Three key things to consider when deciding to buy an existing business

but before you let the heart rule the head and it’s important to do your homework and follow the steps below to ensure that you go into the process with your eyes wide open!

1. Establish what the business is actually worth
There are several ways to do this and business transfer agents or brokers can provide qualified advice on a business’s value.

Key areas to consider include:
• The business’s track record
• Current performance in terms of sales, turnover and profits
• Future projections from its business plan
• The financial situation
• The reasons why it is now on the market.
‘Good-will’ is often an important factor involved in setting an asking price, but can be the most difficult to put a value to, particularly in terms of reputation. It’s advisable to speak to the vendor directly, and to existing clients and suppliers if at all possible, to build up as clear a picture as possible. The more information you have the better placed you will be in terms of negotiations around the business value.

2. Make sure you carry out a thorough due diligence process
Once you’ve put your offer in and it’s been accepted, you’re then given a period of time to get hold of the business’ books and get a realistic snapshot of how your dream business is actually performing. Known as ‘due diligence’ there are three main types and you may need expert advice on each of these.

• Financial due diligence – making sure the numbers stack up and that there are no financial skeletons in the cupboard
• Legal due diligence – as part of the terms of sale and purchase contract, solicitors can check if the business you want to buy has a legal title to sell, ownership of all the assets and regulatory and litigation issues
• Commercial due diligence – this looks at the business’s market position, competitors and regulatory issues.

Due diligence is not simply about the business’s finances but also a more detailed look at what you are taking on and whether you are equipped to handle the undertaking. You should not start the process until you have agreed a price and terms with the seller and on average an investigation period can take in the region of 3-4 weeks.

3. Make sure you are up to speed with your obligations as an employer
Alongside due diligence you should fully research your obligations as an employer to get a clear understanding of your responsibilities, as your dream business could soon turn into a nightmare and you could find yourself facing an employment tribunal.

It’s important to remember that there are employment regulations (commonly known as TUPE regulations) that apply to employees when someone takes over a new business.

Employees have the legal right to transfer to the new employer on their existing terms and conditions of employment and with all their existing employment rights and liabilities intact.

Effectively, the new employer steps into the shoes of the old employer and it is as though the employee’s contract of employment was always made with the new employer and the old employer is required to provide the new employer with written details of all the employee rights and liabilities that will transfer.

Under TUPE regulations you will also need to let existing staff know:
• that the transfer is happening, when and why
• how this will affect them; and
• whether there’ll be any reorganisation.

As the new employer you can’t make an existing employee redundant just because they have transferred from another employer, but this can be considered for ‘economic, technical and organisational’ reasons, for example if a decision is made to close an underperforming part of the existing business. The new employer can consult about redundancies before the transfer if the old employer agrees. This process can be quite complicated and it is recommended that you seek specialist advice.

Buying an existing concern involves a lot of homework and can prove costly. Even after due diligence and negotiations you may decide that it is simply a risk too far and to walk away altogether. However, by following the steps outlined above, you are likely to be better placed to make the right decision.

The Forum can provide advice on a variety of issues, including purchasing an existing business, for further information visit www.fpb.org.

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