How to buy a small business

We have put this guide together to look at some options you have when buying a business and what procedures buyers, like yourself, have taken to acquire a business in the UK.

March 2022.11min read time
We have put this guide together to look at some options you have when buying a business and what procedures buyers, like yourself, have taken to acquire a business in the UK.
By the end of this article, you should know how to buy a business competently and take the first step to becoming your own boss.

Table of Contents

  • What industry is best for you?
  • Which business?
  • Who can help?
  • Where can you look?
  • Business Valuation
  • Raising Finance
  • Negotiating with the buyer
  • Due Diligence 
  • Finalising the sale 
  • What documents do you need?

Which industry is best for you?

Running a business has proven to be challenging, with 20% of UK businesses failing within the first year. Hence, we feel it is necessary to reflect on your industry choice and research into it appropriately.

Sector

The industry you choose will come down to a few factors that heavily impact your choice.

Experience

A good starting point is to review your career choices up until now. For example, what industries have you worked in before?

You don't necessarily have to buy a business in the same sector, but it would help if there were interchangeable skills to bring to your new market.

For example, suppose you have worked in restaurants. In that case, your experience in the hospitality sector can help cover other businesses in this industry like bars, cafes and even B&B businesses.

Aspirations and interests

Once you've gotten stuck into your business, you will come to realise it takes a lot more than profits to keep your business afloat.

Being passionate about what you do will give you contentment in your craft, enthuse your employees and please customers.

A helpful method to highlight your interests is to make a list of tasks you enjoy and those you find stressful.

This list will then help identify a business that fits your lifestyle, skills and personality.

Investment and risk

Some sectors are more profitable than others, and others are riskier.

Many businesses that are safe will only produce a modest and steady income. On the other hand, opening a riskier business will require hard work and passion.

In addition, keep on the lookout for growing markets and their activity in the past half a decade.

For instance, healthcare, tech and education are projected to grow in the next few years.

Still not sure what industry to enter? Click here to see our article explaining how you can figure out what industry to enter.

What business is best for you?

Once you have decided on what industry you'd like to enter, you can begin narrowing down your ideal business to a few potentials. 

The circumstances for buying a business are different for each buyer. However, they will all have these in common: Price and Location.

Price

The amount of credit you are willing to invest will ultimately determine your options when searching for a business. If you have a larger budget, you can opt-in for a larger business with more growth potential.

Location- Relocatable?

Similar to price, your flexibility with business locations will primarily influence your choices for business in your industry.

Leasehold or Freehold

You must also determine whether you would like to acquire a leasehold or freehold business and price and location.

What is a leasehold business?

A leasehold business comes with a pre-existing lease on the space you rent. Essentially, you do not own the property and must pay rent for the land you operate in 

What is a freehold business?

A freehold business is more expensive than a leasehold but comes with the building and land, so there are no annual rent payments.

Acquiring a freehold is more straightforward than a leasehold; the land purchased can be sold along with the business in the future. 

Who can help you buy a business?

It's no secret that buying a business is a time-consuming and costly effort. Here are some people to seek advice from with financial, legal and negotiating problems:

  • Lawyer
  • Accountant
  • Solicitor 
  • Business broker

Although the advisers above charge a fee, they offer a service almost always needed when buying a business and can help save time and money in the long run.

Where can you look for businesses?

So, have you decided whether to buy a business and the sector, location and price range you are interested in?

All the research and preparation will now come into use when searching and enquiring about businesses.

Here are a few places where you can find businesses for sale:

  • Business for Sale websites
  • Social media 
  • Google Ads
  • Word of mouth(usually for local businesses only)
  • Business networking 

Making enquiries online

Business sellers often use various advertising platforms to reach out to as many buyers as possible. Sellers will be vigilant and often receive enquiries that turn out to be a wasted effort.

Suppose you have narrowed your search down to a few businesses. In that case, it is vital to show sellers you have a genuine interest and have researched the industry- which is why it's so important to study and prepare in advance.

