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Buying a Business

When buying a business, the key to a successful transaction is effective preparation, planning and due diligence.

Buying an existing business can have a number of benefits such as it having a proven track record (likely improving the prospects of obtaining finance), established customers, a reliable income stream and a reputation to build upon. Professional help is invaluable as you go through the negotiation, valuation and purchase process.

Having identified the “target business” address how to make your initial approach. Will it be direct and owner to owner (or management to management) or will it be via professional advisors?

It is highly likely that both parties will wish to keep their initial discussions private and confidential. Expect to have to agree the terms of a non-disclosure agreement and by which the exchange of information is kept confidential.

As and when a deal is agreed, in principle at least, then heads of terms are usually prepared setting out the important elements of that agreement.

Detailed due diligence is vital.  Obtain commercial, financial and legal information and have it professionally analysed. Lengthy investigation into the target business is normal. Not knowing the terms of a customer or supplier contract or the detail of the assets and liabilities in due diligence may cause difficulties after completion.

Once the due diligence process has been (or is being) concluded, lawyers will draft an agreement to reflect what is agreed and to document the transaction. Advisors will assist in the legal and accounting issues which are frequently encountered and that warrant careful drafting in paperwork. There are commercial and practical issues to bear in mind: what of the staff and their reaction to a change of ownership? Ditto the customers and suppliers? Both are obviously integral to the future of the business and it will be a commercial imperative to have continuity.

Look at the current management team.  Who is in situ? Will they stay? Do you want them to stay?  If the vendors are leaving what is the likely impact on customer relationships, the remaining workforce and general business continuity? These are legitimate considerations. Having an “earn out” provision in the transaction documents which ties the vendors into staying may be invaluable.  The continuity is likely to retain customers and provide a smoother handover.  Be clear though that the vendors no longer have control or ownership.

The combination of a new business and your current operation might be more challenging than anticipated. With effective advice and a clear plan embrace that challenge.

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