Oct 31, 2023
Buying an SME Business in the UK: A Guide to the Essential Steps
Are you considering, or researching, how to buy a business in the UK?
Embarking on the journey to buy your first business can be daunting. There are a lot of steps to overcome and problems to solve, but with the right process and some helpful guidance, it's absolutely possible. There has also never been a better time to buy an established company in the UK. As the wave of baby-boomer business-owners inches closer to retirement, a unique opportunity is unfolding in the world of business ownership through succession M&A. A significant portion of UK SME business leaders have not yet put succession plans in place for their enterprises, paving the way for a new generation of entrepreneurs (like you!) to step in.
At BizCrunch, facilitating SME acquisition is our mission. We're here to help you find that first company to purchase, and to help business owners find exits. That's why we've written this step-by-step guide, to assist first-time buyers and seasoned entrepreneurs through the intricacies of the acquisition process. This article provides practical tips, essential steps, in-depth insights and further reading recommendations.
Let's get started!
Before you jump into the acquisition process with both feet, a thorough self-assessment is crucial to gauge your own readiness, both entrepreneurially and financially.
Evaluate Your Entrepreneurial Skills: Assessing your skills is the first step towards understanding your readiness for business ownership. It involves identifying the core skills required for the targeted business, understanding the industry, and evaluating your management and leadership abilities. What skills can you carry over from your current or previous endeavours: Are you a trained accountant? A marketing whizz? An industry expert? Allow these skills to help guide you on what businesses to buy, and identify where you can add the best value. Recognising the gaps in your skillset and seeking relevant training or mentorship – or additional members of your transformation team - can be beneficial, too.
Financial Readiness: Your financial readiness is crucial in determining your capability to acquire and sustain a business. It involves analysing your finances, exploring different sources of capital available to you, and understanding the costs involved in buying and running a business. Consulting with financial advisers and ensuring a good credit score are also key aspects of financial readiness. Even more so if you're planning a leveraged buyout.
2. Market Research
Market research is a vital early step on your business-buying journey. If you want to make informed decisions, identify opportunities and minimise risks - do the research first! Ideally, you'll have some knowledge to the market you're looking to enter beforehand, but this isn't always necessary.
Industry Analysis: Delving into industry analysis unveils current market trends, challenges, and the competitive landscape. This will provide insight into the industry dynamics and the positioning of your prospective business. Your research should help shape not just your acquisition, but your strategy for growing the business once you've completed.
Identifying Opportunities: Within the industry, recognising growth or market entry opportunities is crucial. This includes analysing market gaps, consumer needs, and potential areas for expansion or innovation. Are there potential vertical or lateral acquisitions you could later make to improve the business? Perhaps a technological innovation is on the horizon? Is a particular industry or segment exhibiting outdated traditional conventions that are due for disruption? Identifying these opportunities in advance could help to guide your strategy from day one.
3. Searching for a Business
You've got a plan, assessed your finances and done your market research. Now it's time to find the company you want to buy! There are two routes to follow, here: “Listed” and “Off-Market”. Listed buying involves buying a business that is publicly advertised for sale on directories, marketplaces or via brokers. Off-market, as the name suggests, involves buying a businesses that is not publicly advertised or brokered. This involves reaching out to business owners and beginning a conversation around buying their companies – sometimes before the owners have even begun the process of exploring an exit.
Off-Market Deal Discovery: This is BizCrunch’s particular area of expertise, as we’ve made it our mission to fix what we believed was a broken search system. The old-fashioned method for finding off market deals involves research on Companies House, cross-referenced with lots of web searches, LinkedIn and perhaps a credit-referencing tool to get some basic financials. That's just to find potentially relevant companies! You then need a suite of other tools and searches to find their contact information before you can begin to reach out. Apart from the time wasted on this patchwork method, it also leaves some big holes in the data.
BizCrunch's database contains every active incorporated company in the UK with revenue between £1m-50m. Where revenue is not reported, our accurate revenue estimation plugs the gaps. We provide direct email addresses for business owners; estimate net profit; and provide Smart Acquire Filters to help you hone in on the optimum business and format all this data into clean spreadsheet export, ready to plug into your mail merge tool of choice. It's the only platform you'll ever need for off-market deal discovery! But don't just take my word for it, try it for free and see for yourself: www.bizcrunch.co
Publicly Listed Businesses: Online platforms, like Rightbiz or BusinessesForSalesUK host listings of businesses for sale, providing a convenient way to explore available opportunities. These platforms offer a range of options across different industries and regions. You can also engage a business broker to provide options to you.
