Buy A Business
Buying a business can be an exciting yet complicated journey. The process involves several key steps, from finding the right business and conducting due diligence to negotiating terms and finalising the purchase.
When buying a business, legal considerations range from reviewing contracts and ensuring compliance to understanding employment obligations and intellectual property rights. Overlooking these details can lead to unforeseen complications and potential financial loss.
At Lawhive, our network of corporate lawyers is on hand to guide you through the entire process of buying a business.
How can Lawhive help you buy a business?
Initial consultation and planning
Your lawyer will begin with a detailed consultation to understand your goals and requirements. This helps them to tailor their services to meet your specific needs and provide the best possible advice for your business acquisition journey.
Due diligence
Your lawyer will help you conduct due diligence, which involves investigating the financial, legal, and operational aspects of the business to identify any potential risks and ensure everything is in order.
Valuation and negotiation
Our experts assist in evaluating the business and negotiating terms that are favourable to you, ensuring you get the best deal possible.
Legal documentation
Your lawyer can handle all necessary legal documentation, from drafting and reviewing contracts to ensuring compliance with all regulatory requirements. This includes purchase agreements, employment contracts, and any other necessary documents.
Why choose Lawhive?
Our network of corporate lawyers has extensive experience in business acquisitions, providing you with the knowledge and insights you need to make informed decisions.
We tailor our services to your unique needs, ensuring you receive the best possible advice and support throughout the process at a fraction of the cost of a high-street law firm.
By choosing Lawhive, you are ensuring that your business acquisition is handled with the utmost care and professionalism, giving you peace of mind and confidence in your investment.
Contact us today to learn more about how we can help you successfully buy a business.
Why buy a business?
Buying a business offers several advantages compared to starting a new one from scratch.
Established customer base
When you buy an existing business, you inherit its customer base, which can provide immediate revenue and a stable foundation to build on.
Proven business model
An existing business has a track record of performance. This allows you to evaluate its success, understand what works, and avoid many of the pitfalls that new businesses face.
Brand recognition
Acquiring a business with an established brand can save you the time and effort required to build brand awareness and reputation from the ground up.
Existing infrastructure
You gain access to the existing infrastructure, such as premises, equipment, and supplier relationships. This can significantly reduce the initial setup costs and operational challenges.
Unlike a start-up, which may take time to generate revenue, an existing business usually provides immediate cash flow, enhancing financial stability from day one.
Common reasons for purchasing an existing business
Entrepreneurs and investors may opt to buy an existing business to:
Expand their operations by acquiring competitors or complementary businesses;
Generate passive income or to increase the value of their portfolio;
Grow and scale up operations, enter new markers, or add new product lines faster;
Create synergies that enhance operational efficiency, reduce costs, or expand their capabilities.
Finally, starting a new business involves a high degree of risk and uncertainty. Buying an existing business reduces these risks as the business model, market position, and financial performance are already established.
Key considerations for buying a business
Buying a business is a significant investment that requires careful planning and consideration.
Before anything else, you should clearly define your objectives. Are you looking to expand your existing business, diversify your investments, or start a new venture? Understanding this will help you identify the right business to buy and shape your overall strategy.
It is also wise to identify the features you need in a business. This will help you narrow down your options and ensure you choose a business that aligns with your strengths and interests.
Other key considerations for buying a business include:
The size of the business in terms of revenue, number of employees, and physical space;
The location of the business;
The financial health of the business;
Your readiness to take on the responsibilities of business ownership;
Your financial situation and how much you could afford to invest.
Types of business purchases
When buying a business, there are two primary methods to consider: asset purchase and share purchase.
In an asset purchase, you select specific assets and liabilities you wish to acquire from the seller. This can include equipment, inventory, intellectual property, and sometimes contracts. You don't, however, acquire the company's shares, meaning you can avoid taking on unwanted liabilities such as outstanding debts or legal issues.
In a share purchase, you acquire all the target company's shares, effectively taking ownership of the entire business, including all its assets, liabilities, and obligations.
As you might imagine, both methods have their own advantages and disadvantages. For example, in an asset purchase, you have more control over the assets you are buying but each asset must be individually transferred. A share purchase can be more straightforward and the business can continue to operate without interruption.
