Starting a new business from scratch is always a risky enterprise – over half of all new starts fail within their first five years. Fewer than one in ten make it to their tenth birthday.
So it’s little wonder that many entrepreneurs opt for a softer start – buying an existing business.
The logic is obvious: The entrepreneur is buying a reliable cash machine that generates ready profits. An example of this could be when the owner of an existing business decides it’s time to retire. Alternatively, the entrepreneur sets out to buy a business with problems that they believe they can fix.
Clearly, in either case, it’s essential to know what you’re buying. When large companies merge (or are taken over), the buyer goes through an extensive due diligence process. With millions of pounds at stake, no one wants to make an expensive mistake. Ultimately, if the figures or risks don’t add up, the buyer has to be prepared to walk away from the deal.
With smaller business purchases, it’s still essential to go through a similar process. Often, the buyer is spending their own money, or money that’s been loaned to them and secured on their property. If the business they buy doesn’t work out, they could find themselves personally exposed to the financial consequences.
We conduct the due diligence and contract negotiations for our clients’ business acquisitions or sales. We have experience at every level, from small firms sold for just a few thousand pounds, right up to multi-million pound deals.
Obviously the scale of the work involved varies enormously, but when we conduct a due diligence investigation, we seek to answer questions in the following five areas:
- Is the seller actually the business owner and do they have the right to sell? This may sound almost too obvious to ask, but unlike, say, buying a property (where the Land Registry holds the details), there’s no easy way to establish the facts. Just because someone is a majority shareholder in a business, it doesn’t mean they automatically have the right to sell it.
- What debts and liabilities does the business have? While an accountant can read the balance sheet, bank statements and cash flow projections, we go further, and look into areas like how it trades with its customers, whether it has outstanding court judgements & fines, and whether or not there are shareholders with preferential returns owing in the event of a sale.
- Tax liabilities. These are a special case of the general liabilities above. Owing money to the Crown can have serious implications for a business, and similarly, not having made provision for these debts can lead to serious problems in the future.
- Staff issues. We investigate issues surrounding disciplinary and grievance procedures that may have been instigated, as well as the possibility of unionised activity. Similarly, we look at issues outside the company – is there a pending employment tribunal case? Does the company have the correct paperwork for any foreign workers? Are there any outstanding issues with the HSE? Finally, we conduct TUPE regulations, to help transition the employees over to the new business owners without falling foul of the extremely complex regulations in this area.
- Ownership of assets. We have heard stories of people buying a business, only to find they’ve got nothing but an empty warehouse. We investigate the ownership of all the business assets in the sale, and where necessary arrange for the assignment of leases on property, capital equipment, etc, to be transferred with the business sale.
If you’re considering buying a business and want to talk through what’s involved, please get in touch by calling our office.