Buying your first business can seem daunting but the trick is to follow a series of key steps. During each stage your primary focus will be on one particular activity and this will help you feel more in control and move ahead with confidence.
So, if you’re planning a business purchase, here are some important steps to follow.
Selecting the right industry
The first step should always be to decide which industry sector you want to buy into. You want to gain a clear understanding of each sectors’ requirements and challenges, so this will require some careful research.
It’s also very important to familiarise yourself with the regulations and legal frameworks which govern your chosen industry. Any restraints which compromise your business plans will not be easy to overcome and therefore you must take this into consideration at the very beginning. Likewise, you should also identify your major rivals and be sure you can develop strategies to maintain a viable market share despite the competition.
Trade publications are a good source of information, as well as current news and expert insights, these will help you to judge whether you have an aptitude for your chosen field. If after extensive research you recognise a shortfall in your own experience, or knowledge, be prepared to fill that gap with further learning or training.
Sourcing the right business
Having clarified your industry focus, and after confirming you have the right skills and knowledge for your chosen industry, you’ll be ready to begin searching the market for a suitable business. This means deciding on a budget that suits your means and your ambitions. What size business do you want? What is its likely turnover? What locations are most profitable, and most desirable?
A business broker may well have one or two businesses for sale that match your criteria, but a more ambitious approach might involve targeting companies not yet on sale. If an unsolicited offer proves appealing, and you manage to persuade an owner to sell, you will be in the advantageous position of having no competing buyers to drive up the price.
Preliminary visits to the business premises will require careful planning and lots of discretion. The owner will probably wish to keep the fact that his business is on the market confidential, and you should respect that. Nevertheless, you should use any visits to conduct a thorough review of what is on offer, noting as much information as possible to inform your thinking and negotiating strategy.
Once you have a detailed grasp of what exactly is on offer and have decided to continue with your offer, you can start negotiations with the seller. Whether you do this yourself or work via an intermediary such as a business broker, you will need to establish what a possible deal might look like. The essentials will include the proposed selling price as well as some information about the professional valuation upon which this figure is based.
Heads of agreement
The heads of agreement document is a summary of the main terms of the sale as understood by both parties. Though this is not a legally enforceable contract, it nevertheless helps to firm up any early negotiations by mentioning matters such as payment terms and responsibilities which each party will need to accept, and also any expectations about confidentiality.
In addition, the document will map out the agreed timetable for the remaining steps leading to the purchase of the business and will set proposed deadlines for the completion of each residual phase.
Performing due diligence
Due diligence involves the rigorous audit of all the facts and information relevant to the sale. It will include a broad range of financial records and other important information about the state of the company. At this stage, you should call upon a professional to ensure that the outcome of due diligence yields accurate and informative information, and confirms what you have been told about the business and its future prospects.
This audit is vitally important, as the revealed data will be used in your subsequent negotiations as you move towards purchase. The analysis will also help identify areas where you will need further clarification. Some issues may have implications for the purchase price you are prepared to pay. If you are not satisfied with all of the findings, and the sellers subsequent explanations, you may even want to withdraw your offer.
Conducting a closing negotiation
This is the stage which determines the final details of the sale agreement between the two parties. Negotiations will require the support of a professional team to protect your interests and gain you the best possible terms.
By this point, a lot will already be agreed and understood, leaving the discussion to focus on the remaining areas where some compromise may be required or expected. These negotiations need to be handled carefully because the success of the purchase is at stake. However, a pragmatic attitude is usually enough to secure an equitable outcome which is acceptable to all concerned.
Jo Thornley is head of brand and partnerships at Dynamis.
Joining in 2005 to co-ordinate PR and communications and produce editorial across all business brands, she earned her spurs managing the communications strategy and now creates and develops partnerships between BusinessesForSale.com, FranchiseSales.com and PropertySales.com and like-minded companies.
Further reading on buying a business