Buying a freehold vs. leasehold business
When buying a freehold business, you purchase the property outright, giving you full ownership of the land and buildings. This can provide long-term security and potentially increase the value of your investment over time.
On the other hand, a leasehold purchase involves acquiring the right to use the property for a specified period under a commercial lease agreement. This means the property remains owned by the landlord, and you pay rent for its use.
Again, each route to buying a business comes with its advantages and disadvantages. For example, with a freeholder purchase, you have complete control over the property without the need for landlord consent and can avoid the complexities and uncertainties of lease renewals. However, freehold purchases require significant initial capital investment while leasehold purchases generally require less upfront capital in comparison.
If you're considering buying a business, either through an asset sale or share sale, we offer comprehensive support through every step of your acquisition:
Expert consultation: Your lawyer can help you understand purchase methods and determine the best course of action based on your needs and circumstances.
Due diligence: Your lawyer can help you to conduct thorough due diligence to uncover potential risks and liabilities.
Negotiation and documentation: Your lawyer will assist in negotiating terms and drafting all necessary legal documents.
Contact us today to learn more and get a free, no-obligation quote for the services of a specialist lawyer to support you in buying a business.
What are the main steps in buying a business?
The main steps in buying a business are:
Identifying potential targets
Conducting due diligence
Valuing the business
Making an offer
Negotiating terms with the seller
Drafting and reviewing contracts
Completing the purchase
At Lawhive, we offer comprehensive legal support through the entire process of buying a business from expert consultation and negotiating terms to drafting and reviewing contracts.
What liabilities am I assuming when I buy a business?
When you buy a business, the types of liabilities you may take on include:
Existing debts, loans, and financial obligations;
Outstanding tax liabilities;
Existing lease agreements for premises or equipment;
Contracts with suppliers and customers;
Employment contracts and related liabilities;
Ongoing legal disputes or claims like employee claims, customer disputes, or regulatory fines;
Compliance issues;
Product liability;
Liabilities related to service agreements.
The liabilities you take on will depend on the way you buy the business. For example, in a share purchase, you will take on all assets and liabilities, such as those listed above. Alternatively, in an asset purchase, you may be able to avoid certain liabilities based on what assets you buy.
As such, it's important to conduct thorough due diligence to be aware of all liabilities and draft a detailed purchase agreement that specifies exactly which liabilities you are assuming and which remain with the seller.
You might also consider including indemnity clauses where the seller agrees to cover specific liabilities that may arise post-sale, or investing in insurance policies to cover certain liabilities like product liability insurance and business interruption insurance.
Conducting due diligence when buying a business
Due diligence helps you understand the full picture of the business you're acquiring, unearthing potential risks and confirming the business's true value.
Typically, due diligence when buying a business should focus on:
Financial health
Tax compliance
Existing contracts
Compliance with relevant laws, including licenses, permits, and environmental regulations
Ownership and protection status of intellectual property
Staffing
Customer base
Supplier agreements and relationships.
The due diligence process involves reviewing key documents such as financial statements, tax returns, cash flow statements, contracts, and records of legal disputes or litigation to identify potential risks and make sure you are fully informed before making any commitments.
Valuing a business
There are different methods for valuing a business. However, getting a professional valuation is essential.
Common valuation methods include:
Earnings Before Interest, Taxes, Depreciation, and Amortisation
Price to Earnings Ratio
Asset-Based Valuation
Discounted Cash Flow.
Professional valuers bring expertise and impartiality, ensuring a valuation is realistic and based on sound methodologies, not emotional bias which might lead a seller or buyer to overvalue or undervalue a business.
Professionals conduct a thorough analysis of all relevant factors such as market conditions, industry trends, and the specific characteristics of the business, providing a solid foundation for negotiations.
Financing options for buying a business
There are many different financing options available for buying a business, and each comes with different legal implications.
Loans
Loan Type | |
|---|
Business Loans | Loans provided by banks or financial institutions. They can be secured or unsecured. Secured loans typically offer lower interest rates but require collateral. Unsecured loans do not require collateral but might have higher interest rates. |
Commercial Mortgages | This type of loan is specifically for buying commercial property and often requires a significant deposit. |
With any loan agreement, it's important to ensure all terms and conditions are clearly outlined in the loan agreement, including interest rates, repayment schedules, and any covenants or guarantees required. You should also understand the implications of providing collateral for secured loans. In case of default, the lender can claim the secured assets.
