Buying an existing business can be an exciting way of branching out on your own and becoming a business owner, but with any purchase it’s important to avoid entering a bad deal. There are many ways to invest in buying an existing business, but the two most popular ways are through share purchase and asset purchase.
What is the difference between a share and asset purchase?
Share purchase means that you buy every aspect of the business, this includes all of the assets and any of the debts. Asset purchase enables a buyer to pick the parts of the business they want, for example equipment, the brand, and goodwill, but not the debts connected to it. Each method has its own benefits, and it is imperative that the structure of any business purchase should be agreed by all parties involved.
Financial considerations when buying a business
With any business purchase you should seriously consider all aspects of the investment you are making and weigh up the positives and negatives. We strongly advise seeking legal and accountancy advice before you make any offer as this could save you money in the long-term. Having independent experts review the state of the company you are interested in also provides a non-partisan viewpoint of how successful it is and what further investments may be required.
One of the biggest considerations has to be the business’ finances. Is it currently profitable and, if it isn’t, could it be turned around to make a profit? You should consider any debtors and creditors and whether the accounts have been kept up to date. An accountant can help with this and you should be given accounts to review. This can provide you with a key negotiation point as purchase prices are usually linked to the current state of a company’s financial affairs.
Additionally, you should also take into consideration any warranties included within the sale. A warranty is a statement of fact about the state of the business. Essentially, they cover the fundamental parts of the business and are there to ensure that the seller has painted a true picture of the company they are selling. If a seller provides false or inaccurate information, you then have a right to sue them. As a result, sellers will try to reduce the number of warranties connected to the sale.
The value of reputation and goodwill when buying a business
You should also consider what the reputation of the business is like and how much goodwill exists. Goodwill is undoubtedly an asset and adds value to the business. As a result, a popular company will attract a higher price. On the other hand, a lack of goodwill or a poor reputation can be difficult to turnaround and should be a consideration in any purchase. We always recommend that our clients check social media, Google My Business reviews, and do extensive local research to fully understand what they are buying.
Finally, any purchaser should check out how the business operates before completing their purchase. It is completely acceptable to ask to visit and spend time in the business to learn about how it operates. It’s also worth considering retaining the seller as a consultant for a period after the purchase. While they would obviously need to be paid, having an expert in your company available to provide insights can be invaluable.