A guide to buying a business successfully

At the time of writing, over 57,000 businesses were listed for sale on one of the UK’s largest marketplace – roughly 1% of the UK’s 5.5 million active SMEs. 

Buying a business is one of the biggest decisions you’ll make as an entrepreneur. It’s a chance to skip the start up phase, take over an established operation and hit the ground running. Unlike starting your own business from scratch, you’ll have existing customers, cash flow and operations in place.

But if you haven’t bought a business before (that’s most of us!) the process could feel a little daunting. How do you find the right business for you? What funding options are available to finance the purchase? And how do you conduct due diligence and avoid costly mistakes?

In this article, we’ll walk you through each step, from weighing up the pros and cons to closing the deal and setting yourself up for success.

Why buy a business rather than start your own?

If you don’t have the time or resources to start from scratch, buying a business lets you take ownership of an operation that’s already up and running. You’ll pay a higher upfront cost for the privilege, but could inherit established revenue, loyal customers, and proven systems that will allow you to focus on growth rather than survival.

Starting your own business, on the other hand, gives you the freedom to build something entirely your own. You’ll need to invest time and resources into developing your offering and attracting customers, but you’ll be able to shape the business to your vision and values from day one.

For many, the speed and stability of buying an existing business outweigh the challenges. But it’s not the right choice for everyone. If you’re drawn to the idea of building something from the ground up, starting your own business might be more fulfilling. But if you want to hit the ground running with proven systems and existing cash flow, acquiring a business could be the faster route to success.

What are the benefits and risks of buying a business?

Benefits of buying a business

• Established revenue: You could start earning from day one, rather than needing to build revenue from scratch

• Existing customer base: There’s no need to start from zero, since you���ll already have customers who know and trust the business

• Proven operations: Processes, supply chains and operations will already be in place, so you can hit the ground running

• Potentially easier financing: Banks and lenders are typically more likely to back a business with a proven track record than a brand-new start up

• Established reputation: You’ll inherit the goodwill and brand recognition the business has already built

• Faster growth: With existing customers, assets and market share, you should be able to scale the business faster than starting alone

Risks of buying a business

• Hidden liabilities: You might discover undisclosed debts, legal issues, or pending disputes after buying the business

• Overpaying: If you don’t value the business carefully, you could risk overpaying for what the business is actually worth

• Cultural clashes: Integrating teams and adjusting values or working styles can be challenging

• Market changes: Changes in the industry or new competitors could affect the business’s future success

• Due diligence gaps: Overlooking issues in the financials, contracts, or operations could lead to unexpected costs later on

How to buy a business in 6 steps

The process of buying an established business typically takes 3-6 months. But this will depend on the complexity of the deal and how quickly you complete the due diligence.

Here’s how the process works:

Step 1: Check that you’re ready to buy a business

Before you start looking for opportunities, take an honest look at your skills, budget and goals. Ask yourself:

• What type of business fits my experience and lifestyle? A retail shop, a service business, or a tech start up will demand different skills and commitments

• How much can I afford? Consider not just the purchase price, but also working capital, professional fees and potential improvements

• What are my long-term goals? Are you looking for a steady income, rapid growth, or a new challenge?

If this is your first business venture, or you have very limited experience, you might prefer to focus on smaller, more affordable opportunities. If you’re more experienced, you may have the knowledge and resources to take on a larger business.

Either way, clarity at this stage will save you time and help you spot the right opportunity when it comes along.

Step 2: Find the right business

To find the right business for your goals and circumstances, you can start by identifying the type of business you want to buy. Online marketplaces like BusinessesForSale or Rightbiz offer thousands of potential options and working with a broker who specialises in your sector could be helpful. If you already have a particular business in mind, you could also approach the owner directly – some may be open to selling even if they’re not actively advertising.

When evaluating opportunities, it’s important to look beyond the financials. You’ll want to consider:

• Business culture: Does the business’s values, work environment and management style fit with your own? Will you be able to keep hold of key staff and maintain morale?

