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How to buy a business

Acquiring a business is a big decision, and one few people will make more than once or twice in their lifetime. Here are some tips to help you find the right business for you.

4 minute read

What do you want?

Are you looking for a small business lifestyle to provide you a salary, or something to complement a business you already own? Do you want majority or minority ownership, or perhaps a partnership? Do you want to be actively involved in the business or participate as a silent investor?

When searching for a business, it’s important to be clear about what you want, and to consider your core competencies. Business has enough risk without diving into a sector you know little about, and a venture you’re fundamentally interested in is more likely to succeed – especially if you want to be active in the business.

How do you find a business?

There are generally two ways to buy a business: through on-market or off-market transactions. On-market businesses can be found through a range of channels, from professional services firms at the top end of town, to business brokers specialising in smaller enterprises.

Off-market transactions are sourced through your network. You might reach out to your bank, accountant or other professional advisors to ask about opportunities. Or if you’re looking to add a complementary business to your existing operation, you might approach industry contacts. Many businesses also change hands internally, with an owner selling down to a staff member or members, perhaps over a period of time. This approach can help with sourcing finance and mitigating key personnel risk, but shareholder agreements need to be kept clear throughout to make sure everyone involved knows who owns what and when.

What does the buying process look like?

An on-market business will generally be listed with an asking price or price range, with certain high-level information disclosed. If a potential buyer wants to seriously investigate further, a term sheet – essentially an offer subject to a specified due diligence to be carried out (and often subject to finance) – will be drawn up. This will often have a period of exclusivity attached, during which the potential buyer (subject to confidentiality conditions) can carry out their due diligence.

At the end of the due diligence and/or exclusivity period, the potential buyer may go ahead with the purchase in accordance with the initial term sheet. Or, if they’ve discovered something material (and negative), they can either walk away or renegotiate the initial term sheet. Once terms, including price, are agreed, a settlement date is set, finance or a commercial business loan is confirmed, and the deal is done in accordance with a final term sheet.

While off-market sales will follow similar processes, if they involve familiar parties there might be a lighter due diligence process if the purchaser is already relatively familiar with the business.

Do your due diligence

Due diligence involves digging deep into a business’ legal, financial and operational positions to make sure there are no nasty surprises after you’ve inked the deal. Legal due diligence may involve checking employment and supplier agreements, understanding warranties and what intellectual property protection is in place. Financial due diligence involves verifying the business’ numbers (do the accounts provided actually match what you’ve been told?) in terms of balance sheet, profit and loss and cashflow as well as things like ongoing liabilities and tax obligations.

Crucially, during this process you want to gain an understanding of what drives the value in the business – whether that’s key people, contracts, relationships or technology – and make sure you are buying these value drivers.

Asset or share purchase?

Another important consideration is whether you’re offering to buy the shares (essentially taking on the business in its entirety and all that comes with it) or the assets of a business (what the business owns without any ongoing liabilities). There are different risks and benefits associated with each approach, so carefully assess which works best for the situation.

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