Companies for Sale – Top 6 Things to Consider When Buying a Business

Axis are specialist business transfer agents based in Suffolk who specialise in assisting a wide range of companies sell their business. We have a wide range of companies for sale throughout the UK including Suffolk, Essex, London, East Anglia, South East, Norfolk, Cambridgeshire, Home Counties, England, South West, North West, South East, Midlands and West Midlands.

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However, there are several things to consider when buying a business – here are the top 6 factors you should be aware of.

Top 6 Things to Consider When Buying a Business

1. Is it Better to Buy a Company or Start Your Own?
There are several benefits to buying an existing business compared to starting a new one from scratch.

Starting a company from scratch usually takes time in terms of recruiting suitable people, finding suitable premises or equipment and so on. A company for sale, on the other hand, is already ‘up and running’. This is especially useful if your reason for acquiring the business is to have access to a particular type of function or expertise (for instance if you are a larger company looking to diversify your operation). Starting from scratch only really makes sense if the business functionality you are looking for does not yet exist i.e. it is a completely new type of business, or where you want to be sure that the company operates in a particular way.

One of the hardest things about starting a new company is building up a solid client base and getting known within an industry. An existing company for sale is likely to already have an existing client base in place. Even if you plan to make significant changes to the way the business operates, an existing client base gives you a stream of income to work with. The existing clients may also be invaluable in telling you whether your proposed changes are likely to be well received.

There is usually a big learning curve involved with starting a new business, and as a new business owner there is no-one to turn to for help. When you take over an existing company for sale, the previous owners are likely to lend support and goodwill, making it easier to learn what is needed. In a larger business with staff in place, existing staff can continue to run the business using their experience until such time as you have learned the business yourself.

A new business has to work out its business processes from scratch, often trying different methods until a successful one emerges. An existing business will already have been through this phase and, assuming it is a profitable business, will have a tried and tested business formula in place. It is far easier to modify and improve upon a model which is working, than to try to create one from nothing. In particular, it is far easier to calculate likely outgoings and to project future returns, since costs of staff, premises, materials and so on, will already be known.

In general, the failure rate of new businesses demonstrates the increased risk of starting a new business compared to taking over an existing one. If your purpose as a buyer is to invest and produce a return, an established business will generally offer a greater chance of success compared to starting a similar business from scratch.

2. What Type of Company do you Want to Buy?
Apart from deciding what products or services you want your company to provide, you need to decide whether you want to buy a franchise or a private company. The choice will depend largely on your current level of experience within an industry, what level of support you want to have available, and what your funding situation is.

Franchises are ideal for people looking to become their own boss but who have less money to invest and who do not have any leads or clients lined up. A franchise will usually have an existing client base – or be a known brand enabling you to attract clients more easily than an unknown startup. A franchise will often also provide training and administrative support, as it is in the franchise owner’s interest to help you succeed. However, all this comes at a price – usually an upfront fee plus a percentage of sales for the duration of the franchise, which can be up to 20 years. A franchise usually involves various restrictions placed upon the purchaser, designed to protect the integrity of the larger brand, such as restricting the range of products or services which can be offered, the type of deals which can be made and so on. This makes it viable for an individual only, and not an operating Company.

Private companies are ideal for individuals with more money to invest and who already have the necessary knowledge and experience needed to run the company. They are also a necessary choice for larger operating companies who want to have complete control over the new company after acquisition. If a company has reached a certain level, whether financial or market share, then an acquisition is an ideal format to continue growth. Acquiring a competitor can increase your market share, or allow you to instantly have access to a new client base to cross sell products and services into, whilst also offering the potential of a stronger or more established brand.

3. Finances – How Will You Finance the Purchase?
Buying a company can be achieved through a variety of funding mechanisms – and sometimes a combination of funding sources will be needed to achieve the purchase price.