Confidentiality

Also, don't expect sellers to discuss confidential information right off the bat; they need to be convinced that you are a genuine buyer. It is more than likely that you won't see any financial documents or performance charts until you have signed a Non-disclosure agreement(see below for more info)

-> A Non-disclosure agreement is a legally binding contract you must sign before viewing any confidential financial information about a business. Signing the agreement ensures that you will not share the information with other parties.

Questions to ask

You may seek more information about the business, which you can obtain by conversing with the seller and asking questions.

Here are some questions you may want to ask:

  • What is the reason for the sale?
  • What does this business have that other lack?
  • What assets and liabilities does the business come with?
  • How flexible are you with the selling price?
  • How was the business valued?

Arranging a viewing

Once you have enquired about a business, you may also ask to view the business to meet the owner and get a feel for the business. 

Before viewing the business, be sure to ask the owner a list of questions (see 'Questions to ask for more information).

Along with questions, you will also have to make your own judgments on the business and where it stands. So make use of the time by thinking about the following:

  • Is there much local competition?
  • What surrounding businesses are there? Are there any businesses that may complement the one you are interested in?
  • Does the business suit you and your lifestyle?
  • Is there any local accommodation or amenities(functional facilities like transport links.)  

Valuing a Business

Setting a value on a business for sale is tricky, with many variables fluctuating the final value.

For emotional reasons, sellers' may set a high price on the company they have built, as it is a part of their legacy. However, buyers will assess profit potential before providing an asking price.

Here are a few options you can look into:

Consulting a professional

Getting in touch with an industry expert is the best method to obtain an accurate business valuation. Banks, accounting firms, or business transfer agents are the best places to look for an expert.

However, experts usually charge a fee for this valuation, which is dependent on the size and type of business for sale.

Count up the assets

The counting of tangible assets provides a fairly accurate value of the value of a business for sale.

This value is found by deducting the business's liabilities from the company's total assets.

However, this method is only useful if you know all the business's assets and liabilities. Hence, it is best to use this once you have enquired thoroughly about the business.

Negotiate the sale price

In many cases, the seller and buyer will have different sale prices, depending strongly on how each side comprehends the value of the business.

Thus, the final sale price will come down to how urgent the buyer and seller are and how strong their negotiation skills are.

If you would like to learn more about evaluating a business you intend to purchase, click here.

Raising Finance

There are a few ways to raise finance for a business acquisition, all of which come with their own benefits, drawbacks, and specific uses.

Although the most popular option amongst small businesses is to take out a loan, there are alternatives available.

As soon as you show interest and enquire about a business, the seller will want evidence that you have structured a plan to pay for the business.

Your lifestyle and the type of business for sale will determine the options available and which are most suitable.

However, if you have retained profits or savings that you'd like to use to buy a business, this would be even better; you won't have to pay back banks or investors, which will eat into the profits.

Different finance methods

For a more in-depth insight into the finance methods, you can use to acquire a business, click here.

Negotiation

Negotiating takes a lot of skill and experience to master. In addition, most negotiation scenarios don't end with satisfaction on both sides.

During a business purchase, there is always the possibility that the buyer and seller have differing asking prices- the buyer will typically ask for a lower sale price than the seller. 

This dilemma then leads to much compromisation on both sides of the sale, where negotiating power comes into play.

At this point, buyers and sellers will look to business brokers and solicitors to help them with negotiating. The price of hiring these brokers will be reflected in their fees to help mediate.

What does the seller want?

Understanding where a seller stands early will help with your whole negotiation process and help you meet halfway and strike a good deal.

Some sellers are transparent and are upfront about what they want early on. However, others may wait for your offer before making a decision.

An essential factor in a smooth negotiation is mutual trust. Be open and honest with the seller and show you are sincerely interested in the business.

Chances are, they will return the favour and help get a deal done fast!

What do you want?

Firstly, you have to decide on your ideal outcome and come to the negotiation table ready to discuss every option.

