Buying a business in the UK: A step by step guide

Are you a fast-growing company looking for your next acquisition? Or an ambitious investor with capital to spend?

Whatever your circumstances, this guide will walk you through the benefits, risks, considerations and essential points you need to consider before buying a business in the UK.

Acquiring a company can be a shortcut to business growth that avoids the years needed to build a new venture from the ground up. In many cases, it gives you instant access to new customers, distribution channels, employees and resources. It can also be easier to source finance to purchase an existing business with a track record of revenue.

Despite the pandemic, over 7,500 businesses were bought and sold in the UK during 2020, and the appetite for acquisitions is getting stronger every month. Yet whilst buying a business can prove to be a shortcut to success, there is still plenty of work to make sure you’re making the right decisions at each stage.

Let’s start by looking at each step in the business acquisition process.

Understanding business acquisition

Business acquisitions come in various forms, including mergers, asset acquisitions, and share purchases, providing the opportunity for partial or full ownership of the target company. The degree of ownership (and ultimately control) can grant the authority to make independent business decisions, as well as offer flexibility in terms of preserving the business’ existing structure and branding or fully integrating it into your current operations.

Benefits

• Market reach: Acquiring a business can provide access to new territories and a broader customer base.
• Diversification: Acquisitions can mitigate risks associated with relying on a single product line or market.
• Operational enhancement: Integration of operations and streamlining of processes can generate significant cost savings and efficiencies.
• Cross-selling opportunities: Leverage the acquired business’ customer base for cross-selling products or services.
• Intellectual property: The opportunity to acquire valuable intellectual property or technology.
• Reduced competition: A strategic acquisition can solidify your competitive position.
• Market entry: Acquisitions can enable swift entry into new markets leveraging the already-established infrastructure of the acquired company.
• Talent pool: Access a wider pool of skilled employees and benefit from the acquired company’s management team’s industry expertise.
• Reduced risk and expense: Acquisitions are often less risky and costly than starting a new business from the ground up.

Risks

• Financial strain: Acquiring a business can be expensive, and mismanagement can strain your company’s finances.
• Poor ROI: Overpaying for a business can result in a poor return on investment.
• Cultural integration challenges: Merging distinct company cultures, employment contracts, and practices can be disruptive and affect employee morale.
• IP ownership and license issues: Legal complications regarding intellectual property ownership and licenses.
• Unforeseen liabilities: Unidentified debts or legal issues may surface post-acquisition.
• Market dynamics: Changes in consumer preferences, market conditions or technology can all affect the success of an acquisition.
• Reputational damage: A poorly executed acquisition or staff layoffs can tarnish your business’ reputation.

Crucial considerations

When embarking on a business acquisition, it is important to consider the following:

• How the acquisition aligns with your long-term strategy.
• The target business’ market position, including its market share and reputation.
• The cultural alignment between the target business and your own.
• The growth potential of the target and the potential for synergies to be realised.
• The target company’s valuation in relation to the market and your budget.
• The key risks to the target company’s operations, including customer and supplier concentration and any legal and/or compliance issues.

Evaluating potential acquisition targets

To evaluate potential acquisition targets effectively, a comprehensive assessment is required to ensure you are making a sound investment.

• Thoroughly review financial records, including balance sheets, income statements and cash flow statements.
• Analyse historical performance and growth trends.
• Assess current market share, competitive position and growth prospects.
• Scrutinise the size and stability of the target’s customer base.
• Evaluate supply chain operations, technology infrastructure, and processes to understand efficiencies and scalability.
• Check for compliance with regulations and identify potential legal liabilities.
• Gauge the alignment of corporate culture and values.
• Examine the stability and competency of the leadership team.
• Review employee retention rates and key talent within the business.
• Consider potential challenges for integrating the workforce.

How to buy a business – step by step

Step 1: Set objectives for the acquisition or investment

When evaluating the type of business you wish to purchase, it’s essential to identify critical features, such as exposure to certain areas of the market, specialist expertise, the type of company culture, characteristics of key people, and business geography. Perhaps you’re looking to acquire a business that operates in a familiar sector and feel you have the right skill set and experience to deliver success. Or, maybe you’re looking to diversify your business interests and expand into a new industry.

