Small Business Buying Guide: Meet Buyer Needs & Speed Up Sales

DAVID FAČKO

12 min

·

February 6, 2024

If you’re considering taking over the business by buying it outright, there are certain key elements you need to know about. What important factors go into buying a business and how do you make sure your potential business ticks all of your boxes? Are there any special requirements you have to consider? We’ll outline all of this and more below.

What Buyers Look for in a Business?

Buying a business for dummies. Sounds almost insulting, right? However, it’s actually just business selling 101. It’s the bare basics that potential buyers look for when they evaluate a business before they table an offer. Making sure your business hits all of these points can make it seem more alluring to potential buyers, and they’re more like to approach you with an offer. The most important things to know when buying a business include: 

1. The Current Owner is Replaceable 

Take a look at your business. If something were to happen to you and you couldn’t work anymore, how would your business do? Would it collapse or survive? Some businesses are so reliant on the current owner that they couldn’t do well if they were to leave. From a buyer’s point of view, this is a huge red flag.

If they see that your business is entirely dependent on you or a few key employees to survive and profit, they may pass. Make sure that your business can do well without you at the help. 

Building business processes with the focus on your replaceability is one of the key pillars of a healthy business, whether it’s a small business or a growing business, that every buyer will look for.

How to buy a business

2. The business has no Indicators for Collapse and is Profitable 

Market conditions can change instantly, and even a business that was thriving can quickly turn into a money pit. If your profits and revenue are on a constant downward slide and you have huge debts attached to your business that you can’t pay back with your cash flow, don’t expect people to jump in and buy it.

Keep your business in good financial health, and keep a well-documented trail that shows your business’s sustained success. This will draw many more buyers to your business while things are on the up and up. Monitor best financial KPIs to stay a step ahead.

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3. There is a Strong Company Brand 

If your business is drowning under a bad reputation and it’s been too damaged by a business crisis or poor service, it may be drifting dangerously close to unsellable territory.

Some buyers are willing to purchase a damaged or troubled company, but there comes a point when even the bravest buyers won’t touch it. Ensure that you have a strong business brand within your industry and community. Not only does this make your company more appealing, but it also gives you leverage during negotiations. Strong businesses were always more attractive for companies looking at buying a business.

4. Safe Future Revenue 

Buyers don’t like uncertainty, especially with a larger investment like a standing business. For example, if half of your revenue comes from a single customer, expect buyers to be wary. If they were to buy a company and that person leaves and takes their business with them, they’d sink.

If every contract you have with your customers includes a termination notice of just a few days, your revenue can vanish inside of a week.

Buyers want to see a business that has a recurring revenue model. In this model, you lock revenue streams in for the future, and there is a minimised chance of customer terminations putting your business’ revenue in the red.

5. No Hidden Problems 

Buyers want businesses with clean reputations and no nasty surprises. Things like chaotic financials and legal liabilities can quickly turn would-be buyers away. If you are to sell your business, you cannot have hidden skeletons like this in your company, and you have to be able to prove this to any buyer that shows interest.

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8 Crucial Steps to Consider When Buying a Business

Purchasing a business is a significant decision that requires careful planning and consideration. Here’s a detailed guide outlining the key steps involved in buying a business:

1. Self-Assessment

  • Identify your interests: Understand what type of business aligns with your passions and skills.
  • Evaluate your financial capacity: Assess how much you can afford to invest and how you will finance the purchase.

2. Market Research

  • Industry analysis: Research the industry to identify trends, challenges, and opportunities.
  • Business search: Look for businesses that are for sale within your desired industry and location.

3. Initial Evaluation

4. Due Diligence

  • Financial due diligence: Conduct a thorough review of all financial records with the help of an accountant.
  • Legal due diligence: Engage a solicitor to examine legal documents, contracts, licenses, and any pending litigations.
  • Operational due diligence: Inspect the physical assets, review employee contracts, and understand the business processes.

steps in buying a business

5. Valuation

  • Determine the value: Use various methods like earnings multiples, discounted cash flow analysis, or asset-based valuation to estimate the business’s worth.
  • Negotiate the price: Based on the valuation, negotiate a fair price with the seller.

6. Financing the Purchase

  • Explore financing options: Consider loans, investor funding, or seller financing to fund the purchase.
  • Secure the funds: Obtain the necessary financing in line with the agreed terms.

7. Closing the Deal

  • Finalize the agreement: Draft and review the purchase agreement with your legal advisor to ensure all terms are correctly captured.
  • Transfer of ownership: Complete the legal formalities to transfer the business ownership, including any licenses and permits.

8. Transition and Integration

  • Plan for transition: Work with the seller for a smooth handover, ensuring you understand all aspects of the business.
  • Implement your vision: Gradually introduce changes to align the business with your strategic goals while maintaining stability.

By following these steps and seeking the right professional advice, you can navigate the complexities of buying a business and set the foundation for future success.

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How to Evaluate the Saleability of your Business?

