Acquiring a new business is the start of an exciting chapter for any entrepreneur. However, as the saying goes, the best things in life don’t always come easy. Buying a business is no different.
When you decide to purchase a company, you must prepare for a long and sometimes complicated process. Plenty of twists and turns along the way – and there are many factors to consider.
Understanding the steps to a successful business purchase is crucial to your preparation. Knowing what they are in advance allows you to ready yourself and navigate the course smoothly.
We’ve created a step-by-step guide, so you know what to expect.
Research
The first step on your journey is determining in what sector you wish to acquire a business.
Your own industry background may well determine in what sectors you wish to purchase a business, but this is not always the case. You may have a business partner who brings other skills to the table or you are looking for a strategic fit to an existing business.
It’s also worth reviewing different industries to determine which ones are growing or which ones achieve the best exit prices.
Once you determine the sector(s) you are interested in, finding a suitable business to buy will be much easier.
Start searching
Next, you need to search what’s available on the market. In an ideal situation, there will be a company that fits your needs available right now.
Your mission will be refined by the type of business you want, industry or sector and geographical location. Be sure to know your criteria in these areas before you start searching.
There are many ways to search for a business for sale, including:
- Connecting with business brokers and corporate finance advisors who will present relevant companies on the market
- Using online platforms
- Using contacts in your network
The search process will be prolonged if your ideal business isn’t immediately available. Aim to be patient as the perfect purchase could be around the corner.
Seek professional support
Once you have found a potential business to buy – or maybe even earlier – it’s recommended to have professional support. It will prove crucial during the buying process, so recruiting advisors in advance will enable you to find the right people and bring them on board.
First, you need a solicitor who will handle the legal side of the process, including drafting and checking contracts and conducting due diligence. You will need an accountant who can carry out financial due diligence.
Another good idea is to recruit a commercial finance advisor or broker. They will work with you on the entire sale process, including helping identify target companies. They are also able to assist after completion of the transaction to improve your chances of long-term success.
Arrange a meeting and valuation
The next step is arranging a meeting with the current owners. It is important that all owners attend in this meeting. It is your chance to meet with them in person, ask questions and learn more. Generally, this first meeting is held off site.
After this initial meeting, it is common to obtain high-level information on the target business. Some of this may have been provided in an information memorandum, if one was provided.
In most instances, this high-level information will include last filed accounts, management information since this time, aged debtors, and creditors along with a fixed asset register.
Now is the perfect time to put together a valuation of the business. You can recruit a third-party evaluator to give an independent estimate or calculate it yourself: there are several different methods. The valuation aims to validate the company’s worth, so you pay a fair price. It will also stop you from buying businesses that could be a financial disaster.
Once you have met with the business and reviewed the valuation, you should have sufficient information to decide whether to go ahead or not.
Secure finance
By this point, you should know the offer you are looking to make, using the valuation as a guide. You now need to ensure you have the funding in place.
Few buyers will have the reserves to buy a company outright. Fortunately, many forms of external and vendor finance will assist, including:
- Debt funding – raising finance from banks or alternative lenders to contribute to the cost of the business; this may involve commercial loans, commercial mortgages, invoice finance and asset finance
- Equity funding – securing funds from investments in exchange for equity in your business; you must be able to promise high growth potential and return on investment to attract investors
- Vendor financing – where the seller agrees to loan part of the money needed to buy the business until its full potential is realised; this will need to be negotiated with the seller
Determine the ideal option for you based on your preferences and eligibility. Working with a commercial finance broker or corporate finance advisor will help you to uncover the best route.
Make a formal offer
With the funds arranged for the purchase, it’s time to make a formal offer. This is where you officially state your interest in the business and your intention to buy it.
The formal offer should be given in writing. Work with your solicitor to make sure you cover everything you need to.
With any luck, the seller will accept your offer. If they don’t, you have the option of making another offer or stepping away from the deal altogether.
Negotiate
Once you have put in the formal offer, it’s time to negotiate the finer details of the deal. Your solicitor will be essential during this stage as you draft your heads of terms for agreement.
Examples of elements you will cover in the negotiation process include:
- Expected completion dates
- Seller financing
- What will be transferred in the sale (including assets, liabilities etc.)
- Who is responsible for what during the process
- Exclusivity clauses
- Any pre- or post-sale conditions
It is critical to cover the detail at this early stage as it provides both parties with clarity.
Reach a final agreement
After the negotiations are complete and everyone is happy, the next stage is to commence your due diligence.
You need to conduct thorough checks into the business to uncover any issues that may affect the value or lead to later headaches – such as debt, HR issues, ongoing legal action, customer complaints, etc. Within due diligence, the three key areas focused on are commercial, financial, and legal matters.
If anything is found during your checks, it should be addressed immediately at this stage to reach a point where both sides are satisfied.
Whilst this is occurring, the parties will be drafting the legal agreements that are governing the acquisition of the company (share purchase agreement) or its assets. This will have been based on the heads of terms agreed and any mechanisms contained therein and may include service agreements, shareholders agreements and the like.
Things may still fall apart if something goes wrong – but the risk is reduced with a strong deal and adequate due diligence.
Completion
The final step of the process is the signing of the legal agreements and transferring the monies via lawyers, at which point the business is transferred to you as the new owner.
Depending on the agreement, the seller may still be involved in some respect – such as in the event of seller financing or where they retain a small shareholding. In most scenarios, you are now free to run the business in the way you want to realise your vision and generate favourable results.
Remember, there may be some transition time as you make necessary changes to the venture and allow existing staff and stakeholders to adjust to the change in ownership.
Conclusion
Understanding the steps of a business purchase is essential to completing a successful transaction. While everyone hopes for a smooth and quick process, many factors may complicate things.
It will take time to find the right business for your needs, conduct your due diligence and negotiate a deal that suits all parties. However, if you’re patient, you will improve your chances of securing the company you want and leading it to long-term success.
If you are going through a business purchase, Pegasus will work alongside you throughout the process. We work with you to identify opportunities and guide you through the process, bringing in our network of professional advisors to assist you as needed and help you achieve your goals. Once have identified target companies, we utilise our extensive range of funding contacts to secure the finance you need to move forward.
We act as a trusted advisor for the lifespan of your business, including cash flow management, growth finance and exit planning.