How to buy or sell a business


chris griffiths
Technical Investment Director
Published:
business sale transaction

Deciding to buy or sell a business is a major financial decision, possibly one of the biggest decisions you will ever make. There’s no going back once you sign on the dotted line. When it comes to buying a small business or selling a small business, many people are overwhelmed by the complexities of the process and simply don’t know where to start.

A business sales transaction does not have to be such an intimidating prospect though. If you plan properly, do your research into the legal side and work with the right people, your experience needn’t be a stressful one.

In this article on how to buy or sell your business we’ve summarised the main elements and things to consider in a typical business sale or purchase transaction. Please keep in mind that the points outlined below are suggestions. Never enter a business deal without conducting your own due diligence.

When to Buy or Sell

When it comes to buying and selling a business, timing is everything. A good opportunity will not remain on the market for long. Both buyer and seller must consider carefully the timing of their desired transaction, both personally and financially.

Things to Consider as a Buyer

If you’re thinking of buying a business it needs to be the right time for you. Don’t rush into this decision, especially if there’s anything likely to change in your life that would impact the time you have available to manage the business, or have a significant impact on your financial situation. When you buy a business there are often new staff to manage, business processes to learn, and a company culture to adapt to. This almost always requires more work than you expect.

In addition to considering your personal circumstances, you should research the current macroeconomic climate - the broader economic landscape and your sector - alongside the microeconomic climate - regional or local economy.

The evaluation you conduct as you consider if you should be buying a small business might not be restricted to an analysis of economic factors. You may need to conduct research into any changes to legislation that are likely to impact your industry, and what the effects of these changes would be. The more informed you are, the better decision you are likely to make.

Things to Consider as a Seller

There are any number of reasons why you want to sell your business. It may be because of something in your personal life, like an upcoming retirement, or you just want to exit after years of successfully growing your company.

Regardless of why you want to sell your business, it is important to recognise that certain factors will have a big impact on the price that you will get from selling your business.

One of the most important is the value you have built up in your company. Can your business function independently without you? What is the strength of your revenue, contracts and governance? Do you have any IP or a strong USP? What is the level of debt in the company? The answers to these questions will help define the value of your business. If you see room for improvement then perhaps now is not the time to sell.

Furthermore, prevailing tax regimes and the strength of the economy are also important as both can have an influence on your final selling price. Having worked hard to build your business up over the years you will want to ensure you sell it for the optimal price. You need to decide if it is worth selling now or holding onto your business for a longer while.

 

timing sale

Timing is important in getting the right price for your business

Engaging Professional Advisors

Whether you’re a business novice or an experienced investor, you’re probably going to want help from a professional advisors. The buying and selling process is complicated and time-consuming. Not only that, a dispassionate third party can help you get a better price when you are either buying or selling your business in addition to acting as a buffer between you and the seller.

The size of the business will determine the kind of intermediary that you are going to use. A business broker is often used for small to medium sized business sales. Brokers are generally paid a commission based on the price of sale. This often equates to a percentage of the value of the business. This can be up to 10%.  Investment bankers are normally used for more complex transactions involving larger businesses. They are paid an upfront fee in addition to a percentage of the value of the business.

Things to Consider as a Buyer

If you are buying a small to medium sized business you will probably negotiate with a broker hired by the seller. The broker will compile the necessary business documents that you need to evaluate the value of the business. You will still need to hire your own lawyers and accountants as you proceed with buying the business in order to assist you in carrying out diligence.  You may also need corporate finance advisors to help raise funds for the purchase.  The key to selecting advisors is to find people who have a proven track record in supporting business purchasers.  Ask to speak to previous clients and ensure that you are clear who is going to be working with you – often partners appear for the initial meeting only for the day to day relationship to be held by more junior members of staff.

For mergers and acquisitions of larger businesses, your company may choose to hire its own representatives. if you don’t have your own in-house team, having professionals manage the process will increase the chance of coming away from the negotiation with the best deal.

Things to Consider as a Seller

How do you want to sell your business?  Are you happy to market generally and see who may be interested or would you prefer to keep off market and be more selective in approaching potential buyers?  Your preference might determine whether you should choose a corporate finance boutique or a business broker to represent you and help prepare to sell your business. Beware of people promising the world and not showing a genuine understanding of your business.  If you hire the wrong advisor you could get stuck in an exclusive contract with no potential buyer on the horizon.  Before committing to anyone, make sure you understand the likely approach and that advisor’s track record of selling businesses.  Ask to speak to people they have sold businesses for. 

Look for professional advisors with the skill-set, contacts and experience to get you the best possible price for your business, and does the paperwork so you don’t have to. The benefit of using a third party, apart from the fact that they have experience in buying and selling a business, is that you can focus on running your business while they focus on getting the best deal for you.

