Buying a Business Made Simple: 20 Expert Tips for Smart Investors

1. Avoid Business Brokers

Especially if this will be the first business you buy, steer clear of business brokers. Yes, they have lists of start-ups and established small businesses for sale that you can browse, but they prefer dealing with people who have a track record, the businesses are almost certainly over-valued, they are an obstacle between the buyer and the seller, and they are generally unfamiliar with and/or resistant to innovative financing methods.

Approach business owners directly to simplify the process.

2. Don't Be a Motivated Buyer

In a business transaction, only one party should be motivated and it isn't the buyer! When you become determined to buy at any price, you run the risk of making an expensive mistake.

Stay as impartial as possible. Set targets and red lines for the outcome you want, and be prepared to walk away if it turns out not to be the right business for you.

3. Have Good Deal Flow

The key to not becoming a motivated buyer is deal flow – making sure you have a decent number of good-quality businesses to look at. If you only have one business to look at, that business assumes enormous significance and it's easy to get the importance of acquiring it out of proportion. If you have half a dozen on your shortlist, you can be more circumspect.

4. Negotiate With the Owner

Having third parties involved in the negotiation – business brokers, solicitors, friends and family of the seller and more – can complicate matters, hold things up and add to the bill. There will be times others do need to be involved – conducting due diligence, and drawing up the sale and purchase agreement, for example – but as far as is practical and possible, deal direct with the owner.

5. First Impressions Matter

Set the tone from the outset when talking with the current owner. Be clear as to what your expectations are, manage their expectations, and aim to build a friendly rapport. If they like you, that can go a long way towards getting a deal over the line!

6. Position Yourself as the Expert

It might be the first time you have bought a business but that doesn't mean you aren't knowledgeable and prepared. Make sure you are familiar with the jargon. Also, you have your deal team to support you.

And don't forget – chances are it's the first time the owner has sold a business too!

7. Expect Exaggeration

For a variety of reasons, sellers have a tendency to overrate and overvalue their businesses. Accept what they say at face value – unless it's completely ridiculous, it's not worth getting into an argument about – and let due diligence show the truth of the matter. That way, you counter emotion with facts and logic.

8. Assemble a Good Deal Team

It stands to reason you can't do everything yourself – you're unlikely to have the breadth of knowledge and you definitely don't have the time. Pull together a good deal team to support you. You'll need professional advice from a solicitor, an accountant, and perhaps others such as an industry expert who understands that type of business, HR professional and/or funding specialist. They'll spot any red flags.

9. Ensure — As Far As You Can — Continuity of Business

Add a special clause into heads of terms (also known as a letter of intent) stating that there should be no material change in the performance of the business between signing heads of terms and completion. That way, if the business starts to struggle or financial performance falls, which will affect business valuation, you have leverage to renegotiate.

10. Don't Skimp on Due Diligence

Even if you're getting a bargain, do your due diligence. The due diligence process gets under the bonnet of an existing business and takes a good look at everything that makes it work – principally (but not exclusively) legal, financial and operational issues. It lets you know as closely as possible what it is you are buying.

Things that are scrutinised include tax returns, financial statements and financial projections – balance sheets, cash flow statements, profit and loss accounts – assets, including any intellectual property, liabilities, contracts and more.

11. Be Flexible

If you get a deal that runs smoothly, savour the experience, because that isn't how things usually go when you set out to buy your own business! You have to be flexible and sometimes nimble to navigate the various things that can happen during the purchase process.

The seller gets cold feet and needs reassurance that they are doing the right thing; they have a pal who tells them they should ask for double the price, or insist on getting every penny upfront; due diligence finds something gnarly; business finance falls through; change happens elsewhere that impacts the business … and so on. Whatever crops up, you need to deal with it. Having a business plan, goals and red lines should help decision-making here.

12. Be Prepared to Renegotiate After Due Diligence

Due diligence will surface things that affect the value of the business – and it generally reduces it. Be prepared to renegotiate price and terms depending on what it turns up.

13. Be Patient, but Don't Be Lackadaisical

Some things take time – sorting out leases on property, for example. It can be frustrating, but you have to go along with the process. That said, knowing that, start it as early as possible. Also, keep on top of things. Get on the phone if things don't seem to be happening, get updates from your deal team, make sure the seller is doing what they need to do, keep things edging forward. If you take your eye off the ball for too long, the economy can change, the market can change, the business can change and the deal can peter out.

14. Mitigate Risks

Minimise exposure by having an element of deferred consideration in the business acquisition deal. If at all possible, avoid giving a personal guarantee. Make sure appropriate warranties and indemnities are included in the sale and purchase agreement.

15. Don't Simply Write a Cheque for the Business

If you do, business brokers and sellers will love you! However, unless the particular established business is inexpensive, look for payment terms that avoid handing all the purchase price over on completion. There are benefits to keeping back some of the purchase price, including you have some leverage if anything should go wrong or anything untoward should surface. Also, as the new owner, you potentially have additional funding for other purposes, such as working capital.

16. Get the Finance Sorted

There are a number of ways you can finance a business purchase, from pulling out the money from your savings (we don't generally recommend that approach) to seller financing, from approaching a high street bank (they generally offer the best terms) to finding an alternative lender. Do your research, take advice as necessary, and go down the best path for you.

17. Leverage Business Assets for Funding

If the business has good assets – things that have serial numbers and a value on the balance sheet, for example – you might be able to leverage them to get finance to buy the business. If the customer base comprises other businesses, there might be value in the accounts receivable, and you could be able to gain finance based on the debtor book.

18. Propose Fair Payment Terms That Also Favour You

There are ways to structure deals that don't involve handing over the full purchase price on completion and also benefit the seller. For example, if the seller is confident the business will do well with new management/investment, consider proposing an earn-out deal. If the business does do better, you earn more profits and the previous owner gets paid more for their business.

19. Don't Panic If Something Goes Wrong on Completion Day

Sometimes that happens, and you have to roll with it. Remember what we said earlier about being flexible? That applies right up to the point where the business transfer is completed.

Make sure you are available to deal with anything that arises, and if completion day slips back a day or two, accept that as a pretty normal occurrence. If something does crop up, it doesn't mean the deal has collapsed, it's usually just something that needs sorting out.