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The 10 steps to buying a business (part two)

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This article continues to outline the ten step process of buying a business.

Step six: paying for the business

There are many ways you can structure how you pay for a business. The simplest way is to pay on completion.

You pay the whole lump sum and the business is yours. Banks will lend up to 60% of the value of the business and you will need to find the rest yourself.

Alternatively, you can defer the consideration, the legal term for payment. This involves holding back some of the payment until a certain event or milestone is hit.

For example, if the value of the business you are buying is affected by the renewal of an important contract - with a key customer for example - then you may wish to defer full payment until that contract is renewed.

You may wish to agree terms with the vendor. In effect, the vendor loans you some of the money you need to buy his or her business by taking a big deposit for the business and then accepting monthly or quarterly payments from you, the buyer, over a certain period of time (three years, five years or even longer) for the rest.

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The seller will wish to have some security built into an agreement giving him or her an equitable stake in the business, should you fail to meet payments or if the venture fails. This is a very common way of buying a business in the US - usually called 'loan notes' or 'vendor financing' - and is becoming more popular in the UK.

The purpose of heads of agreement is to prevent misunderstandings between the buyer and seller when it comes to completing a deal

Step seven: heads of agreement

The purpose of heads of agreement is to prevent misunderstandings between the buyer and seller when it comes to completing a deal. Think of it as a roadmap that outlines how the sale will take place. It's not the contract of sale - that comes later.

Essentially it's a document of terms, matters that you've both agreed on. For example, it will include a period of exclusivity that will prevent the vendor from talking to another prospective buyer.

And it will protect the seller by preventing you from revealing information about the business to third parties. Importantly, the document gives you the right to recover costs if the seller suddenly decides to pull out of the deal.

The heads of agreement are only partially legally binding. For example, the exclusivity period or confidentiality terms discussed above are legally binding, but the price of the business, the completion date or whether you actually have to complete the deal are not.

You can still walk away, even if you've signed the heads of agreement. See the heads of agreement as laying down the foundation of the deal, setting the parameters. They are designed to give comfort to both the buyer and seller.

At this stage you will be employing professionals such as lawyers or accountants. Make sure they have actual experience of buying and selling a business. Your family solicitor or current accountant may not be the right professional.

With the heads of agreement a timetable will be drawn up. Detailed negotiations with finance providers will take place and information about when and how the money will be made available will be written into the heads of agreement.

Step eight: due diligence

This is the official due diligence undertaken by professionals to ensure everything is as it should be. It may include commercial due diligence to assess the business itself, legal due diligence to look at the contracts of the business, and financial due diligence to assess the tax position.

You won't necessarily need a complex assessment. For example, the due diligence involved in buying a post office may only take a day or two of your accountant's and lawyer's time.

But if you were buying a multi-million pound software company you would probably need a team of lawyers and accountants working for several days, perhaps weeks. Nevertheless, in either case the principle remains the same: to ensure the buyer is 100% sure of the business he or she is buying.

Step nine: sale and purchase agreement

This legal document will contain the terms and conditions of the acquisition and the rights and obligations of the parties involved. Apart from establishing the price and how and when the purchase will be financed, the sale and purchase agreement will also contain more detailed clauses.

For example, you may put in a restrictive covenant preventing the seller from setting up a new business that will directly compete with you.

Step ten: completion

Congratulations. You've signed all the documents and the business is now yours.

It can take up to six months to go through this 10-step process, but it's worth being patient and thorough - because the stakes are incredibly high.
 
Throughout the process you should always be prepared to walk away. However expensive or painful it might be to do so, the pain and expense will pale into comparison with going ahead and buying the wrong business. It could be the costliest mistake you'll ever make.

Many thousands of people buy businesses every year and for many it's the start of a fulfilling and liberating chapter in their lives. You will need a measure of good fortune, determination, organisation and a good accountant if this is to be the case for you as well.

And when it gets tough, when you have moments of doubt, just remember how good it will feel to be your own boss, to be the master of your own ship. There is possibly no greater freedom than to be in control of your own profitable business. Independence is the ultimate happiness.
 


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