What are the Five Stages of Buying a Business?
STEPHANIE CREASEY >
PartnerThu 17 January 2019
Buying a business is one of biggest decisions that can be made. Taking the leap of faith from being an employee or manager to becoming a director and owner, perhaps through a management buy-out, or acquiring a new business as part of a growth plan can be a stressful and complicated process.
Whether you are buying shares from an outgoing shareholder who wants to retire, acquiring a new subsidiary company for the first time or expanding an existing group of companies, or buying another company’s assets to incorporate those into your own business, the purchase process can largely be split into 5 key stages.
- Identify a Target
First and foremost, you need to find a business to buy. Once you have done so, the next step is to identify whether the purchase is likely to happen at all. As a buyer, you need to consider whether this is an opportunity which is right for you and your business and whether it will fit in with your longer-term plans.
Any opportunity identified needs to be carefully analysed by the management team with input from external advisors and the viability of the deal determined. Once the green light has been given that the opportunity is worth pursuing, you need to consider how the deal will be structured and the value of the target business in order to make an offer to the existing owners.
- Agree the terms of the deal
Once you have found a suitable business to buy and made an offer which has been accepted on general terms, it’s time to start putting together and agreeing the terms of the deal with the seller.
This phase can vary considerably in length depending on the size and nature of the businesses involved. Negotiations will focus on not just the price to be paid but what the terms of the sale/purchase actually are including how payment will be made, what will happen to the existing staff, whether the existing owners will remain to help with a smooth transition.
In some cases, parties may sign non-binding heads of terms to make clear what has been agreed (which is helpful for all involved) or may agree an exclusivity period in which to conclude their negotiations.
- Arrange finance
Before the deal can go ahead, you will need to make sure you have the funds to actually pay the seller!
At this stage, if not already done, you will likely need to prepare or update your business plan – particularly if you are seeking external funding or investment. Projections and forecasts will need to be drawn up to ensure that there will be sufficient funds not only to buy the business but also to ensure that it can continue post-deal. There is little point in going to the expense and effort of buying a business if it cannot then be supported.
Where external investment is required, you will need to approach funders and establish their requirements, assess the same and select your preferred funding option. Where loans are involved, you may need to consider what security can be provided and on what terms any loan should be taken. If external investors are providing funds, thought will need to be given as to how those investors are to be provided with a return on their investment.
At Taylor Rose TTKW, we and can help you get the right documentation in place to support your funding requirements and, if requested, can make introductions to a range of finance providers who can discuss your options with you.
- Complete the legal paperwork and buy the business
After a deal has been agreed and funding arranged, the legal process commences. This may have already started, but will generally involve a formal due diligence process designed to identify any issues with the business you are about to buy, drawing up the legal documents such as the sale and purchase contract, board minutes, disclosure letters, indemnities and suchlike.
Many first-time buyers underestimate the size of the documents required to protect their interests and the volume of paperwork needed – it is not simply a case of drawing up a 3-4 page document and signing the next day. The paperwork will be lengthy and the process will involve long hours and several meetings with your solicitor. Your interests as a buyer need to be protected in the event that anything untoward arises once you have bought the business and you need to make a claim against the seller and that is the reason for this.
Having the right solicitor in place is crucial to keeping the deal moving. A slow or unresponsive solicitor can cause unnecessary delays, fraying relations between the parties and impacting on funding arrangements. The advisors you appoint need to work together. Having a solicitor on your side who is proactive, follows up on points raised and is able to effectively manage the other advisors on the transaction will make a significant difference to your buying experience. We are here to help you get the deal done and to make the process as smooth and efficient as possible so that you can get on with what is important to you – running a successful business.
Once the paperwork is complete, the business is yours and it’s time to celebrate.
- Post deal – what happens next?
Once the process is complete, the paperwork is signed and you have celebrated buying your new business, the work continues. You will need to begin working in/on the business – putting your own systems in place, integrating staff and managing cash flow to ensure you continue to go from strength to strength.
There may be completion accounts to deal with, stock takes to complete, contracts to review and update, or even a re-branding project to be undertaken.
Don’t forget - just because the deal is complete, you are not on your own the day after completion. Having been by your side through the acquisition process, we like to keep in touch from time to time to see how things are going. Should you need further help, having got an in-depth understanding and knowledge of the business you have just bought, we can make introductions to other teams within our firm and our professional contacts who will be happy to address any concerns you may have and provide further assistance.
If you are considering buying a business, be it for the first time or as a seasoned acquirer looking for further growth, and have questions about the buying process or how we can help you, please get in touch with Stephanie Creasey or call us on 01733 333333.
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