How to buy a business?

Businessman Slide

Buying a business can be a way of entering into a new industry or developing your current business in a time-efficient manner. When starting a business from the ground upwards it can be challenging because you must invest your own funds or seek start-up funding such as a business loan. Also, it can be very time-consuming and labour intensive as you have little to no trade currently. Therefore, you have to be very careful with cash flow and re-invest profits as much as possible to grow the business.

When buying a business that already is trading you can potentially build and strengthen on what the previous owner has built. Knowing the reasons why the business owner is selling is crucial. You may have experience in specific industries such as engineering, recruitment, hospitality, or many others and want to develop your business accomplishments further. Many business owners who are looking to make a business acquisition have a team around them to delegate roles to.

How do I fund buying a business?

Leveraging against the business you are looking to acquire is one of the most common ways to buy a business. Looking at the balance sheet in the annual accounts will show what the company owns as assets against what it owes in liabilities. These assets can be used to acquire the business for the purchaser. For example, if the company is a B2B or business-to-business industry such as recruitment then invoice finance could potentially be used. If there is a large debtor book shown on the balance sheet, then commonly up to 90% of this can be used to finance the acquisition. Certain industries lend themselves well to invoice finance such as recruitment, haulage, engineering, printing, and healthcare recruitment. Many other forms such as business loans and asset re-finance of current equipment or vehicles within the business can also be used as funding the business acquisition.

Free-hold commercial property can be a great way of funding a business for sale. The reason being is a commercial property lender can finance against the property and release the equity which is tied up. An example would be a £100,000 commercial office that is owned in the property and £70,000 of this is used to buy the business.

Vendor Finance is another way business acquisitions can take place. This is whereby the seller effectively finances the deal themselves and sells shares back to the acquiring owners at pre-agreed prices. This of course is less popular than debt financing or leveraging the business because the seller is effectively having to wait longer to get paid. Although it can achieve a higher business sale price consequently.

How long does it take to buy a business?

Legal due diligence and raising the finance will be the main 2 factors that can cause delays when purchasing a business. The amount of due diligence you want from an accountant or commercial solicitor will also be a factor in the costs involved. In short, the more due diligence conducted, the higher the fees. This is understandable as this is more time involved for the accountant or solicitor. The size of the business acquisition will also be a variable in relation to the time taken to purchase the business. Having a pre-agreed target date of completion in the heads of terms is always good practice.

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