Buying A Business: A Beginner's Guide

Fancy ditching the conventional 9-5, escaping the daily grind of the office and setting up on your own?

It's an alluring prospect, and an increasingly popular one - according to Government figures there are 4.3 million small to medium sized business in the UK.

If you want to add to that number our handy seven step guide to buying a business should help you along the way.

Now is your chance to live your dreams, but research thoroughly to get a clear picture of what your new role would involve, and be realistic about matching your goals with your situation and talents.

Next, decide if you want to buy an existing business. As long as it's healthy, you should be able to start earning from the day you take over, but you will pay hard cash for the hard work that someone else has put in.

Or, would you prefer to start from scratch? This is cheaper in the short term, but it is a riskier proposition, for which you will need sufficient funds to keep yourself going while the business is growing.

What's your timetable?

If you have a choice, think carefully about when to start your business, particularly if takings are likely to fluctuate during the year.

Shops are usually quiet after the Christmas rush, and anything to do with the holiday industry may go dead all winter, so, plan ahead to avoid overstretching your finances before you have properly started.

What's your budget?

Before looking for finance, work out what your personal resources are: the equity you have in your house, your savings, and any help being offered by friends and relatives, in order to find out how much you can afford.

You should work on the basis of raising 80 per cent of the purchase price. But don't forget you'll also need some working capital to keep you going until the business is up and running.

You'll need to put aside less if you're buying an established company, but you may need to cover any restructuring, including costly redundancy payments if you're shedding staff.

The first place to start is to look at the businesses already for sale, either on the Internet, in trade papers, or via an agent.

The main advantage of this is that the owner is likely to be motivated to sell, but you may be under pressure from other potential buyers

However, according to Mark Blayney, author of Buying a Business and Making it Work, and owner of the business finance resource website Creative Finance you don't have to necessarily wait for your perfect business to come onto the market.

"If you find one you want that isn't for sale, you'll have to convince them to sell, says Blayney, "but you won't have the competition."

If you're looking for a corner shop, you can just have a drive around your chosen neighbourhood, but if it's a widget factory you yearn for, the Internet should come up with likely contenders.

Before even approaching an owner, you can download, for a fee, the firm's accounts from Companies House. From this you should be able to work out roughly how much it would be worth first.

Blayney advises that if it's your first business, you should look for companies that make good, stable earnings.

If you know what you're doing, however, and you're up for a challenge, you could search for businesses in financial trouble that you can buy cheap and turn around.

Always remember to respect seller confidentiality. The owner will not want their employees, suppliers or customers to know that the business is for sale, or they may go elsewhere, which would be bad for you too.

Before approaching a bank or a broker you will need a business plan. There are many guides and resources available to help, including a number of business plan software programs on the Internet.

The Government's Business Link is a good place to start.

If you're buying an existing business that has a three-year track record of profits, your cheapest option is a commercial mortgage from a high street lender.

But, if you are simply buying a business premises, for example, a shop currently run as a greengrocer's that you want to turn into a hairdresser's, you would probably have to look for a non-status loan from a commercial lender.

This would be a type of self-certification, and it comes at a premium of perhaps around 1.25 per cent more than a normal commercial mortgage.

Assuming you have a clean financial record, you may be able to borrow up to 85 per cent of the cost of the company.

Once you've found a business you're serious about, met the seller, and agreed a price, you must now prepare a 'letter of Intent'.

This covers all aspects of your offer, and outlines the conditions you still need to determine before being in a position to buy.

The value of a business tends to be based on either a multiple of the income derived from the company (its profits, owner benefits, and certain expenses), or, particularly where a company is not in profit, on its assets.

But prices aren't fixed in stone. "It's like any market, you don't know what a seller's situation is," says Blayney. But, he adds, if a firm has been languishing on the market for a while, you can expect some flexibility.

In terms of business property, he warns that we should be realistic: "People have got used to domestic property prices rising through the roof, but commercial property rises much more slowly."

The exception to this is if there is some kind of development aspect to a premises, such as the potential to convert a commercial building to residential use.

If you can't raise enough money to buy the business of your dreams, you may be able to buy it in installments via a system called 'deferred consideration'.

Though not usually a seller's preferred method, insurance policies are available to protect their interests, and buyers can gain as long as five years to pay up out of the company's profits.

If your preliminary offer is accepted you now move on to due diligence - a period when you can access the company's books and records.

You'll need help from an accountant, a lawyer, and maybe a property surveyor, because it's about more than just verifying the company accounts.

This is your only chance to review every aspect, from the company's sales, to their customers, systems, and legal and corporate issues before you commit to buying it.

Blayney advises trying to get an exclusivity period while you do this, usually around two to three months. But, he says, don't take so long that your sale goes off the boil.

It is wise to use a solicitor from early on to ensure that the contract is tailored, as far as possible, to your requirements.

As in a residential sale, a solicitor will also oversee searches with the local authority to check for planning or financial issues that affect the premises, and apply for licenses and planning permission if needed.

Once contracts are exchanged, and cheques handed over, the keys to your business are finally yours, and at last you're ready to begin the really hard work.

Nikki Sheehan

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