Equity financing
Equity type | |
|---|
Venture Capital | Venture capitalists invest in businesses in exchange for equity. This is common in high-growth industries like technology. They provide not only funding but also expertise and networking opportunities. |
Private Equity | Private equity firms buy into businesses with growth potential, often aiming to improve their value before selling them at a profit. This option usually involves giving up a significant share of ownership. |
In shareholder agreements, it's important to clearly define the rights and obligations of each party. This includes profit distribution, voting rights, and exit strategies.
You also need to be aware that raising equity finance will dilute your ownership stake. Therefore, you should be comfortable with the level of control you are giving up.
Investors
Investor Type | |
|---|
Angel Investors | Individual investors who provide capital for startups or business acquisitions, typically in exchange for ownership equity or convertible debt. |
Crowdfunding | Raising small amounts of money from a large number of people, usually via online platforms. This can be an effective way to finance your business while also building a customer base and community around your product or service. |
In any investor agreement, you should make sure all terms are explicitly stated, including the amount of investment, equity stake, and any expected returns of involvement in business decisions.
It's also important to define clear exit strategies for investors, such as buyback options or conditions for selling their shares.
Alternative methods
Funding method | |
|---|
Seller Financing | The seller provides a loan to the buyer to cover part of the purchase price. This can be a flexible option and often involves favourable terms for the buyer. |
Asset Finance | Using the assets of the business (like equipment or inventory) as security for a loan. This can help spread the cost of purchasing expensive assets. |
At Lawhive, our network of corporate lawyers is on hand to draft and review all necessary legal documents throughout the process of financing your business purchase to ensure compliance and protect your interests.
Contact us today to find out more.
Making an offer when buying a business
Initial offer
Your initial offer should be based on a thorough valuation of the business. It's often strategic to start with a slightly lower offer to leave room for negotiation, however, you should be prepared to explain your offer and provide a rationale based on financial performance, market conditions, and your due diligence findings.
Terms and conditions
Your terms and conditions should specify how you plan to finance the purchase, including any deposits, installment plans, or contingent payments based on future performance.
You might also include conditions that must met for the deal to go ahead, like satisfactory due diligence results, financial approval, and transfer of key contracts and licenses.
Heads of Terms
The Heads of Terms document outlines the main aspects of the deal. While it is not legally binding, it sets the groundwork for the final agreement and typically includes the purchase price, payment structure, and any key conditions.
What is the role of a solicitor in drafting a purchase agreement?
A solicitor drafts the purchase agreement, making sure all terms are clearly defined and legally enforceable. They will also review all documents to protect your interests and ensure compliance with all legal requirements.
Business purchase agreements can be complex, involving various legal, financial, and operational elements. A solicitor's expertise ensures that all aspects are covered and potential risks are mitigated.
Solicitors can also provide valuable support during negotiations for buying a business, helping to interpret legal jargon, negotiate favourable terms, and draft clauses that safeguard your interest.
Beyond your business purchase, your solicitor can also continue to provide legal support as you integrate the new business, helping to address any post-acquisition issues should they arise.
At Lawhive, we combine expert legal knowledge with a personalised approach to guide you through every step of buying a business.
Contact us today to learn more about how we can help you make a successful acquisition.
Legal documents required for buying a business
When purchasing a business, there are some essential legal documents required to ensure a smooth and legally sound transaction. These include:
As you might expect, clear and concise contracts are vital to avoid misunderstandings and disputes.
Completing the purchase of a business
Before finalising the purchase of a business, it's important to conduct thorough pre-completion checks, such as reviewing the sale agreement to make sure all terms agreed in the Heads of Terms are accurately reflected and that there are no unexpected liabilities or vaguely worded terms.
A solicitor can conduct this review for you to identify and rectify any potential issues.
Following this, both parties will sign the final sale agreement, making the deal legally binding. At this point, you may have to pay a deposit (usually around 5-10% of the purchase price). Then, a date for be set for completion. This is when the remaining funds are transferred, and ownership is officially transferred.
