Buying an existing business can be a great way to become a business owner, expand an existing company or enter a new market without starting from scratch.
Instead of building customers, employees, systems and revenue from day one, you’re acquiring a business that already has them.
But finding a business that looks attractive is only the beginning. You need to understand what you’re buying, what it’s worth, how you’ll fund the acquisition and whether the business can continue performing after ownership changes.
This guide takes you through the main stages of buying a business.
1. Decide what type of business you want to buy
Before looking at opportunities, define what you’re searching for.
Consider things such as:
- sector
- location
- revenue and profitability
- purchase price
- business model
- level of owner involvement
- growth potential
- whether you want to run the business yourself or appoint management
You don’t need an overly restrictive set of criteria, but having a clear acquisition profile makes it much easier to filter opportunities.
Think about what you can realistically own and operate, not simply what looks attractive on paper.
2. Work out what you can afford
The purchase price is only part of the equation.
Consider how much capital you can invest yourself and whether you will need debt, external investors or another form of acquisition finance.
You should also allow for professional fees, due diligence costs and sufficient working capital after completion.
A £2 million business does not necessarily require £2 million of your own cash. Acquisitions can be funded using a combination of buyer equity, debt and, in some transactions, deferred consideration or vendor finance.
Understanding your funding position early will help you focus on realistic opportunities.
3. Find businesses for sale
Businesses can be found through marketplaces, business brokers, corporate finance advisers, professional networks and direct approaches to owners.
Not every business that is available for acquisition will be publicly advertised.
Some owners prefer a confidential process, while others may consider selling if approached by a credible buyer even though they are not actively marketing the business.
When reviewing opportunities, don’t focus solely on the headline asking price.
Start by understanding the business itself.
4. Review the initial opportunity
Before spending significant time or money investigating a business, decide whether it meets your basic criteria.
Look at:
Financial performance
How have revenue, profit and margins developed over the last few years?
Customers
Is revenue spread across a broad customer base or dependent on a small number of relationships?
Revenue quality
Is revenue recurring, contracted or repeatable, or does the business need to continually win new work?
Management
How involved is the current owner and who actually runs the business day to day?
Growth
What could realistically make the business larger or more profitable?
Reason for sale
Understanding why the owner wants to sell can provide useful context.
At this stage, you’re deciding whether the opportunity deserves further investigation rather than trying to answer every question.
5. Speak to the seller
If the business looks interesting, the next step is usually an initial conversation with the seller or their adviser.
This is an opportunity to understand the business beyond the numbers.
Ask about how the company operates, the owner’s role, customers, employees, competitors, growth opportunities and why they are considering a sale.
It is also an opportunity for the seller to assess you.
Business owners often care about who they sell to, particularly where they have employees, customers or a brand they have spent years building.
Being able to explain who you are, why you’re interested and how you intend to fund an acquisition can make a difference.
6. Understand what the business is worth
An asking price is not the same thing as a valuation.
For established profitable businesses, valuation will often consider maintainable EBITDA and an appropriate valuation multiple.
For example:
£750,000 maintainable EBITDA × 5x multiple = £3.75 million enterprise value
But the appropriate multiple depends on the individual business.
Growth, recurring revenue, customer concentration, management, margins, market position and the level of risk can all affect what a buyer is prepared to pay.
You also need to understand whether the price being discussed represents enterprise value or equity value and how debt, cash and working capital will be treated.
7. Make an offer
Once you understand the business sufficiently, you may decide to make an indicative offer.
Price is important, but it is only one part of the proposal.
Your offer may also need to address:
- how much will be paid on completion
- whether any consideration will be deferred
- whether there will be an earn-out
- how the acquisition will be funded
- whether the seller will remain involved
- your proposed timetable
- any conditions attached to the offer
A seller will look at the certainty of your proposal as well as the headline valuation.
A slightly lower offer with committed funding and a clear route to completion may look very different from a higher offer with significant uncertainty attached.
8. Agree Heads of Terms
If your offer is accepted, the main commercial terms will normally be documented in Heads of Terms.
These typically set out the proposed valuation, transaction structure, payment terms, due diligence process, timetable and any period of exclusivity.
This is an important stage because it establishes the framework for the transaction before significant time and money are spent on due diligence and legal work.
You should take appropriate professional advice before agreeing the terms.
9. Carry out due diligence
Due diligence is your opportunity to verify what you’ve been told about the business.
Depending on the transaction, this can include financial, commercial, legal, tax and operational due diligence.
You might review customer contracts, employee information, financial performance, tax records, intellectual property, property arrangements, supplier relationships and other areas relevant to the business.
The aim isn’t simply to find problems.
It’s to understand exactly what you’re buying and identify anything that could affect the valuation, transaction structure or your plans after completion.
10. Finalise your funding
If you’re using acquisition finance, your lender or investors will usually require information about both you and the business being acquired.
Funding can take time, so it is worth speaking to potential funders early rather than waiting until the transaction is ready to complete.
Make sure you also understand the impact of debt repayments on the business after acquisition.
A transaction that can technically be financed isn’t necessarily one that leaves the company with a comfortable level of cash flow afterwards.
11. Complete the legal process
Your lawyers will negotiate the final transaction documents.
For a share acquisition, the principal document is normally the Share Purchase Agreement.
The legal documentation will set out the final terms of the acquisition, including the price, payment arrangements, warranties, indemnities and other protections agreed between the parties.
Once the documents are agreed, funding is available and any conditions have been satisfied, the transaction can complete.
12. Plan for day one
Completion isn’t the end of the acquisition. In many ways, it’s the beginning.
Before taking ownership, have a clear plan for the first few weeks and months.
Think about employees, customers, suppliers and how the change of ownership will be communicated.
Understand which relationships the seller needs to introduce you to and what knowledge needs to be transferred.
And resist the temptation to change everything immediately.
You have spent months investigating the business because you believe it is worth buying. Take time to understand how it really operates before deciding what needs to change.
Buying the right business
A successful acquisition isn’t simply about finding a profitable company at an attractive price.
You need to understand why the business is successful today, what could threaten that success and what you can realistically do with it after the acquisition.
Having clear criteria, being disciplined about valuation and carrying out proper due diligence can help you avoid becoming emotionally attached to the wrong opportunity.
There will always be another business.
The objective is to find the right one.
Find businesses for sale on The Brokerage
The Brokerage connects buyers with business owners looking to sell, alongside brokers, investors and advisers involved in the transaction process.
Create your buyer profile, set your acquisition criteria and discover businesses that match what you’re looking for.