There are some pitfalls to avoid, if this is the route you decide to take. Every year, it is estimated that there are 50,000 companies for sale, but there are, annually on average, only around 2,000 acquisitions and mergers of companies each valued over £1m GBP. With so few acquisitions making it over the line, and with interactions happening generally through intermediaries like brokers, this can lead to unrealistically elevated prices. There is also an argument to be made that buying a business listed "for sale" can be risky as the owner may be disengaged, and focusing mainly on selling. These are both reasons why UK Private Equity firms heavily favour off-market deals.
Going off-market? Then you need to get comfortable with doing some outreach. The downfall of off-market deal finding is that not all business owners will respond, and even fewer will want to sell! Don't be disheartened by this. It's a necessary part of the journey. Our advice is to try and minimise the manual work and automate as much of the process as possible.
Emails: Emails can be easily personalised and sent en-masse, for a very low cost. There are a plethora of guides out there that will tell you how to do this best! The hard part is finding the emails (hint: try BizCrunch!). Generally, targeted emails that reach individual majority shareholders will work much better than emailing the office-wide info@, sales@, hello@ mailboxes.
Letters: Sending formal letters can also be a professional approach to express your interest. It is a more costly process, due to the price of printing and posting so many letters, but finding addresses is generally easier than finding emails and some feel that a physical letter is harder to ignore. Our advice is to try and find the trading address of a company when sending letters. Registered addresses can often be mailboxes, or accountant's offices. If your letter ends up at either of those, the chances of it falling into the right hands are much slimmer. You can speed up the process by using a mail merge tool like ClickSend, or a CRM like Folk. The BizCrunch export handily formats addresses to be plugged into a service like this, saving you multiple hours of reformatting.
5. Due Diligence
Due diligence is a decisive phase in the business-buying process, entailing a thorough examination of the prospective business to validate all relevant facts and financial information. This stage is crucial for identifying any potential red flags that could impact the investment. If you're not an expert here, it's a good idea to instruct one. This is not a stage to scrimp on.
Financial Analysis: Financial due diligence encompasses a deep dive into the financial health of the prospective business. It involves analysing financial statements to fully understand its finances and the internal controls on how they are prepared. Reviewing revenue streams, growth-rates, cost efficiency, profitability, and other financial patterns helps reveal the economic landscape of the business. It's essential to look at cashflows to identify patterns, seasonality, liquidity and credit risks. Special attention should be paid to any discrepancies in accounting standards between the acquiring entity and the target company and whether any material liabilities are not reflected in the financial statements. Moreover, assessing risks, compliance issues, and identifying hidden costs are other critical aspects of financial due diligence that can impact the purchase price and the success of the transaction.
Legal Compliance: Legal due diligence entails an in-depth investigation into the legal rights, obligations, and exposures of the target company. This includes evaluating the legal structures, ownership, securities laws compliance, stockholder agreements, and the management's authority to enter into the transaction. A thorough review of material contracts, agreements, and obligations should be conducted to identify any potential liabilities. Examining the intellectual property status, commercial rights, and any pending litigation is crucial for determining the legal hygiene of the business. If the target operates in a regulated industry, special attention should be given to regulatory compliance diligence. Engaging in compliance due diligence allows the acquirer to assess the required remedial actions and improvements that could be implemented to the compliance framework post-acquisition, estimate their cost, and evaluate less quantifiable risks such as reputational issues.
6. Valuation and Offer
Arriving at an accurate valuation and making a compelling offer are, of course, pivotal steps in the business acquisition process. The valuation not only provides a basis for the offer but also sets the tone for negotiations, affirming the credibility and seriousness of your intent to both the seller and any involved intermediaries. It's a meticulous process that necessitates a thorough understanding of both the financial and operational facets of the business in question, as well as the prevailing market conditions. Furthermore, the offer you make encapsulates your valuation, your understanding of the business's potential, known challenges, and your willingness to engage in a fair transaction. This phase is not only about numbers but also about strategy, negotiation skills, and sometimes, the ability to foresee the unseen potential or risks in a business venture.