Transfer of ownership when buying a business may involve:
If any issues arise post-purchase, such as disputes with suppliers, employee matters, or regulatory compliance, it's important to seek legal advice to address them and ensure that your business continues to operate smoothly and legally.
Potential pitfalls of buying a business (and how to avoid them)
Buying a business can be a rewarding venture, but it's important to be aware of the potential pitfalls and understand how you can avoid or mitigate them.
Hidden liabilities
One major risk when buying a business is inheriting hidden financial or legal liabilities from the previous owner. These could include unpaid taxes, outstanding dents, or pending legal claims.
As such, it's important to carry out thorough due diligence before purchasing a business to uncover these potential issues.
Staffing issues
Existing employees might be resistant to new management, or there could be key staff dependencies that were not disclosed.
For this reason, you should engage with the workforce early on if you're inheriting staff to better understand their roles and concerns.
The Transfer of Undertakings (Protection of Employment) Regulations (TUPE) protect employees' terms and conditions when a business changes ownership. As such, you should ensure compliance with TUPE to avoid legal disputes and ensure a smooth transition for employees.
Contractual obligations
It's important to ensure all existing contracts are reviewed, including leases, supplier agreements, and customer contracts.
You should verify that these contracts are transferable and identify any clauses in them that could pose risks.
Regulatory compliance
Check that the business complies with all relevant regulations and has all the necessary licenses and permits as non-compliance can lead to fines and legal issues post-acquisition.
Intellectual property
Verify the ownership and protection of intellectual property, such as trademarks and patents. Also, ensure that these are included in the sale and that there are no ongoing infringement issues.
How long does it take to buy a business?
The timeline for buying a business can vary based on several factors, including the size of the business, its location, and the complexity of the transaction.
Below is a simple breakdown of the typical stages involved and how long each might take. However, it's important to note these are for illustrative purposes only and can vary depending on the circumstances.
Stage | Duration |
|---|
Initial Search and Research | A few weeks to several months |
Making an Offer and Negotiation | 1 to 3 months |
Due Diligence | 1 to 3 months |
Securing Financing | 1 to 2 months |
Legal Documentation and Completion | 1 to 3 months |
Experienced buyers familiar with the process may complete the steps more quickly compared to first-time buyers who might need additional time for due diligence or to secure financing.
The preparation of the seller can also impact the timeline.
What are the costs involved in buying a business?
The main costs involved in buying a business include:
The purchase price of the business itself
Solicitor fees
Due diligence costs
Business valuation fees
Financing costs
Accountants fees
Business broker fees (if applicable)
Stamp Duty on property transfers.
Post-purchase, there might also be costs associated with integrating the new business, such as IT upgrades, marketing, rebranding or restructuring, and training staff.
How do I know if a business is a good investment?
Before buying a business, you need to know if it's a good investment. That's where due diligence comes in. In this process, you should look at the business's financial health, market position, operational efficiency, and management and workforce. This will help you uncover hidden risks and liabilities that may not be apparent initially.
It's also wise to hire a professional to conduct a business valuation to get an accurate assessment of its worth. This will help you in making a fair offer and avoiding overpayment.
By evaluating a business holistically against your goals, you should be able to identify whether it is a good investment and proceed accordingly.
Can I buy a business with no money down?
It is possible to buy a business with no money down through:
That being said, buying a business with no money down can be challenging and requires creative financing strategies. Therefore, it's wise to seek advice from relevant financial professionals to better understand your options.
Buy a business with expert help from Lawhive
Buying a business is a significant and complex undertaking. From conducting due diligence to navigating contractual agreements, legal support is vital in mitigating risks and ensuring a smooth transaction.
At Lawhive, our network of experienced solicitors is on hand to provide affordable, comprehensive guidance through each step of the process.
Whether you are an entrepreneur looking to expand, an investor seeking new opportunities, or an individual aiming to start a business by purchasing an existing one, our expert network of corporate lawyers offers personalised legal assistance tailored to your specific needs, helping you achieve a successful business acquisition.
Contact us today for a free case evaluation and quote to take the first step towards a successful business purchase with confidence.