You also need to think about how much time you’re able to commit to the transaction and whether you plan to take more of a passive or active role, which will impact the level of professional assistance you will likely require.

Step 2: Know your budget

If you’re thinking about buying a business, then chances are you have a rough idea of the level of capital you’d be willing to invest. That said, unless you plan on paying a lump sum in cash, you’ll also need to research your financing options to fund the purchase.

It’s worth having these conversations early to lay out all your options and determine exactly how much you, your company or your partnership can borrow. You may fund acquisitions through debt finance, equity finance or a combination of the two. An experienced M&A advisor will be able to source a range of options offered by different lenders and pinpoint the right structure for you.

Step 3: Identify potential targets

The next step is to compile a shortlist of companies that fit the criteria established in Step 1 and the approximate budget identified in Step 2.

Connecting with an M&A advisor is an excellent option if you have a business profile in mind but struggle to find companies that match. A good deal advisory service can maximise your reach and introduce you to a vast professional network to find the perfect acquisition opportunity.

Of course, you may already have your eye on a specific business, but it is worth expanding your search to seek similar companies for comparison if this is the case.

Step 4: Initial contact and discovery

Once you’ve narrowed down your options to a manageable shortlist, it’s time to find out more about them. This will involve reaching out to the respective owners to see whether they are interested in discussing a purchase. You may also request limited financial and operational information to inform the negotiation process.

Make sure to stay alert to red flags, such as poor financial records, excessive competition, and high levels of debt, which we’ll discuss later in this guide.

Step 5: Enter negotiations and agree ‘heads of terms’

If you’re happy with the outcome of your initial discussions, then you can move forward with formal negotiations. This is a crucial phase in which both sides lay out the main details of the deal in a ‘head of terms’ agreement, including the provisional value of the transaction, alongside other key aspects of the proposed transaction.

This agreement will be the basis for drafting formal legal documents, so it is wise to have a lawyer look over the heads of terms before signing. As the buyer, you also need to ensure an exclusivity clause in negotiations at this stage so that the seller cannot continue discussing a potential sale with other buyers.

Step 6: Prepare for due diligence and appoint advisers

After the main terms have been agreed and a deal in principle is on the table, you need to carry out thorough due diligence. This will likely require specialist support from financial and legal professionals to ensure no stone is left unturned before finalising the share purchase agreement (SPA).

Ensuring you appoint the right professional advisers for a transaction can be critical to a successful deal. You will undoubtedly require legal advisers but will also likely require financial DD providers and tax DD providers. You may also need specialist streams of due diligence depending on the deal, such as environmental, political, or regulatory DD. It’s important to review different providers and choose the one you can work best with to drive towards completion.

Effective due diligence can take months to complete, and it’s possible that any findings could present grounds for further negotiation of the purchase price and other terms set out in the Head of Terms. The seller should be motivated to support you through the process and, ideally, will have prepared a virtual data room that includes financial records, balance sheets, tax documents, and other essential information your due diligence team needs.

Step 7: Secure your funding

With the deal nearing completion, it’s time to ensure you are ready to fund the transaction. If you are financing the deal via debt, this may include speaking with your bank and providing due diligence information. Depending on your company’s governance structure, this stage may involve securing approval from the board of directors.

Step 8: Finalise the legal documents

Having reached a provisional agreement with the seller, the next step is to negotiate and draft legal documents in parallel with the due diligence process.

The final SPA outlines the terms of the acquisition, such as the consideration, structure, warranties, indemnities, details of future consideration, and much more. It’s essential to retain a corporate lawyer to scrutinise this document from all angles.

Step 9: Complete the transaction

Congratulations! After months of research and negotiations, the moment has finally arrived to sign the contracts, sign the contracts and send the required funds to complete the transaction and transfer ownership of the business.

This is just the initial challenge, with plenty of work to be done to ensure a smooth and successful post-acquisition period – but not before popping a bottle of champagne, of course!