Part of buying a business is the ability to evaluate its saleability. Consider this when it comes to selling. There are a host of both good and bad attributes that influence whether or not you’ll be able to sell your business for a premium price or not. Your job is to get rid of any negatives and build up your positives. In order to do this, you need to look over every aspect of your business from a buyer’s perspective. The key areas you have to take a good hard look at include: 

  1. Customers – Any potential buyer you have is going to look at your customers, and they want to see a loyal and established customer base that will stick with the business after you sell it. The greater your ability is to demonstrate that you have a loyal and large customer base, the more appealing your company is to any buyer who looks at it. 
  2. Employees – Your employees make up your business’ backbone. Can a buyer trust your staff, and are they experienced enough to provide business continuity after you sell? Are your key players under a contract that ensure they stay with the business for a set period after it changes ownership? If not, this could impact your ability to sell. 
  3. Market Position – A strong company is very well differentiated in your direct market. This business offers services and products that are different from those of the competition, and they enjoy a very strong position in the market as a result. Buyers will look hard at your company’s operational processes and products to gauge the business’ ability to hang on to the current market position after the sale.
  4. Net Worth – Financial stability is critical to buyers. The best buyers want to see that a business’ assets are higher than its liabilities, and they also want assurances that future business revenue will be able to cover any financial obligations the business may have moving forward.
  5. Profitability – One of the first things any prospective buyer wants to know is whether or not your business is turning a profit. They want to see a healthy bottom line, and they also want to see an upward growth trend that showcases increasing revenue over multiple years. You should have a realistic financial projections for the next few years on hand.

things to know when buying a business

Things a Buyer May Ask About Taking Over Your Business

Ideally, you should have a legal team helping you through the process, as they can give you valuable insight into the buyer’s mind. They help you understand the key things to know when you’re buying or selling a business. Buyers will most likely want to know about: 

– Taxes and Payroll Taxes 

If someone buys your business, the ATO can then come after the buyer if they find out you owed sales taxes, had issues with payroll or owed other business taxes. It’s essential that you can prove that you’re up to date with your employment tax payments, especially if you have other employees and you’re using a payroll service. The buyer may also request that the ATO issue a clearance letter for your business that states that you are currently caught up and clear on your taxes. It can take a  few weeks to get this letter. 

– Accounts Receivable 

At your closing date, there is a good chance that some of your clients will still owe the business money. Who is responsible for collecting these overdue payments and unpaid invoices? The first option is to allow the buyers of the business to purchase the accounts at closing, with a discount to protect against the possibility of non-payment, or you can collect them yourself whenever you’d like.

Many buyers will choose to simply include your accounts receivable in the original purchase because this gives the buyer a better chance to negotiate if the late-paying customer wants additional products or services after the sale closes. 

Following this approach, sending late payment reminder emails becomes a strategic tool for maintaining positive cash flow and leveraging negotiations with clients post-sale.

– Your Lease 

Do you own or lease the property in which you have your business? If you lease, the buyer may ask you how much time you have left on the lease term. They’ll also have to find out if your current landlord will allow them to assume your lease “as is” without a rent increase. If the lease has less than two years left to run, the seller may want to negotiate a new lease with a 5 or 10-year run.

They may also ask about your security deposit, because they’ll most likely want to buy this along with the agreed-on price for the assets. If you want to include the security deposit in the final purchase price, make sure you put this in writing. 

– Prepaid Expenses 

Do you have any prepaid expenses your buyer will want to know about? Maybe you bought a years’ worth of advertising in the local paper, and you’d like the seller to reimburse you the cost left over when you sell. Most prepaid expenses aren’t a part of your security deposit, and you usually don’t include them in the sale price. However, you would usually add them on at closing.

The buyer may request a list of closing adjustments, and these are anything that you have prepaid that the buyer will have to pro rate in order to budget for them. This ensures that there are no nasty surprises all round.

– Indemnity

Even if the buyer has gone over all of your books with a fine-toothed comb, most buyers will request an indemnity so they don’t get sued for something you did or forgot to do before you sold. An indemnity is a document that promises your buyer that will you defend the lawsuit and pay all fees and judgements if required. The buyer should also have an indemnity for you that promises the same thing if a lawsuit were to arise as a result of their own actions, or their inactions, as the case may be.

– Employees 

You most likely have one or two key employees, or possibly more, and the buyer should get to know them. Ideally, these employees will stick around after you sell your business. These are the people who see your customers on a day to day basis, run all of the machinery, and know all of the ins and outs of the organisation and how it operates. Your buyer should have a chance to meet your key employees before the sale, but you don’t necessarily have to announce you’re selling until two or three days before closing.

The buyer may ask to add a provision that states they can walk away from the entire deal if they’re not 100% satisfied that your key employees will stay with the business long enough to allow the seller to learn from them. You may have already included this in your employee contracts, and you can show this documentation to the buyer as a form of proof.

What to know when buying a business. Employees stick with selling company

How Can Billdu Assist with Your Financial Management?

