There are some great benefits to buying a business in the UK. Here are some of the risks and obstacles you'll need to overcome in order to make a successful purchase.
Why buy an existing business?
One of the most difficult things about starting a new business is getting it off the ground to a point where you have steady revenue.
You not only have to create a product or service that people want, but you also have to find a way to market it and get people interested in what you're selling.
There is no guarantee of success. However, there is another option: buying an existing business.
Business buyers know that when they purchase an existing business, they inherit much of the work that has already been done to get it up and running.
This can include everything from established customers and vendors to a proven marketing methods and reliable income streams.
In addition, you'll be able to draw on the experience of existing employees to help solve problems and keep the business running smoothly. As a result, buying an existing business can help to bypass many of the difficulties of starting a business in the UK.
Buying an already successful business is a great option. If you already have businesses in a certain sector then you may be looking into buying similar businesses. When you buy a business, it may save you the additional costs of things such as buying premises.
There may be other businesses similar to yours that you are looking to acquire in order to either reduce the competition or accelerate a specific function.
Disadvantages of buying an existing business?
One of the biggest disadvantages of buying an existing business is that you often need to invest a large amount of money up front. As part of the purchase process, the buyer may seek extra funds from finance lenders depending on their financial situation.
This can include the purchase price, professional fees for solicitors, surveyors, and accountants, and working capital to assist with cash flow.
Additionally, if the business has been neglected, you may need to invest quite a bit more money to get it up and running successfully.
When taking over an existing business, you also need to consider why the current owner is selling and how this might impact the business.
Current staff may not be happy with a new boss, or the business might have been run badly and staff morale could be low. There are many potential pitfalls to watch out for when buying an existing business, so it's important to do your homework before making any decisions. This includes everything from culture and existing contracts, to the next years financial projections
Seek Professional Help
When buying a business, there are a number of professional services you should seek out in order to ensure a smooth and successful transaction.
Consult an experienced business broker, who can help you find the right business for sale and negotiate the purchase price.
You'll also need to consult with an accountant to ensure that the financials of the business are in order and that you understand the tax implications of the purchase. An accountant can also help you with the finer details of finance transfer for things like new VAT registration.
You should consult a commercial solicitor to review the paperwork and ensure that everything is in order, this could range from existing contracts with suppliers and employees, to the conditions of the purchase.
Valuing a business
Valuing a business properly can help you to improve its real or perceived value, choose a good time to buy or sell a business, and negotiate better terms.
By understanding the value of your business, you can make smart decisions that will benefit both you and your company in the long run.
Valuing a business is not an exact science, and there are a number of different methods that can be used. The most important thing is to get professional advice from someone who is experienced in business transfers.
They will be able to help you understand the strengths and weaknesses of the business, and how these might impact its value.
However, it is important to remember that the final sale price will also be influenced by other factors, such as the current market conditions. With this in mind, it is always wise to leave some room for negotiation so that you can reach an agreement that is acceptable to both parties.
Finance for buying a business
One of the most important aspects of buying a business is securing the financing to make the purchase.
There are a number of finance lenders who can provide the funds needed to buy a business, but it is important to choose the right lender for your needs.
One way to finance the purchase of a business is through a bank loan.
This type of loan can be used to finance up to 100% of the purchase price, making it a good option for buyers who don't have a lot of money saved up.
Another option is to finance the purchase with a Small Business Administration (SBA) loan. These loans are backed by the government and can be used to finance up to 85% of the purchase price.
When choosing a finance lender, it is important to compare interest rates, fees, and terms to find the best deal.
You should also consider whether you want a fixed-rate or variable-rate loan. Fixed-rate loans have interest rates that stay the same for the life of the loan, while variable-rate loans have rates that can fluctuate. Choosing the right finance lender will help you get the best deal on your loan and ensure that you are able to finance the purchase of your new business.
Applying for business finance can be a complex and time-consuming process. Lenders will often require a range of financial information in order to assess the risks involved in lending money to a particular business.
This may include details of the business, sales particulars, accounts for the last three years and financial projections. If no accounts are available, lenders may also ask for details of your personal assets and liabilities. All of this information helps lenders to determine whether or not a business is a good credit risk. By understanding the financial needs of a business, lenders can provide the appropriate level of funding to support its growth and development.
Should I buy the assets or the shares?
You have two options as a buyer. You might want to ‘cherry pick’ the assets of the business that you want. If the target business is a company, you could alternatively buy the shares from its shareholders. Sellers would generally prefer a share sale as you’ll be taking over on the entire business, and the sellers get a cleaner break.
Our solicitors will look at:
- the type of business;
- tax issues with your accountant or tax adviser; and
- unique assets that the target business has (including customer contacts, intellectual property rights or contracts).