• Customer base: Is the customer base loyal and diverse, or reliant on a few big clients? Are there opportunities to grow or expand the audience?

• Reason for sale: Is the owner retiring, moving on to another venture, or facing challenges? Be cautious if the reason seems unclear or evasive

• Location and logistics: Is the business in a convenient or strategic location? Are there any lease, property, or supply chain issues to consider?

• Competition: How does the business stand out in its market? Are there threats from competitors or new entrants?

• Growth potential: Are there untapped opportunities, such as new products, services, or markets?

Watch out for red flags such as unclear financial records, high staff turnover, or a seller who’s reluctant to share details. And don’t rush your decision. The right business should align with your skills, budget and goals.

Step 3: Value the business

Valuing a business can be complex and there are different ways to figure it out. Numbers are important, with revenue, profit and assets providing a good starting point. But you’ll also want to consider intangibles like brand reputation, customer loyalty and intellectual property. A business that has a loyal customer base could be worth more than the bottom-line numbers suggest.

Common valuation methods include:

• Multiples of earnings: This method looks at annual profit and applies a multiplier, usually between 2-5 times, depending on the industry and the business’s growth potential. For example, a tech start up with high growth potential might be valued at 5x its annual profit, while a well-established retail business could be valued at 3x its profit

• Asset valuation: Here, you calculate the total worth of both physical assets (eg equipment or property) and intangible ones (eg patents or trademarks)

• Discounted cash flow: This approach forecasts future earnings and adjusts them to reflect their value in today’s terms. This can give you a clearer picture of what the business is worth now. For example, if a business is expected to generate £1 million in profit annually over the next five years, you’d calculate the present value of those earnings, accounting for factors like inflation and risk

If you’re new to this, it’s worth hiring an accountant or valuation expert who can help you avoid overpaying and structure a fair deal.

For funding options tailored to your stage, use Tide’s Business Loan Calculator to estimate costs.

Step 4: Secure suitable funding

Once you’ve valued the business, you’ll need to secure funding. In many cases, the amount needed to acquire the business will be substantial and require external financing. In some cases, you may also simply prefer to spread the cost rather than use your existing cash reserves.

The type of funding you need will depend on your business stage and creditworthiness.

• Invoice finance: With this option, you unlock cash tied up in unpaid invoices, boosting your immediate cash flow without taking on long-term debt

• Asset based lending: This lets you borrow against assets like equipment, property, or inventory

• Business loans: These fixed-term loans are best suited for established businesses with steady cash flow

• Personal savings or investor funding: If you have your own capital or financial backers, this route can give you more flexibility

If you find your options are limited by a poor credit history, consider focusing on building it back up before moving forward, using a tool like Tide’s Credit Score Insights.

Step 5: Do your due diligence

Due diligence is your chance to verify everything you’ve been told about the business. It typically covers:

• Financials: Take a close look at at least three years’ worth of accounts, tax records and cash flow statements to get a clear picture of the business’s financial health

• Legal: Review all contracts, leases and any ongoing disputes to avoid unexpected liabilities

• Commercial: Assess customer contracts, supplier relationships and the business’s position in the market to understand its stability and growth potential

• People: Get to know the team by examining staff contracts, assessing morale and identifying key personnel who drive the business forward

• Technology and systems: Assess the IT infrastructure, software licences and security measures

• Property and assets: Inspect physical assets (eg equipment and premises) for condition and ownership

• Reputation: Look at online reviews, customer feedback and social media presence to understand how the business is perceived

• Environmental and sustainability: Check for compliance with environmental regulations or potential risks (eg waste disposal and energy efficiency)

Although there’s a lot to do at this stage, it’s incredibly important not to overlook it. Skipping due diligence is one of the biggest mistakes a buyer can make, given that it can lead to costly surprises down the line.

