Buying an Existing Business
Starting a business from scratch is a major undertaking, as the entrepreneur will be working ferociously to attract customers whilst at the same time attending to the nitty gritty. You might also think about buying an existing business with an established market presence, which might be a better way to start.
VALUING THE BUSINESS
The cost of buying an existing business will include ‘goodwill’ – the existing and return customers that the current owner has built up. Where the business is offering a face-to-face customer service such as in retail, or one built on trust such as in professional services, the goodwill is likely to be a significant part of the purchase price. The change of ownership will have to be handled very carefully to retain the trust and to maintain the customer relationship, and to preserve the value of the goodwill.
BUY SHARES OR ASSETS?
You could just buy the goodwill and certain key assets of the business, leaving everything else with the current owner. If you bought the shares of the company instead though, customers are less likely to mind a change of ownership and this will help in preserving the value of the goodwill. There may also be important contracts that the company has, such as the lease of the premises, which may be non-transferable. We can advise you on the pros and cons between buying shares or assets.
Due diligence is the process by which the buyer investigates commercial, legal, accounting and tax aspects of the business. Together with your accountants we will prepare a list of questions for the buyer to answer. You should be focusing on the current order book together with employees, brand and other business assets which reflect the goodwill of the business.
REPRESENTATIONS AND WARRANTIES
The sales and purchase agreement will contain representations and warranties relating to the business given by the seller usually based on information provided during the due diligence exercise. The representations and warranties should give you comfort as to the state of the business. We will need to go through the representations and warranties carefully with you to ensure that they give you the right protections and that you are paying the appropriate purchase price.
HEADS OF AGREEMENT
Heads of Agreement are an outline agreed between the buyer and seller, setting out the main points of the deal. The Heads of Agreement should be stated to be “subject to contract” and therefore non-binding. You should generally avoid entering into any binding agreement at an early stage, although sometimes an exclusive period during which the seller will not be allowed to offer the business for sale to anyone else is useful.
If you are considering buying a business, whether it be a Limited Company, Limited Liability Partnership or Partnership, or in some other form, then it can be advisable to receive advice at an early stages, even before the negotiations have concluded. Our dedicated team at Sanders Witherspoon LLP Commercial Department can help with all your business needs. You can contact us on 01277 889251.