Buying a business: the process and how to pay for it

Buying a business means acquiring either the company that owns it or the assets and trade it uses. You take over customers, contracts, staff and equipment, and, depending on the structure, some of the history that comes with them.

Buyers choose it to skip the early years of a start-up, to enter a market with an existing customer base or to grow by taking on a competitor. It carries its own risks, because you pay for what is there today and inherit what the seller did not tell you.

It depends on how much of the business’s history you want to take on: a share purchase brings the whole company, while an asset purchase lets you choose what you buy. The table sets out the difference.

Because the legal and tax consequences differ, ask a solicitor and an accountant which structure fits your deal before you make an offer.

The steps run from research to completion, and finance should be discussed early, not left to the end.

1. Decide what you are looking for: sector, size, location and how involved you want to be.
2. Find a business and ask for its accounts, key contracts and the reason the owner is selling.
3. Value it and agree a price in principle.
4. Carry out due diligence, checking the figures and the paperwork behind them.
5. Arrange the finance and agree the terms of the sale agreement with your solicitor.
6. Complete the purchase, pay any duty and update the records at Companies House and with HMRC.

A purchase of a smaller business can be simpler than one involving many staff, property or a complex group, but speed depends on the parties and on the findings of due diligence, so do not plan around a fixed timetable.

You value and check a business by testing the seller’s figures against evidence, not by taking the asking price at face value. Our guide to how to value a business covers the methods; due diligence is where you confirm that the numbers are real.

• Accounts and management figures: are the profits consistent, and do they reconcile to bank statements and tax returns?
• Customers and contracts: how much comes from one customer, and can the contracts be transferred?
• Staff: who is essential, what are their terms and who may leave when the owner does?
• Liabilities: debts, leases, disputes, outstanding tax and any security already held over the assets.
• Premises and equipment: who owns them, and what condition are they in?

Ask your accountant to review the figures, such as EBITDA and the balance sheet, and your solicitor to review the contracts.

Beyond the price you will pay duty, professional fees and the cost of running the business while it settles in. Plan for these in the funding, because they come due around completion.

• Duty on shares: usually 0.5% of the price. If you use a stock transfer form, Stamp Duty applies when the price is over £1,000 and is due within 30 days of the form being signed and dated.
• Duty on property: Stamp Duty Land Tax applies in England and Northern Ireland, with a £150,000 threshold for non-residential property, and the return is due within 14 days of completion. Our guide to stamp duty on commercial property has more.
• Advisers: solicitors, accountants and any specialist surveys or reports.
• Working capital: money for wages, suppliers and tax in the first months.

Where TUPE applies, employees’ jobs and terms usually transfer to the new employer. GOV.UK says the new employer takes over contracts, including terms, holiday entitlement and continuity of employment, and that employers must inform and consult representatives before the transfer.

TUPE applies to a business transfer where the identity of the employer changes, so it is more likely in an asset purchase than where you buy the company’s shares. If you buy shares and gain more than 25% of the shares or voting rights, you will usually be a person with significant control, and the company must tell Companies House of the change within 14 days of confirming it.

Most buyers pay with a mix of their own money, borrowing and, sometimes, payments deferred to the seller. Which mix fits depends on the price, the assets and the cash flow of the business.

Lenders will look at the target’s cash flow as well as at you, and may ask for a personal guarantee. Our guide to acquisition finance explains how lenders approach the borrowing side in more detail.

Buying an independent business gives you full control but no ready-made system, while a franchise gives you a brand and a method in return for fees and rules set by the franchisor. Both need finance, and both need the same checks on the numbers and the contract.

If a franchise is what you are considering, read our guide to franchise finance. If you are a manager buying the company you work for, see the guide to a management buyout.

The biggest risks are overpaying, missing a hidden liability and borrowing more than the business can support. These usually come from rushing or from relying on the seller’s numbers alone.

• Skipping or shortening due diligence.
• Forgetting duty, fees and working capital in the budget.
• Not checking whether key contracts and licences transfer.
• Depending on the seller’s relationships with no handover plan.

Capzy is a credit broker, not a lender, and is paid by the lender. We can introduce you to lenders for the borrowing part of a purchase, such as term loans or asset finance, but we do not arrange equity or investment, and we do not give tax, legal or accounting advice.

You can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and any offer is subject to status and lender criteria. The lender directory shows the types of finance on offer.