Find a balance between standing your ground and compromising. Again, this will help strike the best deal possible; you don't want to back down too quickly, but do not become resistant to compromise.

To conclude, ensure that you make your position clear and that you and the seller understand each others' goals.

Tips for negotiation

  • Come to the negotiation table prepared
  • Think from the sellers' point of view- find out what they want from the sale.
  • Think about what you want from the sale- make this clear to the seller.
  • Build a relationship with the seller- mutual trust is crucial.
  • Always be prepared to walk away if the seller does not want to negotiate.

Once mediating has concluded, it's time to analyse the business and verify it is ready for sale, or in other words, Due Diligence.

For some tips on negotiating the purchase of a business, click here.

Due Diligence

Once terms have been agreed upon, it's time to flip through the business books and records to build a picture of how the business is performing finally.

What exactly is Due Diligence?

Due Diligence is a review conducted to confirm details and facts that the seller has given to the buyer. These checks are typically a thorough analysis of the business's financial records.

It ensures the business's performance aligns with the details discussed thus far.

It is crucial that you start the due diligence process once terms and a price have been agreed upon. 

How long does Due Diligence take?

The due diligence process takes typically three to four weeks. However, this can fluctuate depending on how transparent the business is and your experience analysing financial records.

The process is tedious and often slowed down by the seller, who usually is slow to get information out. 

It's also worth getting in touch with a business advisor(accountant, solicitor, business agent) when you are ready to undertake Due Diligence. An expert will help identify the correct documents and books to look through and essentially what these books are saying.

There are three main areas of Due Diligence that you must focus on:

  • Legal Due Diligence
  • Commercial Due Diligence
  • Financial Due Diligence.

Roughly 50% of business sale deals collapse during the due diligence process and with good reason most of the time.

During this time, a prospective business buyer will have a deep look at the finances and operation of the business. Unfortunately, on some occasions, sellers aren't fully clear about the business's liabilities or issues, which can act as a deterrent to follow through with the sale.

Here are a few red flags to look out for when buying a business:

  • Finances: Double-check with your accountant that all finances add up. If they don't, be sure to ask questions to get the answers you need.
  • Little flexibility: If you have uncovered something in the due diligence process, you can negotiate the price and use this as a selling point. If their seller is not willing to negotiate 

Roughly 50% of business sale deals collapse during the due diligence process and with good reason most of the time.

During this time, a prospective business buyer will have a deep look at the finances and operation of the business. Unfortunately, on some occasions, sellers aren't fully clear about the business's liabilities or issues, which can act as a deterrent to follow through with the sale.

Here are a few red flags to look out for when buying a business:

  • Finances: Double-check with your accountant that all finances add up. If they don't, be sure to ask questions to get the answers you need.
  • Little flexibility: If you have uncovered something in the due diligence process, you can negotiate the price and use this as a selling point. If their seller is not willing to negotiate.
For more information on Due Diligence and how to prepare for it, click here.

Sealing the Deal

You're almost at the end, but there is still a chance the deal does not fall through. So how do you cross the line and finalise the deal? Should you consider walking away at any point?

After long hours of searching, negotiating and finally agreeing on a final price, it's time to finalise the sale and take the final step in becoming a small business owner.

Nevertheless, on an infrequent occasions, the deal can collapse at this stage of the sale, and it can be a preference on either side of the sale.

There are a few things to consider when trying to finalise the sale and prevent the deal from not falling through:

  • Set a precise time
  • Keep building trust
  • Be prepared to walk away if something doesn't seem right.
  • If you have any doubts, don't be afraid to ask questions.

Any Documents?

There is a list of legal and financial documents needed to buy a business. Organising and knowing what documents are required will help you navigate the sale much easier.

Here are a few examples:

  • Confidentiality Agreement
  • Letter of Intent
  • Exclusivity Agreement
  • Acquisition Agreement

We have another guide thoroughly describing the documents you will need to gather when acquiring a business.

Click here to find out more.