Welcome to our new apprentices
November 8, 2023
Have you ever considered buying a business? Whether you are an experienced entrepreneur or just starting out, acquiring a ‘ready-made’ business offers a number of advantages.
For established businesses, buying a second company can help them break into new markets or acquire machinery, skilled workers or innovations that can help their operations grow.
Meanwhile, new entrepreneurs can acquire a ‘turn-key’ business that requires minimal work to start generating profits.
However, the process of buying a business is not without risks, especially at the deal-making stage, so we have put together some quick tips to help.
Research, research, research
Before even approaching another business do as much background research as you can.
Find out exactly who owns it, look into its previous accounts, speak to its suppliers – don’t be afraid to ask questions.
Once you make that initial contact with a seller you will need to obtain as much information as you can from them.
Check to see whether they have recent management accounts you can check and find out if the company has any debts or obligations that could create risk.
Some owners may be selling for retirement, others may think that a new owner could help the business grow, while some may have concerns about the business and are seeking a quick exit. Learning more about the reasons for a sale could alert you to issues within the business.
Be open, be honest
Try and be as transparent as possible with a seller as it encourages them to be honest and open with you as a buyer. Trust is important when securing a deal, as both parties face risk during a transaction.
You should also be honest with yourself and ask whether the deal is suited to your needs and whether any issues can be feasibly fixed.
It sounds a bit clichéd but try to make decisions with your head, not your heart. If you are unsure, why not ask a trusted friend or adviser for their independent opinion?
Not every business is going to be suited to your goals. There are a number of factors that can be difficult to identify at first, but once you open up a dialogue with a seller, you should check:
Draw up heads of terms
If you are serious about purchasing a business create a heads of terms agreement. This should set out the points that have been agreed in principle between parties during the course of negotiations.
Heads of terms provide serious intent and have moral force, but do not legally bind the parties to conclude the deal on those terms or even at all.
Despite this, they are a great first step in setting out the intended purpose of the transaction and the aims of each party.
Make sure you have access to sufficient finance
Once the basic terms of the sale have been agreed you will need to ensure that you have sufficient funding to cover the costs of the transaction.
Few business owners fund the whole of a sale out of their existing personal or business funds.
Instead, many seek out a loan or investment that allows them to access the funds they need.
Of course, this requires lenders and/or investors to sign off the investment in the new business, which can be challenging and take time.
Most lenders and investors will not only want to know about your own financial position but they will also want to know more about the health of the business you are buying so that their money isn’t at risk.
Entrepreneurs should factor this process into the timeline for their transaction and ensure they have the funds they need to complete it.
Don’t be afraid to walk away at any stage
Possibly one of the most important tips is to walk away if the deal isn’t right. Transactions have been known to fail at the last second, perhaps after due diligence uncovers an unexpected issue.
By this stage, both the buyer and seller may be emotionally and financially committed to the deal but that doesn’t mean that it has to go ahead.
Until a final contract is signed and funds are transferred a deal can always be cancelled or, in some cases, renegotiated.
Signing up to a deal that leaves you, your existing business and finances at risk is rarely worth it.
Ask for help
If you haven’t bought a business before, or even if you are an experienced entrepreneur, it pays to seek out help from a professional.
Working with an accountant can help you to structure a better deal, acquire finance and identify potential risks.
Six steps to secure finance for your business
Lots of businesses are seeking out finance at the moment, whether to fund an acquisition or finance investment, but given the challenges the economy faces, it is becoming increasingly difficult to secure the right deal.
If a business hasn’t sought out finance for a while or there has been a significant change to their operations since they last requested funding, then there are a few steps they should consider to improve their chances of success.
Review your business plan
A business plan is often one of the first documents that a potential lender and/or investor will want to see, as it clearly lays out your vision for the company.
Having an up-to-date business plan will show financiers that you have a path to profitability and growth, giving them the confidence to invest or lend you the money you require.
If you haven’t reviewed your business plan in a while, take the time to review it and update it, highlighting potential future risks, as well as opportunities.
Investors or lenders will appreciate transparency as it makes it easier to calculate the benefits and disadvantages of a deal.
Get the figures to back you up
As well as having an effective business plan, businesses will need to be able to demonstrate that they can service the debts of any loans that they make or offer the right level of return to investors.
A key aspect of this is demonstrating financial health and positive cash flow. Although not essential, it is highly recommended that you produce detailed management accounts in the months leading up to seeking finance.
This should demonstrate profitability, cash flow, debts and sales. Doing this over a period of several months will give a lender or investor confidence that the business is stable.
If you are borrowing for a specific reason, such as investment in a particular piece of equipment or to hire a certain type of employee, borrow as much or a little more than you need.
Lenders will want to check the value of the investment you are financing and may be concerned if you borrow too little or far too much.
Both may indicate that you are taking on too much additional risk, which could affect your ability to repay them.
Prepare for due diligence
At some point during the lending or investment process, the other party will want to conduct financial and legal due diligence.
It is unfortunately fairly common for deals to fall through at this late stage because a detail has been missed.
Remember, lenders and investors tend to be risk-averse. If they feel that something uncovered during due diligence should have been revealed to them earlier it can put them off entirely.
Try to be as open as possible early on and you should avoid any complications during this stage that may prevent you from obtaining the finance you need.
Try alternative finance
If you can’t get a loan from a traditional lender or you are struggling to find investors that will finance you, then you may want to consider an alternative form of funding.
There are a growing number of alternative finance options out there to help. If you need money in the short term, for example, you could use invoice finance.
This allows a lender to effectively ‘purchase’ your unpaid invoices for a fee. Then when the invoice is paid by the customer, you get the remaining balance minus the fee.
If you need to borrow a larger sum then you could borrow against your existing assets or property owned by the business. This could help you secure a larger sum over a longer period but may put the assets you own at risk.
Finally, there is crowdfunding and peer-to-peer lending. This approach allows businesses to seek finance with a number of individuals, often online.
Typically, investors will be offered a small percentage of equity in the company in the case of crowdfunding or will see numerous lenders loaning money and earning interest on repayments.
This allows investors and lenders to share the risk, which makes it easier for them to lend the money.
Possibly one of the most important steps you can take is to seek corporate finance advice from an experienced expert. They can help you to find the best deal and assist you with preparing the information that lenders and investors need – negotiating the best outcomes for you and your business.