Starting up

Buying a business

Buying a business should not necessarily be seen as an easier option than setting up your own business. Running a business is a long hard slog, whether you build up your business yourself or have bought the business.

All the principles in starting your own business should be applied in buying a business, in terms of knowing the market and conducting a market research. This section will look at the basic information you will need before buying a business. For more detailed information and advice, please consult an accountant, independent adviser and solicitor.

Choosing a business
To find a business, you must first answer a number of questions:

How much would it cost you? Can you afford it?
What is your ideal market? By knowing your market and undertaking
a market research will help you to answer this.
What kind of product or service do you intend to sell?
What is the price you can afford for the business?
What size business are you looking for?
Do you have any preference where it is located?
How successful should the business be?
What is the acceptable minimum amount of profit and income?

By having an idea of your business profile, will put you on a better footing when looking for a business for sale.

Looking for a business
There are a number of sources where you can find businesses for sale, which includes: Business Pages, Exchange & Mart and attending Trade Exhibitions. At BusinessVision.co.uk we also have a list of various businesses for sale.

Assessing the business
After looking at a number of businesses, you may have two or three you may be interested in. Your next step should be to investigate the business thoroughly both the qualitative and quantitative aspects. An accountant should be able to help you assess the quantitative side by checking the accounts. You might need to do your own discreet investigation about the qualitative aspect of the business such as checking how important the employees are to the business and what customers think of the service or product. Most importantly, you need to find out the real reason why the business is being sold and decide whether or not it is a business that can be improved upon.

Once you are satisfied with the results, you will need to delve closer into the assets and liabilities of the company with an enquiring mind. Carry out detailed enquiries covering every aspect of the balance sheet including land and building, plant and equipment, stock, debtors and other assets. On the liability side, examine what the business owes. The business sales, products or services and employees should also come under close scrutiny.

What is included in the price?
This depends on the business legal identity of the business you are buying. If it is a sole trader or partnership (refer to: Choosing your legal business entity, you are buying the assets, which excludes what the previous owner owned and was owed. If the owner was not trading under his or her personal name, you could buy the business name and its associated goodwill.

If it were a limited company, you would be buying either just the assets or the company itself. Bear in mind that if you buy the latter, you would also be buying the obligations and liabilities, such as contracts and debts in addition to the assets.

Setting a price
There are no hard and fast rules about how to calculate the price of a business. Much will depend on your skills as a negotiator (refer to: How to be a better negotiator.) However, there are some guidelines to help arrive at the price that your accountant should be able to base the price on. Essentially, there are three ways of valuing a business, which are:

i) Asset value - in simplistic terms, that is the value of the assets less the value of the liabilities.

ii) Earnings multiple - apply some multiple to the earnings from the business.

iii) Return on capital employed - once you have decided on the rate of return for your money, you can then work out the income before interest and tax is as a percentage of the capital invested. If this figure is less than your required rate, you need to decide whether or not to buy or lower the figure.

There are many factors to consider when buying a business, and it is a decision not to be taken lightly. However, if you do your homework, it can pay dividends!

Check out the latest businesses for sale