The most obvious funding source will be cash – available from existing company profits, or as the result of a sale of a previous business. Buying an asset (e.g. another company) using excess profits can be a way to reduce a larger company’s tax bill as well as expanding the business. Ideally the purchaser will be funding the acquisition from funds either within their company listed on their balance sheet, or private funds of the directors.

But most purchases will involve at least some element of a loan. In the current financial climate banks are being more stringent about funding business acquisitions. However, banks will still lend if they can be shown a good business case and good prospects of repayment. They will consider the financial health of both the purchasing company and the target company, as well as the terms of the deal. An alternative to a bank loan is private investor funding, which tends to offer more competitive rates and more flexible terms.

It may also be possible to attract funding from venture capitalists and investment consortiums. These funders, like the banks, will want to be assured of a return on investment and will want a percentage share of the company. Some may also want a say in strategy or operations. The ongoing demands of venture capitalists have to be offset against the opportunity for the purchaser.

4. How Profitable is the Company?
The profitability of a company will affect its market valuation and sale price. Profitability is a therefore rather a double-edge sword when it comes to buying a company. Companies with low profits or even losses can be acquired for relatively little – but there will be work to be done to bring them into profit and/or reorganise their assets in relation to the acquiring company. Companies with high profits will be more expensive to buy, but will give the purchaser an income stream immediately.

Companies are valued taking into account the adjusted profits of the company, which is calculated by adding the operating profit as shown on the profit & loss to any costs or benefits linked to the departing directors, one off costs for the year or synergetic savings to an incoming purchaser. The company is then evaluated in its sector taking into account the strengths of its brand, staff, clients and growth prospects and comparing it against the remainder of the market. High scores in these areas mean that a higher multiplier is attributed to the adjusted profit, which results in a higher valuation. A buyer will evaluate a company based on its Return on Capital Employed (ROCE) – a measure of how many years they expect to operate before getting their money back. For companies at the low end of the scale a buyer will only value at 1-2, whilst at the higher end the figures can be 5-6 depending on industry and demand.

If your purpose in buying a business is to acquire an income stream, then you will want to choose a company which is already profitable. However, there may also be good reasons for buying a company which is not profitable. In particular, you may see scope for bringing a non-profitable company back into profit if certain operating changes can be made. For those with the business skill to make this happen, this can be a good way to acquire businesses for relatively little and add value to them.

Companies may not make a profit due to the operating style of the owners (e.g. employing too many staff on high wages, working on low margins or not marketing aggressively enough). A purchaser should therefore review the operational aspects of the company and see what prospects there are for reducing costs or altering operations to increase profits (for example, relocating the office into their existing setup and therefore saving on rent and rates).

Additionally the vendors may be purposefully operating their company in such a way to reduce the profitability in order to reduce the corporation tax payable each year, by running costs through the Profit & Loss which an incoming purchaser would not have to pay going forward and would result in the company becoming profitable. A purchaser should not make any decisions purely on reviewing the profitability without understanding the operational aspects and possible tax situations.

5. Staff
Taking over an existing company will almost certainly mean taking over responsibility for existing staff currently employed by the business – only the owners, and perhaps directors, will leave the company.
In some cases, it will be the skills and expertise of the staff that will form a significant part of the company’s value e.g. in an engineering or creative company. In other cases there will be an overlap of skills, especially in the case of a takeover by a larger company delivering similar services.
Due to TUPE (Transfer of Undertaking Protection of Employment) in 2006, when acquiring a company, whether it be the shares or assets, staff must be retained on their current contractual terms. This provides existing staff with an element of job security, while also providing the buyer with assurance that the workforce will remain at its current capacity. It is therefore important to gauge the size and characteristics of the workforce you will be taking over, prior to purchase.

6. Timeframe
Buying a business is a long term proposition, so you should take sufficient time to find and research the right company before making any final decisions. A prospective buyer should become aware of the market and the demand 6-12 months before planning to make their first acquisition. It is invaluable to make your requirements known to a broker who specialises in your industry, as they can ensure you are contacted as soon as something suitable becomes available.