Step 10: Manage the integration

By this point, you should have formulated a roadmap that outlines the key steps, timings and milestones you need to meet following completion of the purchase. The nature of the transition will depend on the deal’s structure and purpose of the acquisition.

If the purchase means you’ve also inherited existing employees, make sure you align communications with the seller and start the relationship with your new team on the right foot.

Frequently Asked Questions

With all of the steps involved with buying a business in the UK covered above, let’s now take a look at some of the questions we commonly receive about the process.

Why is financial due diligence essential when buying a business?

Due diligence is crucial because it allows the buyer to identify risks that can either be mitigated or avoided, reducing the risk of any nasty surprises cropping up once the purchase is complete. The due diligence process also provides the purchaser with significant leverage during negotiations, enabling them to secure a more accurate business valuation and negotiate the price accordingly.

Here are a few common issues and considerations which effective financial due diligence can assist in identifying:

• Trading issues – Companies will often present trading figures in the most positive possible way, especially when going through a sale process. Identifying trading issues within the target during due diligence is extremely important if they exist and can reduce consideration paid on completion.
• Normalised working capital – Identifying and agreeing on a ‘normal’ level of working capital forms a crucial element in most corporate transactions to ensure that its day-to-day operations can continue to run smoothly post-completion. This process is a subjective task and is a critical negotiation point in most deals, with a common adjustment to consideration reflecting any shortfall or surplus to the agreed value ‘normal’ working capital.
• Understanding debt – The definition of debt varies from deal to deal but generally includes many items beyond regular bank debt, such as intercompany liabilities, tax liabilities, accrued bonuses, office dilapidation provisions, lease obligations and litigation liabilities. The FDD provider performs tests and checks to identify all such debt items, including any contingent liabilities, commitments or liabilities which may not be disclosed on the target’s balance sheet.
• Taxation matters – Tax due diligence is a key part of FDD and involves reviewing a target’s historical taxation affairs, including, but not limited to, corporation tax, VAT and PAYE. This process helps the purchaser understand the exposure to taxation liabilities and protect against this exposure by including appropriate protections in the SPA.

For more information, make sure to read our article on the importance of financial due diligence in mergers and acquisitions.

How can an M&A advisor support a business purchase?

Buying a business is a major decision that involves many moving parts. Often, investors turn to an experienced M&A advisor to help weigh up their options, lay out a plan for the purchase and deliver successful outcomes at each stage of the process.

At Gerald Edelman, we regularly assist entrepreneurs and ambitious companies with:

• Business acquisition planning
• Finding investment opportunities
• Raising capital and sourcing finance
• Deal negotiation
• Transaction structuring
• Performing financial due diligence
• Working with legal teams to agree on terms and legal documentation

How can I finance a business acquisition?

Debt financing and equity financing are among the most common options when funding a business acquisition, and each has its pros and cons depending on your specific situation. Debt finance refers to money borrowed from a third-party lender that you are due to pay back at a future date with interest. Equity finance refers to the money exchanged for a percentage of ownership of the business.

You may also benefit from alternative sources of finance, particularly if you have access to a strong professional network. Peer-to-peer lending, angel investment, venture capital and crowdfunding are potential routes to source funding beyond banks and building societies.

For more information, make sure to read our expert guidance on how to fund a business acquisition.

What is the best way to transfer ownership of a business?

Buyers can transfer the ownership of a business via either a share purchase or an asset purchase. With a share purchase, the buyer purchases the entire business, including its assets, staff, and existing liabilities. With an asset purchase, the buyer only acquires the specific assets they wish to purchase, leaving the remaining assets with the seller. Each route comes with its challenges, and a certain type of structure may actually benefit one party more than the other. You’ll need to talk to a business advisor to establish the optimal structure for your purchase.

Your next steps

If you’re looking to buy a business in the UK, then our friendly Deal Advisory team is here to help. We have extensive experience in business acquisitions and pride ourselves on providing exceptional client service with every step of the way.

Get in touch with one of our advisors today for a free consultation to talk through your options and start laying out a plan for your next acquisition.