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10newsteps

Buying a business in 10 steps

Follow these strategic steps to a successful business acquisition.

By popular request, we've taken one of our most popular articles: 10 steps to buying a business and rejigged, clarified and simplified it for it for you.

The process of buying a business is often long and complex, but it can be straightforward if you cover all of your bases. 

So, let's take a look at BusinessesforSale.com's (simplified) 10 steps to buying a business!

1. Identify the industry you want to be in

Step one of business acquisition is defining the type of enterprise you're looking for.

This will begin with a general decision of which industry to move into. You’ll need to research the mid-to-long-term prospects of the sector before moving forward.

Pay specific attention to legal concerns, changes in regulations, and look at local competition within the industry.

Trade magazines and newsletters are a good start – they provide expert opinion on the prospects of your chosen business.

2. Target the business for acquisition

With broad marketplace knowledge now at your disposal, the next logical move is to target a suitable, specific business.

Have in mind an ideal budget, size, location and annual turnover and, most importantly - whether you feel you can make a success of it. Now to find one which matches these expectations. 

Think about businesses that are not actively seeking a buyer, as well as those advertised for sale. Every enterprise has its price, and tabling an unsolicited offer may convince the owners that the time is right to sell.

You will also beat competitive bidders to the negotiating room this way.

Don't promise a deal that you cannot deliver, simply to open negotiations. A professional broker can be instructed to begin talks discreetly on your behalf and help draw up mutually agreeable terms.

3. Research

Before you bring in the experts you can undertake a little investigating of your own.

Pose as a customer to experience the service first-hand, whilst also working with the company to look through its finances.

This position of trust and privilege cannot be abused, and you will most likely need to sign a confidentiality agreement before you can get access to sensitive company data.

4. Open negotiations

At this point in the acquisition, you will have a more detailed picture of both the target business and the industry within which it operates.

With your clearer understanding of its business activities, you can begin to talk directly to the current owners and work together to build a deal that will satisfy all parties.

One of the first points of negotiation will be price, after a preliminary valuation. At this point, you do not have to worry whether your initial offers are legally binding - they are not.

Spend time formulating a plan to work towards so that everyone is pulling in the same direction.

5. Evaluate the enterprise

The valuation stage of buying a business is perhaps the most vital to ensuring a successful purchase.

The approach you use will differ depending on the type of concern that you are buying. Assets will often make up the bulk of any valuation: value from property and real estate to machinery and equipment. 

However, whilst these can be relatively easy to appraise, you shouldn't overlook the importance of turnover, profitability, and ongoing contracts as a way of informing your offer.

A specialist accountant may be brought in, and they will often provide expertise within a certain field or industry that can help inform your offer.

6. The Heads of Agreement

The Heads of Agreement, though not a legally binding document, is nevertheless an important and useful stage in the negotiations process. It essentially condenses the key elements of a sale into a single document.

Payment, responsibilities, periods of confidentiality will all be set down in the heads of agreement at a point in the negotiations when each party is still free to walk away from the proceedings.

Most importantly, the Heads of Agreement will act as a timetable towards completion: explaining to each party the time-scale and deadlines for every step of the deal, from financing to the release of payments.

7. Due diligence

By this point in the buying process, you will be intimately familiar with all aspects of the sale and you should have a detailed understanding of how the rest of the process should unfold.

Having already undertaken your own, informal due diligence in the early stages of the purchase, you can now look to bring in the professionals, who will offer a more thorough analysis of the target business' accounts, practices and day-to-day operations.

Although you don’t want to take risks by cutting costs at this important stage, remember to stay in budget and keep your outgoings to a sensible ratio of the overall purchase: you do not want to be spending tens of thousands on accountants and lawyers for a firm worth only a hundred thousand.

8. The Sale and Purchase Agreement

The completion of your sale and purchase agreement will mark the closing stage of the acquisition process.

Whereas the Heads of Agreement sets out in broad, non-legally binding terms an overview of the purchase, your Sale and Purchase agreement will give both parties their legal obligations for the sale.

9. Pay

You will have a different set of options for paying for your new acquisition, depending on the size and scale of your purchase.

A larger merger of multinational interests may involve complex financing from multiple sources. For a smaller scale buy-out, the most common method is a straightforward payment on completion agreement.

Financing can come from private means, angel investors, banks, loans companies, or peer-to-peer lending platforms.

Sometimes, the current owners may relinquish full control of their business at sale, but take only a percentage of the full value on completion, in return for ongoing shares in company profits.

10. Completion

With the final documents completed, contracts signed and payment agreement in place, you have completed your newest business acquisition.

Although this ten step process may at times seem slow and the workload insurmountable, everything will fall into place with time. Even the hardest negotiations can find a positive resolution.

Congratulations: the business is yours!

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Melanie Luff

About the author

Melanie Luff is an in-house journalist and writes for all titles in the Dynamis stable including BusinessesForSale.com, FranchiseSales.com and PropertySales.com as well as other industry publications.

@Be_TheBoss

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