Buying a business
Buying a business in the Lake District is a dream for many, but it is also a huge decision and fraught with risk, so it’s essential that you plan the process professionally. Read on for some pointers and tips....
The first step is to make sure you know what you want out of a business, what type of business you’re interested in, what owning the business will involve, and how much you’re prepared to invest to try and achieve your objectives. This sounds straightforward, but needs careful thought. If you don’t know where you’re going you’ll probably never get there.
Once you’re sure about the course you want to navigate you are ready to search the market and investigate the opportunities available, within the parameters you’ve set. There are various ways of doing this – eg, by using business sale agents, approaching businesses that aren’t on the market directly, or by making enquiries using professional firms such as accountants.
When you've found an opportunity that you think is worth pursuing and have approached the vendors they will probably ask you to sign a non -disclosure agreement before they will provide you with a full sales memorandum.
That sales memorandum should:
- describe the business operations in more detail and outline its trading history.
- explain what is for sale (eg, shares or assets, the whole or part of a business)
- contain financial information, such as accounts and forecasts
- provide further details on matter such as employees, premises, contracts, licences etc
This is where you can begin to get some real insight into what is on offer.
If you’re still interested in the business once you’ve reviewed the sales memorandum carefully, and you haven’t already appointed professional advisers (accountants & solicitors), now is definitely the time to do so.
It is a false economy to proceed on your own and try to negotiate something which is potentially full of hidden bear traps, especially if you haven't done this before. You need proper professional advice.
On the basis of the information to hand, your advisers’ experience, and a little preliminary ‘due diligence’ (fact checking the vendor’s representations – in particular, the legal and accounting aspects) it may be possible to formulate an initial offer.
This should outline:
- how much you are prepared to pay
- payment terms (eg, there may be staged payments, or an element contingent on post completion performance)
- any further information required
- conditions (eg, an exclusivity period where the business is taken off the market to give you time to complete)
The initial offer should be 'subject to contract' but is always better in writing because the quicker both buyer and vendor get round to documenting their respective intentions the less chance there is of wasting time, money and effort due to misunderstandings.
When the initial offer has been agreed in principle you can move to documenting your intentions in more detail, by drafting ‘Heads of Terms’ (HoT), which will form the basis of the final Sales Purchase Agreement (SPA).
Whilst the HoT can contain some legally binding elements - such as the vendor’s ‘disclosure letter’, the agreed exclusivity period, agreements to pay the other parties costs to date if the agreement aborts because of (say) broken commitments – you will nevertheless not be obliged to purchase the business unless and until you sign the final Sale Purchase Agreement (SPA).
This stage in the process often proves crucial because by now you are getting down to the detail of the deal (and the detail is always difficult!). Differences will be highlighted, but if they can’t be resolved you can at least pull out before most of the professional costs are incurred.
NB. Depending on the complexity of the deal, it may actually be possible to move straight to HoT and use those to frame the initial offer. Anything you can do to get to completion quicker will mean less time spent and lower costs, but you must be careful to weigh any cost savings against increased risk.
When Heads of Terms have been agreed you've cleared a major hurdle and can now instruct you advisers as follows:
a) To carry out detailed due diligence
Your accountant will usually handle the financial, tax, and commercial aspects of due diligence.
Your solicitor will check and advise on legal issues such as title.
NB. This process can be limited for some smaller value deals (and therefore cost significantly less), if you are prepared to rely heavily on vendor disclosures, warranties and indemnities.
b) To draft and finalise the SPA and any related documentation (eg, leases)
Most of this – eg, the SPA itself, warranties and indemnities, non-compete agreements, transfer of employees - will be dealt with by your solicitor
Other areas, such as finance, company secretarial work (minutes, share transfer etc) may be dealt with by both the accountant and solicitor.
If these final 2 stages don’t reveal a show stopper, you may finally be ready to sign on the dotted line, so good luck!
For further advice on either buying or selling a business please contact David Sutton by phone on 015394 32540 or by emailing firstname.lastname@example.org