There can be a number of benefits of purchasing a business; helping you strengthen your market position, or branch out into new markets. However, whilst the scope for reward may be great, purchasing a business also contains a great element of risk. For those planning on buying a business following these three simple steps can help you manage the commercial risk.

1) Preliminary Research

The key to effective negotiation is conducting preliminary research. From this you may be able to highlight any immediate areas of concern and establish how much you are willing to pay for the target company. Some of the areas that you might want to consider may include:

(a) Reviewing the accounts – the annual accounts of the target company can be downloaded from the Companies House website. Looking at the accounts should give you a decent understanding of the value of its assets, liabilities and of its profitability;
(b) Type of business – what sector is the business in; is this one you have/need any experience;
(c) Property – does it own or lease its current premises;
(d) Size of the business;
(e) Location;
(f) Number of employees.

As well as the above points, consideration should be taken into the financial position of the current owners of the target company and whether they are looking to sell, as this may allow you to reduce any offer you make.
At this early stage, buyers may wish to carry out their own research, rather than enlisting professional assistance, to mitigate any costs. However, seeking advice at this early stage from a solicitor and/or an accountant may be crucial to establish a comprehensive evaluation of the target company and to consider whether a purchase of the shares or just the assets of the target company is most advantageous.

2) Heads of Terms

Although not a necessity, once an agreement has been reached in principle, both parties may wish to sign heads of terms establishing the main terms of the deal. Heads of terms are generally not legally binding on the parties, however, they can play a very important role. Not only do they focus everyone’s minds as to the terms of the deal, but they tend to save time and costs further down the line, as the key terms have been negotiated at the outset.

Buyers may wish to include a legally binding exclusivity period in the heads of terms to prevent the seller from negotiating with any other potential buyers whilst terms are being discussed.

Both parties may also want to sign up to confidentiality provisions, preventing the other party from disclosing any confidential information of the other party.

3) Due Diligence

In the majority of cases, upon signing heads of terms, it is important to undertake a comprehensive examination of the business, carrying out financial and legal due diligence. The aim of this process is to undertake a thorough investigation into the target company to ensure that you know exactly what you are buying. It will also allow you to identify any areas of concern in the target company, including any existing and/or potential liabilities.

The importance of consulting a solicitor who specialises in the sale and purchases of businesses should not be overlooked at this stage. A solicitor will be able to make detailed checks into the target company, helping to significantly reduce the risks by identifying the main areas of concern and advising on how you can be suitably protected in the main sale agreement .

For further information regarding the purchase or sale of a business please don’t hesitate to contact Farleys’ specialist Corporate law department on 0845 050 1958. Alternatively please complete an online enquiry form.