So, you’ve had an offer accepted on a business? Congratulations!
That’s our work done, we’ve connected you with businesses for sale and now you’ve found your perfect match.
But don’t worry, we won’t leave you wondering ‘what’s next?’. This guide will walk you through the steps to get the sale over the line.
Although not strictly necessary, we strongly recommend both parties to instruct solicitors at this point in the business sale journey.
The following steps should be undertaken (by yourself or your solicitor) to ensure you have done thorough checks on the business you wish to buy and to ultimately get the sale completed.
First things first, you’ll need to draw up Heads of Terms.
1. Heads of Terms
Note, Heads of Terms can sometimes be called Letters of Intent.
What are Heads of Terms?
In short, they form a document that defines the financial terms and conditions of a business sale including the type of purchase (shares or assets), purchase price, a closing date, and conditions of closing. It explicitly demonstrates your intent to buy.
Although not usually legally binding, they set out the key commercial issues at this stage in the transaction and they will likely be used to form the Purchase Agreement after due diligence is completed.
As due diligence is such a thorough exercise, it is only fair that both parties have an expected outcome. So, unless a major bump in the road is stumbled upon, it means you agree to pay the seller the amount set out in the Heads of Terms.
2. Non-disclosure Agreement
Due to the private nature of the due diligence, you may be asked to sign a non-disclosure agreement (NDA) if you haven’t done so already during the enquiry stages.
As due diligence is an in-depth exploration into all aspects of a business, an NDA prevents you as a potential buyer from disclosing confidential information to any other parties. It also protects the business against potential duplication of ideas.
3. Due Diligence
What is Due Diligence?
It is essentially an investigation into the facts and financials of a business, it is extremely important in a sale and should not be neglected. It is where the bulk of the post-offer work occurs.
The process enables you to assess the true value of the business, along with the risk associated with it before completing the purchase. It can be a lengthy process and exposes all the company’s information, including and not limited to strategy, pricing, customers, suppliers, and any other propriety information.
What is Looked at During Due Diligence?
- Financial statements and accounts; including at least 3 years of tax returns, balance sheets, cash flow statements, and sales records
- Condition of stock (if applicable)
- Customer contracts and orders
- Employment contracts
- Management structure (if applicable)
- All legal documents; including leases, purchase and distribution agreements, insurance, licences, and permits
- All liabilities; including all settled and outstanding bills, incoming payments, and any debts
- The business’s operations, strengths, weaknesses, threats, and opportunities
- The business’s wider market via industry and economic data
- The reputation of the business with customers, suppliers, and local stakeholders
It’s ultimately down to you as a buyer to uncover all you can about the business, so be as thorough as possible in your analysis.
Realistically, there will be at least one feature of the business that will flag up an issue and we advise that you analyse and evaluate any problems objectively.
Remember - if you come across any significant issues, ensure you renegotiate accordingly.
Now that we’ve explained due diligence and that it can be a complicated process, we want to again highlight our strong recommendation to use a solicitor.
4. Purchase Agreement
Both parties will need to agree on a more extensive Purchase Agreement. The basis of this will have been agreed upon in the negotiation stage and further detailed in the Heads of Terms.
In this agreement, the detailed terms and conditions of the sale will be documented.
The seller will include details and representations about the business. These details are statements of fact regarding the status/condition of assets, such as equipment, inventory, contracts, leases, taxes, lawsuits, customers, and suppliers.
Once this is signed and agreed upon by both parties, it is time for the funds to exchange hands.
This is important… ensure you’re completely happy with all the terms of sale before the transferal of funds occurs.
When you’re ready to pay, this can be directly done as a cash sale between the buyer and seller, or you may prefer to use your solicitor.
5. Funding a Business Purchase
Borrowing money from a bank is a popular option for business funding, with approximately half of business buyers securing a bank loan to fund their purchase. These loans are usually worth 50-70% of the total purchase price.
The buyer is then expected to supplement the remainder of the cost in cash.
Depending on the circumstances of your chosen business, you might be eligible for a range of commercial/business mortgages.
And there’s more to consider:
Many banks offer deferred payment deals. This allows a buyer to pay only a portion of the loan on completion of the business sale, followed by monthly instalments for the outstanding balance.
You might be wondering how you can increase your chances of securing a bank loan.
Ultimately, you’re more likely to be granted a loan if you’re purchasing an existing business with a successful trading history.
You’d also ideally provide the following:
- A detailed business plan
- Information about your business experience, skills, and financial past
- Three years’ worth of accounts
- A deposit ranging from 15-50% of the business’s sale price, dependent on your circumstances
- Potentially some added financial security, such as guarantees against a property
One final thing to consider is the handover, this can be immediate or transitional.
An immediate handover is when there is a sudden shift in ownership and management and from this point, the buyer is now responsible for the business.
With a transitional handover, the exchange is more gradual. The terms of this type of handover are to be decided between you and the seller. Usually, the seller will stay on for a transitional period, normally lasting a couple of weeks or even months.
We recommend a transitional handover where possible.
… and breathe, that’s it!
We’re so excited for you and your new business – best of luck.
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