Hopefully our guide to buying a small business for dummies, and the implications this has for the seller, has given you some insight into what to expect during the process.

Most of the information contained in this guide has direct ties to your business’s financial records. This is because the buyer will want to see proof that your business is doing well and that it has steady growth.

Billdu simplifies this process by helping you to directly prove the financial health of your business to the buyer. Billdu handles this by allowing you to track all of your income electronically, so you have a solid record of all transactions and balances. The solution is a cloud-based software that gives you complete control over your business finances. When you track everything electronically, this allows you to see growth patterns very quickly and easily, and you can use this information for your own purposes or to help with the sale.

Additionally, you can use the information you get from Billdu to create sales projections extending far into the future, and you can show these to your potential buyers. This shows your business in the right light, proving that it is a well organised and stable investment, and buyers are more likely to take you seriously as a result. Billdu also allows you to track and print individual or batch income documents, so you have these all ready to go when you meet with your buyer.

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Frequently asked questions

How to buy a business in the UK?

To buy a business in the UK, start by conducting thorough research to identify potential businesses that align with your interests and goals.

Next, engage in due diligence to assess the business's financial health, legal standing, and market position. Consider consulting with professionals like accountants, solicitors, and business brokers for expert advice.

Once you've selected a business, negotiate the terms and price, and proceed with legal documentation to finalize the purchase. Ensure you understand the regulatory requirements and obtain any necessary approvals or licenses before completing the transaction.

What are the pros and cons of buying a business?

When you are considering about buying a business, it's important to weigh both the advantages and disadvantages to make an informed decision. Here's a concise overview:

Pros:

  • Established Operations: The business already has a customer base, suppliers, and operational processes in place.
  • Immediate Cash Flow: Unlike startups, an existing business may generate revenue from day one.
  • Easier Financing: Banks and investors might be more willing to finance a business with a proven track record.
  • Less Risk: There's often less risk compared to starting a new business from scratch.

Cons:

  • Upfront Costs: Buying a business can require a significant initial investment.
  • Inherited Problems: You may inherit existing issues within the business, such as poor staff morale or outdated systems.
  • Integration Challenges: Blending the acquired business with your vision and practices can be complex.
  • Market Dynamics: The business’s current success doesn’t guarantee future profitability in changing market conditions.
 
 
 
What is Due diligence when buying business?

Due diligence in the context of buying a business refers to the comprehensive and systematic investigation or audit of a business that a potential buyer undertakes before signing a contract. This process is crucial for assessing the operational, financial, legal, and strategic position of the business in question.

It involves reviewing financial records, legal documents, contracts, compliance with regulations, employment agreements, asset inventories, and any other material facts that could affect the value of the business or the decision to proceed with the purchase. The goal of due diligence is to confirm the accuracy of the seller's information, identify potential risks and liabilities, and ensure that the buyer is making an informed decision.

Where do you find small businesses for sale?

Locating businesses for sale is a critical aspect of the acquisition process. To identify opportunities, prospective buyers can explore various avenues and resources. Here's a professional overview of where you can find businesses that are available for purchase:

  1. Business Brokers: Engaging with reputable business brokerage firms is a common method. These professionals specialize in connecting buyers with sellers and often have listings of businesses for sale.
  2. Online Business Marketplaces: Numerous online platforms, such as BizBuySell, BusinessForSale.com, and LoopNet, host listings of businesses across various industries and locations.
  3. Industry Publications: Industry-specific magazines, journals, and websites often feature classified ads for businesses for sale within their respective sectors.
  4. Networking: Attend industry events, conferences, and local business associations to network with potential sellers or individuals who have information about businesses on the market.
  5. Professional Advisors: Seek assistance from financial advisors, accountants, and attorneys who may have knowledge of businesses available for purchase.
  6. Social Media and Forums: Participate in online forums, social media groups, and communities related to entrepreneurship and business acquisition. These platforms can provide leads and insights.
  7. Business Associations: Explore memberships in business associations relevant to your industry, as they often have resources and connections to businesses for sale.
  8. Local Newspapers and Classifieds: Traditional sources like local newspapers and classified advertisements may still feature businesses for sale, especially in smaller markets.
  9. Real Estate Agents: In the case of businesses with physical properties, real estate agents may be aware of businesses available for sale with associated real estate.
  10. Direct Approaches: Identify businesses you are interested in and approach the owners directly, especially if you have a specific target in mind.

Remember to exercise due diligence when assessing potential businesses for sale, and seek professional guidance to ensure a smooth and successful acquisition process.

How to negotiate a better price when buying a business?

Negotiating a better price when buying a business involves thorough due diligence, demonstrating commitment, being prepared to walk away if necessary, using market research, emphasizing future potential, considering flexible payment structures, seeking professional advice, and maintaining open communication with the seller.

DAVID FAČKO

SEO Specialist at Billdu

David Fačko specializes in SEO and Content at Billdu, a highly-regarded invoicing software solution known for its efficiency in assisting freelancers and small businesses worldwide.

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