Business Valuation Methods: Business valuation is an intricate process that entails determining the economic worth of a business. Common methods include the Discounted Cash Flow (DCF) method, which forecasts the business's future cash flows and discounts them back to present value. The Comparable Company Analysis (CCA) method evaluates similar businesses within the same industry to derive a comparable valuation. The Net Asset-based valuation method calculates the total value of a business's assets minus its liabilities. Each method has its merits and may be suitable depending on the nature and circumstances of the business in question. Many companies are valued and acquired for a multiple of EBITDA contextual to their industry sector, on a “debt-free, cash-free” basis whereby the cash value after deduction of liabilities is added to (or subtracted from) the valuation.
Making an Offer: Once a valuation has been ascertained, crafting an offer is the next step. The offer should be fair, reflecting the valuation, and also attractive to the seller to engage in further negotiations. It’s essential to outline the terms of the offer clearly, including the price, payment structure, and any conditions such as due diligence findings or regulatory approvals. Having a well-structured offer can set the stage for fruitful negotiations and a successful transaction. Also, if this deal is a leveraged buyout it is a good idea to check with your lender that they can offer you the money needed before a formal offer is made!
7. Negotiation and Closing
This stage is where the groundwork laid in previous steps (hopefully) culminates into an agreement between buyer and seller. The negotiation and closing phase is often seen as a complex dance that requires a balance of assertiveness, compromise, and meticulous attention to detail. It’s a juncture where both parties work to align their interests, iron out differences, refine and agree on the terms that govern the transition of ownership. The significance of this phase cannot be overstated as it not only determines the final terms of the deal but sets the tone for the future relationship between the buyer and the seller. It's the part of the journey where a combination of patience and negotiation skills will serve you well.
Legal Aspects: The legal dimension of negotiation and closing involves reviewing and finalising the terms and conditions of the sale and ensuring compliance with all legal and regulatory requirements. Engaging legal representation to navigate through the contracts, Sale & Purchase Agreement (“SPA”) – including requisite warrants and covenants, and any other legal documentation is imperative. Ensure you address any outstanding legal concerns or disputes before closing, to avoid future liabilities.
Closing the Deal: Closing the deal is the final step in the acquisition process. It's where the agreed upon terms are executed, the “consideration” (payment) is made and ownership is transferred. This phase involves fulfilling any remaining conditions, finalising the wiring of funds, and ensuring all necessary legal documents are signed and recorded. Congratulations - you just bought a business!
9. Transition and Operations
This phase is not merely about taking over but about smoothly transitioning the business while retaining its operational integrity, customer relationships, and employee morale. A smooth transition can significantly influence the future success of the business. It's also the stage where the initial steps towards executing the long-term operational and strategic plans are enacted. This phase necessitates a balance between introducing new operational paradigms and retaining the existing ones that add value to the business. If you did your homework in Step 2, you'll be better prepared for this!
Transition Planning: Transition planning is important to ensure a smooth handover and to lay the foundation for successful operations post-acquisition. It entails detailed strategisng and roadmapping around various aspects such as staffing, management structure, operational processes, and customer communication. Establishing clear short-term and long-term goals, and developing a roadmap to achieve them is crucial during this phase. It's also essential to have a contingency plan to address any unexpected challenges that might arise during the transition.
Running Your New Business: Running your new business post-acquisition involves adapting to and managing the operational, financial, and human capital aspects of the business. It's about stabilising, retaining key team members, and implementing your strategic vision while managing the day-to-day operations efficiently. This phase also involves shoring-up relationships with the existing customers, suppliers, and employees, and possibly introducing new operational or management systems to enhance efficiency and achieve the desired business outcomes. Ensuring a robust communication channel with all stakeholders and being receptive to feedback can significantly aid in navigating this phase successfully.
So, now you know how to buy a business in the UK! Easy, right? The truth is, the journey of acquiring a business is long and tough, but ultimately rewarding. Each phase, from self-assessment to running the newly-acquired business, requires a blend of analytical acumen, operational insight, strategic foresight and agility. The essence of a successful acquisition lies in meticulous preparation, thorough due diligence, fair valuation, good communication and a well-orchestrated transition plan. While the process may seem daunting, with the right opportunities, resources, guidance, and a well-thought-out plan, it can be navigated successfully.