Step 6: Negotiation, completion and post-acquisition

Once you’re sure you want to buy the business, it’s time to make an offer. You’ll need to work with a solicitor to draft ‘heads of terms’, which outlines the price, payment structure and any conditions (eg a transition period with the seller).

After agreeing on terms, you’ll sign contracts and complete the purchase (congratulations!). But the work doesn’t stop there. If you’re taking over an existing team, one of your first challenges will be to retain their trust and motivation. A well-planned handover can make all the difference.

You can plan for a smooth transition by:

• Communicating clearly with staff and customers: Be transparent about changes and reassure them about the business’s future

• Managing cash flow carefully in the early months: Pay close attention to expenses, revenue and working capital to avoid any surprises

• Setting clear goals for growth: Define short-term and long-term objectives to keep the business on track

• Retaining key employees: Identify and incentivise top performers to stay during the transition

• Reviewing and updating contracts: Check supplier, customer and employment agreements to make sure they align with your plans

• Building relationships with key stakeholders: Meet with suppliers and major customers to maintain trust

• Planning for a handover period: If possible, overlap with the previous owner to transfer knowledge and introductions

Wrapping up

Buying a business is a major endeavour, but it’s also just the beginning of your journey. With the right preparation, funding and support, you can turn the acquisition into a future success.

Here’s a reminder of what to consider when buying a business:

• Start with your own goals: Think about what you really want – whether it’s stability, growth, or a fresh challenge – and make sure the business fits your skills, budget and lifestyle

• Take your time finding the right match: Look for a business that feels like a natural fit, with a solid customer base and real potential. Trust your instincts if something doesn’t add up

• Get a fair sense of its worth: Valuing a business involves more than looking at the numbers. You’ll also need to consider reputation, customer loyalty and future opportunities. If in doubt, you can bring in an expert to help

• Sort out the finances early: Figure out how you’ll fund the purchase – this could be through loans, savings, or investors – and leave room for unexpected costs along the way

• Ask the tough questions: Due diligence might not be the most exciting part, but it’s your chance to spot any hidden issues (eg financial, legal, or operational) before you commit

• Make the transition as smooth as possible: Try to keep the team motivated, reassure customers and use the handover period to learn the ropes from the previous owner

• Don’t go it alone: A good accountant or solicitor can save you from headaches later, helping you spot risks and navigate the process with confidence

Ready to explore your acquisition financing options? Compare Tide’s business loans to find the right fit for your business.

FAQs

What’s the difference between a share purchase and an asset purchase?

A share purchase means you buy the entire company, including all assets and liabilities. An asset purchase lets you choose the specific assets you want to include in the purchase, leaving unwanted liabilities with the seller.

How long does it take to buy a business?

The timeline for buying a business is usually 3-6 months, but simpler deals can move faster while more complex acquisitions may take longer. The speed often depends on how quickly you gather information, negotiate terms, and finalise due diligence.

Can I buy a business with no experience?

You can, but lenders and sellers usually prefer buyers with some experience in the industry the business they’re buying is in. If you don’t have experience, consider businesses with strong management in place or bring in an advisor to fill the gap.

How can I build my creditworthiness to access better funding?

You can use tools like Tide’s Credit Score Insights to track and improve your score. A revolving credit facility and business credit cards could also help.

What’s the best funding option for a business at my stage?

If you’re new, revenue-based financing may work well. Established businesses can explore term loans or asset finance.

How do I access larger funding amounts for bigger acquisitions?

For bigger deals, consider combining loans, investor funding, or vendor financing. Tide’s business loans can connect you to a range of lenders.

What are the tax implications of buying a business?

You may need to pay Stamp Duty on the purchase and ongoing taxes will depend on the business structure. Always consult an accountant.

How do I integrate an acquired business smoothly?

Focus on clear communication, retaining key staff and aligning systems. A detailed transition plan will help.

Do I need a business plan to buy a business?

Yes. Lenders and investors will want to see how you’ll grow the business after you buy it. A solid plan will also keep you focused.

Photo by Gabrielle Henderson on Unsplash