How to buy a small business

For many, owning a business is a dream – the exciting prospect of being your own boss, having complete creative control, and working flexible hours for a better work/life balance can be hard to beat.

But many people don’t realise that starting from scratch isn’t the only way to make that dream a reality.

You could start your journey by buying a pre-existing business, such as a franchise or a small business the original owner is selling.

You might also consider buying an additional business to strengthen the services or products your start-up is offering, to buy additional expertise, or to diversify your business income.

However, it’s important to ask yourself whether this approach will suit you and your needs – is it financially feasible, and do you have the skills and know-how to take on an established company?

If buying a business is something you feel might be for you, seeking professional advice is essential, as there are many things to consider before you seal the deal.

Buying a business – advantages and disadvantages

As with any business journey, there are several considerations to weigh up when it comes to the type of business you may want to buy and run.

The advantages of buying a small business can include:

1. established operations – the business is already up and running, with systems and processes in place, and this saves time and effort as you won’t be setting everything up from scratch
2. customer base – an existing business usually has a customer base, which provides an immediate source of revenue
3. existing brand – you benefit from the brand’s existing reputation and recognition
4. proven business model – it’s easier to secure financing for a business with a proven track record.

But the disadvantages may involve:

1. hidden problems – there may be unforeseen issues such as debts, employee problems, or outdated systems
2. dated products and services – the current offerings may need to be updated, which can require significant investment
3. reputation risk – if the business has a poor reputation, it could affect customer loyalty and future growth
4. High upfront cost – buying a business can be more expensive initially than starting from scratch.

Remember, each business is unique, so it is crucial to do thorough due diligence before making a purchase decision.

Deciding what kind of business to buy

Before buying a business, consider what kind of company you want to buy and why.

The industry could have an effect on which business you purchase – if you have previous experience in a certain market, you may have transferable skills that could increase your chances of business success.

Looking into the industries you are passionate about, such as food, flowers, or fashion, could also make the process more successful.

What could also affect your chances of success is the demand for the business you’re looking at – is there any room for growth in the market?

You may want to purchase a business in a booming or developing industry with plenty of opportunity, which is why conducting market and industry research is important.

Where to find small businesses for sale

When looking for a business to buy, it could be a good idea to search far and wide for the right company rather than focusing on the first one that ticks all your boxes.

You could find small businesses for sale:

• on dedicated online broker websites
• by word-of-mouth within your desired industry
• through a franchisor – a business owner who sells the rights to use their company name, trademarks, and business model
• through local business brokers.

You could then list all possible options and compare them to find the right one for you.

Initial viewing and valuation

Just as you would buy a house, it’s a good idea to thoroughly examine a business and its value before making a formal offer.

There are a number of methods you could use to evaluate a business – an asset-based approach (focusing on a company’s asset value), comparable analysis (which looks at similar companies), seller’s discretionary earnings (SDE), and price-to-earnings ratio (P/E).

You could also use a combination of these methods to get a deeper, better understanding of how much a business is worth.

A business valuation is vital and you don’t have to do it yourself – you can hire an experienced professional to ensure it is done correctly and thoroughly.

Read our full guide on how to value a business.

Arrange finance

In order to buy a business, the seller may want to see evidence of realistic financial planning and assets from you to ensure that you’re in position to buy their company.

If you don’t already have the money to buy the business, you could source funding from elsewhere – with a loan from friends or family, a bank loan, seed funding, or a Start Up Loan.

Start Up Loans is a government-backed scheme that offers fixed-rate business loans of up to £25,000.

Several factors could affect the financing options available to you, including the nature of the business you want to buy and your own personal and financial circumstances.

To help make the right decision, read our guide on the best business funding alternatives.

In order to make the transfer a smooth one, you may also need to consider the money required to run the business, not just buy it.

This could include staff salaries, insurance, equipment and supplies, and overheads such as utilities.

Make a formal offer

When you’re in a position to make a formal offer, you may feel like everything is coming together, and you are one step closer to becoming a small business owner.

Before making an offer, it could be wise to consider the lowest amount you are willing to pay and the reason why you are offering that amount.

You may need a negotiation strategy, which could include offering your lowest amount first.

To begin negotiations, you will need a Letter of Intent, which a lawyer can prepare.

This is the first step in the process, and it lets the seller know you are interested in coming to an agreement with them about buying their business.

When you talk to the seller, consider highlighting any incentives around this lower price – for instance, you may be able to complete the sale quickly – to persuade them to accept it.

However, don’t be deterred if the seller wants to negotiate, as this is a common thing to do.

If you offer more than the asking price, consider whether or not you can recoup the costs quickly once the business is yours.

Doing due diligence

Once you have arranged your finances and made a formal offer on the business you want, it would be considered wise to do your due diligence.

This typically involves working with a lawyer and an accountant to gather all the information you need before buying a business.

Doing due diligence involves closely examining the business to ensure it is as the seller presented it, identifying any potential problems that could affect operations once you take over.

If you discover undisclosed problems, you may want to – and can – back out of the deal or renegotiate terms.

Doing due diligence involves three key areas: financial, commercial, and legal.

• financial due diligence can involve establishing a clear paper trail for the business and scrutinising certain financial details
• commercial due diligence is about getting to know the relevant business processes and the customer and employee perspectives
• legal due diligence may involve investigating legal claims, trademarks, contract terms, and other legal processes to ensure that the seller has disclosed them all.

Read our complete due diligence checklist.

Complete the sale

At this stage, you may want to do a number of things to create a smoother transition process, including:

• set a firm date to have everything finalised
• have the final contract ready to be signed
• keep up with the progress of the sale using clear, open communication as the seller could still back out before signing the final contract
• apply for any relevant business licences once the deal is closed.