able to build the premium value and sell the business for a profit.

What should I look for in a business?
What you should look for will depend on a number of factors. It is important not only to look for a business which will provide you with a good income but also that it is something that you are good at or can learn to be good at. I also think that it is important to choose something that you enjoy. Look for a business that you think that you can improve in some way, what skills do you have to offer the business? By improving an existing business you will increase sales, profits and customer satisfaction, this will ultimately increase the value of the business and also make the business much more saleable.

How is the selling price calculated?
When buying a business it is important that you pay the right price, unless you understand how businesses are valued this will not be possible. Most small businesses that are marketed by the owners are priced according to what the owner would like as opposed to what the business is actually worth. When considering purchasing a business you should always seek professional advice. Involve your accountant from the start and listen to his advice, most accountants will have dealt with several sales and accusitions. Having said this don’t let the accountants opinion put you off, it is always worth remembering that there is an element of risk with any business and accountants are not usually business people. I did very well on a business that my trusted accountant advised me not to buy. Listen to the advice and make your own informed opinion.

Most professionally valued businesses will be priced by taking into account many different aspects of the business.

Return on investment is always important – how long will it take the purchaser to get back the money that they invest in the purchase? Important points here are the profits generated less the salary of the owner.

Owners involvement – The amount of work that the owner of the business does has an impact on not only the value of the business but also on the saleability. It makes sense really that a business that runs well with good management will be more attractive to buyers than one which generates similar income but requires the owner to work long hours.

Trading hours – Price can be affected by the number of trading days and hours of the business. Take an example of two restaurants with similar turnover, asset value, and profits. One is open 7 days a week and the other is open only 5, which one would you rather buy?

Asset value is also used in the process of valuing businesses, this is the value of the plant, fixtures, and fittings according to the balance sheet.

Should I use a solicitor?
Yes – the process of buying a business involves many legal documents and is best handled by a solicitor that has dealt with business transfers previously.

Why is confidentiality so important?
Confidentiality is very important to the seller during the sale process. Customers, staff, and suppliers tend to worry about a business changing hands and the seller needs to minimize business disruption. Once the sale progresses to exchange of contracts the seller will normally inform all related parties in order to assist the buyer and all others involved with the business. This then gives the buyer the opportunity to establish a relationship with staff, customers, and suppliers and reassure them about any concerns that they may have regarding the business sale.

What is due diligence?
Due diligence is a systematic way of gathering and analyzing information about the business, this information is what the buyer uses to make a decision about committing to the purchase of the business. Due diligence includes information about all financial matters, employee and management systems, and also licenses and location matters. For further information see our Due Diligence Page.

Why do some businesses fail under new management?

The purchase price was too high
Too much finance or over geared Inadequate due diligence
The business was too dependant on the previous owner
New owners fail to establish a good working relationship with staff, suppliers, and customers.
Too many changes made too quickly
Unforeseen changes to the market conditions

How much cash will I need to buy a business?
Usually a good percentage of the purchase price is borrowed funds. The amount of deposit that lenders will expect you to put in will vary and will also be dependant on how much security you are offering them. You should allow to put in 1/3 to ½ of the purchase price and remember to leave some working capital and also a contingency fund.

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