This guide is provided by BusinessesForSale.com – the leading global website for the buying and selling of small and medium sized businesses.
There are a number of processes that need to be understood and undertaken when purchasing a business.
Heads of terms
Firstly, there are the 'heads of terms' (also known as 'heads of agreement) – this is the process where you set out the main terms of the sale. It enables you to describe the agreement in principle, before due diligence and drafting documents has begun.
The heads of terms usually takes the form of a memorandum of understanding or a letter of intent. This stage in the buying process is non-legally binding and usually helpful for both sides concerned because it can expose misunderstandings before they become irreversible.
The areas in need of clarification are:
- Exactly what you've agreed to buy
- The way the payment is to be structured
- Whether the seller is satisfied with your offer, or still searching for other buyers
- Preconditions that you want to set in order for the sale to go ahead
- The warranties and indemnities that the vendor will be providing
A word of warning: sellers may encourage you to agree to heads of terms before you find out too much about the market. Query anything you're unsure about.
The next process to go through is due diligence.
“Better safe than sorry” applies to the buying process. There are many ways to flesh out your research and while they may appear time-consuming, they could save you a lot of vexation in the future.
A certain amount of preliminary due diligence – becoming familiar with the business sector – should be done before you make a firm offer. Detailed due diligence is aimed more specifically at the business you wish to buy and should take place after signing the heads of terms.
- Ask customers their opinions on the business – how long they've used it, what improvements they'd like to see and what should stay the same
- Contact suppliers and see how happy they are with the way they've been treated
- Talk to experts such as business analysts at merchant banks who have a long-term view of the market
- Through your agent, access as many as possible of the business' documents and arrange to meet with all parties involved in the transaction (advisers, landlord, lenders, etc)
Remember, the customers and suppliers might soon be fuelling your business, so it's worth approaching them early and getting them on side.
Finally, post-completion it is good practice to ensure you do the following so that you maintain the business' momentum:
- Plan how you will announce the change of ownership, preferably with the co-operation of the seller
- Try and meet each employee in turn and establish a working rapport
- Remember to inform customers and suppliers of the change of ownership
- Draw up a detailed timetable of what you wish to achieve. Try and set it in motion from day one
Although this may be a time of uncertainty and apprehension for you, the changeover will be much more fluid if you appear confident and convinced.