I was offered a business for sale a few years ago, but after looking into the risks and costs I wasn’t convinced it was worth the hassle. The things I was watching out for were:
- Are there any outstanding liabilities associated with the business? You won’t want to find out post-purchase that there’s a £10,000 overdraft the owners ‘forgot’ to tell you about.
- Are there are outstanding legal issues? This could be anything from a demand from HMRC for unpaid/late tax to an unfair dismissal claim from an ex-employee.
- Are you buying the assets of the business or the shares (assuming a limited company)? Buying the assets means you can cherry-pick what you want, whereas buying the shares might be easier as you step into the shoes of the previous owner.
- Will the customers leave when they find out there’s a new owner? This might be the case, especially if they have short contracts and the sale comes out of the blue, or if they had a good personal relationship with the existing owner. One company I used to work with got bought and lost customers who didn’t like the change.
- Will the staff leave when they find out there’s a new owner? The same company who were bought lost most of their good staff within 6 months.
- Will suppliers want to deal with the new owner? Similar to customers/staff issue.
- In some industries you have to get approval from a regulator for anything that involves a ‘change of control’ (e.g. a new owner). This can take a long time and isn’t guaranteed.
- A change of control might trigger clauses in contracts such as loan agreements – this can result in full repayment of the loan being demanded immediately.
- Why does the seller want to exit? Unless there’s a good reason that’s not related to the business (e.g. retirement) you have to be wary of someone selling because they know something bad is about to happen (e.g. a major customer is about to cancel their contract).
- Unlike buying a house, where there are standards contracts, searches, enquiries etc., each business sale is unique. This makes the legal work more complex and therefore more expensive.
- Like buying a house, you can be ‘gazumped’ (i.e. someone else swoops with another offer) at the last minute. You can protect yourself to a degree with a period of exclusivity, but that’s more legal work and therefore cost, and you have to be prepared to enforce it.
I had a discussion with a solicitor and the minimum costing I received was £3,000 plus VAT, and that’s for doing the legal work with no guarantee of a successful purchase (and probably doesn’t include much due diligence). For share purchases there’s usually stamp duty to consider – 0.5% in most cases. If there’s a broker or other intermediary involved they’ll want a cut as well. I can’t see this being worthwhile unless you’re paying tens of thousands of pounds for a business, or come across a distressed seller (e.g. divorce settlement) and are prepared to take advantage of the situation.