Deciding on whether you would want to buy the assets or the shares will be one of the first decisions you should negotiate and agree with the seller.
Director Service Agreements (DSAs) in the UK may be subject to specific legal requirements and regulations, such as provisions under the Companies Act or other relevant laws. It's essential for directors and companies to consider these legal aspects when drafting DSAs to ensure compliance.
The DSA should clearly outline the specific duties and responsibilities of directors, including fiduciary duties, statutory obligations and ethical considerations. This helps to establish the scope of the director's role and sets expectations for their performance.
Compensation and Benefits
In a DSA, details about the director's compensation and benefits should be provided. This may include salary, bonuses, stock options, pension plans, and other forms of remuneration agreed upon between the director and the company.
Indemnity and Insurance
Indemnity clauses in DSAs protect directors from legal liabilities arising from their actions within the scope of their duties. Additionally, the inclusion of directors' liability insurance in the agreement can provide an added layer of protection for directors.
The DSA should include provisions for resolving disputes that may arise between the company and the director or among directors themselves. This helps to establish a framework for handling disagreements in a fair and efficient manner.
DSAs play a role in succession planning by ensuring a smooth transition of leadership within the company. Addressing succession-related matters in the agreement can help facilitate the process when a director leaves the company.
Non-Compete and Non-Disclosure Agreements
The DSA may include non-compete and non-disclosure clauses to protect the company's interests. It's essential to understand the limitations and scope of such clauses to avoid potential legal issues in the future.
Review and Updating
Regularly reviewing and updating the DSA is crucial to keep it in line with changes in the company's structure or legal requirements. This ensures that the agreement remains relevant and effective over time.
What documents will be needed?
Whether you buy the assets or the shares, there are a number of preliminary documents that you will need to deal with.
Confidentiality agreement: The seller will usually want to keep the sale confidential from employees, customers and others at least in the initial stages. You will also want to make sure that there is a smooth transfer.
Heads of terms: The main terms of the deal are usually laid out in a non-legally binding document, called a Heads of Terms. You may want to ask for a legally binding exclusivity period during which the seller undertakes not to sell the business to anyone else.
Due diligence questionnaire: Due diligence is the process of investigating the business to check the details about the business and to make sure that there are no hidden issues. The process is particularly important if the shares are being bought, since you will, in the first instance, be taking on all the liabilities of the company. The sellers’ responses may lead to renegotiation. Our solicitors will use the sellers’ responses to the due diligence questionnaire in preparing the asset or share purchase agreement to address any issues which have been discovered.
When it comes to business, there are a lot of moving parts and potential risks. That's why it's important to do your due diligence before making any major decisions. Ideally, you should consult with professionals like accountants and solicitors to help you identify risk areas. If the business is registered with Companies House, you can also obtain copies of the company accounts, the annual return, and other key documents.
Due diligence is about more than just the finances of a business; it's also about understanding the people involved and the products or services being offered. By taking the time to do your homework, you can help minimize the risk of making a bad decision.
Even with the most extensive due diligence conducted, businesses can have hidden problems that you might not grasp until you are 'on the ground.' If the business you are buying has existing staff, you will need to ensure that you have them on your side when the purchase is made. There might be resentment at the change in management, or existing staff might not have the same vision for the business as you do. As a result, it's essential that you take the time to get to know the existing staff and work out a plan for how to move forward together. Buying a business can be a sound investment – but you need to make sure that you've considered all of these potential problems before you take the leap.
Asset purchase agreement
The buyer’s solicitors will normally prepare the asset purchase agreement. The agreement provides for which assets are being bought (eg stock, fixtures and fittings, equipment, customer and supplier contracts, business premises and intellectual property). It will also list out any assets and liabilities which are not part of the transaction.
The asset purchase agreement will also contain protections such as:
- warranties and indemnities; and
- restrictive covenants in relation to the seller carrying on any competing business.
You will also need in relation to any business premises, landlord consents, licenses or personal guarantees.
Share purchase agreement
If you are buying the shares, the principal document is the share purchase agreement. It will be important that we draft the share purchase agreement so that it contains the relevant protections to cover unforeseen liabilities.
The warranties and indemnities, and the restrictive covenants are likely to be heavily negotiated, so having experienced commercial solicitors will be key in ensuring that you have the right protections in a timely and cost effective manner.
Are you thinking about buying a business?
Completing the purchase - financial statements transfer
There are a few important transfers that may need to happen in order to successfully buy the business.
The transfer of leases - this ensures that the buyer has the legal right to occupy the premises that they are buying.
The transfer of contracts and licences - ensures that the buyer has the right to use any intellectual property that is included in the sale.
The transfer of finance - ensures that the buyer has the financial resources to complete the purchase. All of these conditions of sale are important in ensuring that a deal can be successfully completed.