Buying an existing business in the UK: choosing it, due diligence and the sale agreement

Thinking of going into business? One in five businesses in the UK fail within their first year, so buying an existing, successful business can be a better bet than starting from scratch. The process has three main steps: choose the right business, carry out due diligence, and sign a sale and purchase agreement that protects you. Here is what each step involves.

How to choose the right business to buy

The first step is identifying which business you actually want to buy. Four things are worth weighing up at this stage:

• Your own skills. A business you understand, or can learn quickly, is easier to run and easier to grow than one that relies on expertise you do not have.
• Growth potential. Is there room for the business to expand, or has it already reached its ceiling?
• Financial performance. Look at how the business is actually trading, not just what the seller tells you about its prospects.
• Location. Where the business operates matters both for its customers and for how practical it is for you to run day to day.

None of these on its own decides the question. The aim is to find a business where your skills, its prospects and its current numbers line up, rather than one that simply happens to be for sale.

Due diligence when buying a business

Once you have identified a business, the second step is due diligence. Due diligence is the process by which a buyer carries out an in-depth investigation of the target business to identify any risks or red flags before committing to the purchase.

In short, due diligence lets you do three things: gain clarity about what you are buying, manage the risks that come with it, and negotiate the sale price using what you find. If the investigation turns up problems, you can either walk away or use those problems to justify paying less. If it turns up nothing serious, you proceed with far more confidence than the seller's sales pitch alone could give you.

The importance of due diligence should not be overlooked. In my experience it is the stage where most of the avoidable mistakes in a business purchase either get caught or get missed. Enlisting an experienced M&A lawyer to help with it should be a top priority for anyone looking to buy an existing business.

Sale and purchase agreement and warranties

Say you have found the right business and completed your due diligence. The third step is signing the sale and purchase agreement.

The sale and purchase agreement is the document that records the deal. It transfers either the shares in the company or the assets of the business from the seller to you as the buyer, depending on how the purchase is structured.

Within that agreement, it is very important to include warranties that protect your interests as the buyer. Warranties are contractual promises from the seller about the state of the business, and they give you a route to compensation if what you were told turns out to be untrue. A sale agreement without proper warranties leaves you carrying the risk of everything you did not find during due diligence.

Next steps

If you are buying a business for the first time, work through the three steps in order: be clear about why this business suits you, investigate it thoroughly, and only then negotiate the agreement. Speak to a corporate solicitor before you commit to anything in writing, so that the due diligence and the warranties in the sale and purchase agreement are handled properly.