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How to Buy a Business in the UK: 6 Hints & Tips

Thinking about making your first merger or acquisition? Buying a business is a complex process. There are dozens of basic mistakes that business buyers make week in, week out, which could be avoided with proper due diligence and expert help. With that in mind, here are some hints based on experience that you can learn from.

1) Define Your M&A Strategy

Mergers and acquisitions can take many different forms, depending on the way in which you want to expand.

  1. A horizontal merger is where two companies with similar products and audiences merge.
  2. A vertical merger is where a company merges with a supplier, or a supplier merges with a distributor, to control more of its supply/distribution chain.
  3. A concentric merger is where two businesses with the same audience but different products merge.
  4. A conglomerate merger is where a business acquires another business in an entirely different industry.

As such, before you buy a business, you have to assess which one of these strategies would work best for you. For example, your business may need to cut costs by controlling its own supply chain, in which case a vertical merger would be ideal. Identifying the most applicable M&A strategy can either be done in-house by the directors, or by a business development manager.

2) Search Broadly

Were you buying anything else, you would shop around. You might check prices in-store, but later that evening, search for better offers online. You would compare prices between different brands and ranges. You would define what makes a fair price and what makes an extortionate price.

In terms of how to buy a business, the same rule applies. Cast your net as far and wide as possible so that you can identify:

  • How much you can expect to pay for a turnkey business in your industry
  • Whether there are plenty of opportunities available or just a few
  • Whether there is a lot of competition among buyers

This will give you a good idea of the price you might expect to pay, how fast you’ll have to move to secure an opportunity, and how long it might take to finalise a sale.

There are several ways to search broadly for a business for sale. There are online directories, trade magazines and brokers that list businesses with owners looking to sell. Alternatively, you could leverage industry connections to see if there are any opportunities not yet made public.

3) Never Skip Due Diligence

Due diligence when buying a business refers to the research into and appraisal of that business by a prospective buyer. This research involves assessing the profitability and sustainability of the business, its assets and liabilities, and its eventual commercial potential.

In short, due diligence means ensuring that the business presents a good opportunity to the buyer.

There may be reasons why a buyer might put less effort into their due diligence than normal. They may be buying a business from a friend or colleague, for example; or, they may have bought many businesses before and not see thorough due diligence as worth their time.

Running through a due diligence checklist is like paying for a survey of a house before you buy it. Should you choose to forgo a survey, then with luck, time will prove that your risk was worth it in the long term. But should you be unlucky to experience any issues, you may lose money on the value of your property. The exact same applies to buying a business.

So, in short? Don’t skip due diligence.

4) Be Discreet in Your Initial Meetings

Bear in mind that the current owner may not want their staff to know about the sale. The problem is that takeovers can make staff nervous, as they can be followed by performance reviews and redundancies. Even if you don’t plan on making significant adjustments to the business you’re buying, staff can get cold feet, and knowing about the sale can lower morale.

As such, when you have an initial viewing and/or meeting with the current owner, try to avoid talk about the takeover when among staff. You should also be prepared to sign a confidentiality agreement (NDA). These are popular among sellers because a buyer in the same industry could use internal information about product lines and revenue to gain a competitive advantage.

5) Decide on Finance Before Offering

There are multiple ways to finance the purchase of a business. It is, of course, possible to buy a business outright with money from your own pocket or from your existing business. Should you happen to have enough, this is an option, although it would be best to keep ready money to hand should your new acquisition run into any trouble.

Many business buyers use finance instead. Options include bank loans, crowdfunding and seller financing. Whether this is the right route for you to take depends on your unique circumstances, and any decision with regard to finance should be made carefully and deliberately. It is vital that finance be arranged before you make your initial offer to the seller. We are specialist business brokers, which means that we find, vet and approach businesses for our buyers; for financial advice, talk to a financial advisor.

6) Get Your Opening Offer Right

There’s no need to agree to the initial price the seller quotes you. If anything, most sellers who know what they’re doing will be surprised that you roll over without negotiating.

The trouble is that you don’t want to make an opening offer so low that it puts the seller off negotiating with you. At the same time you don’t want to overshoot and accidentally offer more than the seller is expecting. So, how do you walk the line?

Part of the equation is to perform market research. How much are similar businesses sold for? If you can figure out an average based on a dozen similar businesses, that will give you a good starting point. The easiest way to do this is to talk to a broker with experience in the industry.

More important, though, is to use your due diligence to your advantage. During the contact stage you may learn things about the business that lower its value, such as maintenance and repair costs, the cost of relocation to a new premises, and so on. Communicate these costs clearly in your opening offer to justify it.

Buy a Business with Chelsea Corporate

We’re Chelsea Corporate, the off-market business buying experts.

We take a different approach to most business brokers. We exclusively operate off-market, which means that we sell businesses that aren’t officially listed for sale through normal channels. In other words, the businesses you can find through our site or through talking to our experts are exclusively available through our private database. By operating off-market, we ensure that our buyers avoid competition and can secure a merger or acquisition at a fair price as a result.

So, interested in small businesses for sale in your industry, but don’t know where to start? Contact us over the phone at +44 (0) 20 3011 1373. Alternatively, fill out our contact form or email us at info@chelseacorporate.com.