Without an advisor on board you are responsible for valuing, advertising and negotiating the sale of your business whilst juggling your own day-to-day duties keeping it afloat in the interim. This will be a lot of work. If you are buying and selling without a professional on board, see here for a guide on how to value your business.

Finding the Right Buyer / Business

This part of the buy or sell depends to a large extent on your personal expectations and ambitions. As mentioned previously factors like the current economic climate, the complexity of the deal, and who you have chosen to represent you will have a big impact on whether a transaction goes ahead. Below are some general tips to consider.

Things to Consider as a Buyer

Companies are bought and sold for a number of different reasons. The reasoning could be as simple as looking for a business opportunity that you want to maintain and develop, or it could be an opportunity to expand your business portfolio. Alternatively the purchase of a business could be a means of eliminating competition, or acquiring intellectual property rights. If the former is the case, the profitability of the business will probably be the most important factor.

If you are buying a business that you want to grow then a knowledge of the sector that you are investing in is going to be a huge asset. That said, you need to consider other factors. For example, in many sectors the success of a business is underpinned by professional relationships with clients, and the experience of the staff. You need to account for this when negotiating the purchase of the business - try to understand who holds the key relationships with customers and suppliers alike.

Things to Consider as a Seller

You will want to see your business sell for the price it deserves. If you’ve built up your business over the years, your attachment to it is probably as emotional as it is financial. You’ll therefore have an idea of the kind of people you want to carry on its legacy. You will need to consider how much support, and for how long you will offer such support, to the purchaser after the sale of your business. Having an advisor on board to provide realistic and practical advice in this regards can be invaluable.

If you’re selling your business due to financial hardship you may not have the luxury of holding out for the best price. In such circumstances you may be forced to sell your company for below the market value. Of course you may not want to hear this news, but be prepared for a tough negotiation.

Due Diligence and Confidentiality

As part of the process of buying or selling a business, it is standard practice for the two parties to enter a confidentiality agreement for due diligence. This is an agreement to keep something confidential for the purpose of due diligence. It is customary for the buyer to sign a nondisclosure agreement (NDA). This will normally be a one-way NDA.

For the duration of the due diligence process the buyer will have the opportunity to conduct a thorough evaluation of their desired business’ assets and liabilities. This will be done through reviewing things like important contracts, and financial details. This review can last anywhere between 60-90 days and usually commences once a deal and price have been agreed.

Things to Consider as a Buyer

The legal maxim “buyer beware” rules supreme; it’s the buyer’s own responsibility to ensure the quality of its purchase. Due diligence is an opportunity to see whether all the promises and statements that the seller has made about the assets and performance of the company to date are justified.

Guided by your advisor, leave no stone unturned in this part of the process. You will need to check the company’s financial records. Depending on the nature of the business you may also need to check physical assets, including buildings and stock. Don’t compromise thoroughness to speed up the process of buying a business. It is something you might live to regret further down the line.  Finding issues may result in you having to renegotiate the price or looking for additional protections against financial loss in the legal agreements.

Things to Consider as a Seller

Be timely with your paperwork to maintain a level of trust with the buyer. Delays can lead to a breakdown in the relationship and make it seem as though you have something to hide.

A person looking to buy your business will be interested in your company accounts. Buyers do have access to publicly available information about your company, for example information available through the Companies House website. Yet potential buyers will want more than this as part of the due diligence process. The easier it is for an accountant to carry out due diligence, the more confidence a potential buyer will have in completing the purchase.

 

due diligence

Thorough due diligence is key when considering buying a business

Deal Structure and Finance

The reality is, whether you’re selling or buying a business, to complete the deal you are going to have to compromise at one stage or another. This is just as true for the entity looking to buy as it is for the person who wants to sell their business. It’s fine to have an ideal price in mind, but beyond that, be realistic. Keep in mind you may need financial support when either buying or selling a business, and we can help you with that.

Things to Consider as a Buyer

If you have the means to fund the sale yourself, the logistics of the purchase will be more straightforward. If you need help, your professional advisor will discuss all the possible types of finance out there to secure the funds you need to buy your business. If you’re considering equity finance you can review this guide on how to raise investment. Don’t commit to any purchase without considering the likely timescales of securing your desired funding. 

Consider negotiating a level of deferred consideration from the seller in order to complete the funding package. You could also offer the owner a consultancy position if you think you could benefit from their guidance whilst you find your feet. You might want to even include this as a stipulation of the contract.

Things to Consider as a Seller

If things go your way and the buyer has the means, they might offer you a lump sum for your business. If you’ve reached a deadlock in negotiations, accepting that some of the consideration will be deferred and received in installments, could be the solution. There may even be the opportunity to work with the buyer in an advisory capacity as a consultant once the deal is finalised.

 

The Development Bank of Wales can provide commercial loans from £1000 up to £5 million, and equity from £50,000-£1 million for businesses in Wales. If you are looking to explore options to finance your business purchase, see our buying or selling a business page