What You Should Know About Buying a Business

Buying an existing business means you’re taking on a company that already has customers, revenue, and a track record – which can be a faster route to ownership than starting from scratch.

But it also means taking on someone else’s decisions, debts and problems, so it pays to know exactly what you’re getting into before you sign anything. This guide covers what to check, what to ask, and when to bring in professional help.

What is the business worth?

The seller is very likely to have had their business valued already, and should be able to provide financial records detailing the company’s assets, turnover, and profits.

These will usually give an indication of the company’s future potential, but it’s essential you conduct your own investigation as a potential buyer. There are lots of different things you might look at, such as its perceived value in the marketplace or whether it has a distinctive brand – and is that for a good reason or a bad one?

It’s a good idea to get the help of an expert who has experience in valuing businesses. They’ll often help you make a sound decision on how much to offer.

Why buy an existing business instead of starting up?

Buying an existing business gets you a working customer base, existing staff, and a track record from day one, but it usually costs more upfront and can come with inherited problems like old contracts, outdated systems or unhappy staff. Weighing these up before you commit is essential.

Every business you look at will have its own mix of upsides and downsides, but here’s what tends to come up again and again:

What’s in your favour

As we’ve discussed, there are lots of positives when buying an existing business, this includes:

• An existing customer base: You inherit revenue from day one, rather than building it up from nothing. Hopefully!
• A proven model: If the business has been trading profitably, that’s evidence the product or service works
• Staff who know the ropes: Existing employees are likely to have knowledge and relationships that would otherwise take you months to build
• Supplier relationships already in place: No cold-starting those negotiations yourself

What to watch for

Whilst there are many benefits, there are a few things to be aware of:

• The price: A healthy, established business will usually come at a premium
• Legacy issues: Old debts, ongoing disputes, or long-standing “we’ve always done it this way” habits
• Nervous staff and customers: People don’t love change, and a badly handled transition can undo a lot of the value you’re paying for

What questions should I ask the seller?

Before making an offer, ask why the business is being sold, whether it’s financially viable, who its customers are, how the asking price was calculated, and whether full financial records are available. Vague or evasive answers to any of these could be a warning sign.

A bit of straightforward questioning early on can save you a lot of pain later.

5 questions to ask before buying a business

Who else is involved in the business?

If the business you’re thinking of buying is a limited company then the owner(s) will have their own shares to sell, but there may also be other shareholders in the picture. What happens when a new owner buys out the majority of a business?

It’s essential to understand exactly what you’re buying and how much of the business you will own. This could mean you have to buy out everyone’s shares if you want full control. There might also be different classes of shares in play, so go through the fine print carefully.

If the sale goes ahead, Companies House must be notified of the change in shareholder structure using an SH01 form.

Asset sale vs share sale – what’s the difference?

This matters because it changes what you’re legally taking on, particularly around staff:

• Share sale: The company continues to exist exactly as before, just under new ownership. Contracts, liabilities and employees carry over automatically because nothing about the legal entity has changed.
• Asset sale: You’re buying specific parts of the business (equipment, stock, customer contracts, the brand) rather than the company itself. This usually triggers TUPE – Transfer of Undertakings (Protection of Employment) – where eligible employees transfer to you automatically but under different legal obligations to the seller. It protects employees’ existing terms and conditions when they transfer to you.

Which structure you end up with is usually driven by tax and liability considerations as much as anything else, so this is a conversation to have with your accountant and solicitor together, not something to decide alone.

What does ‘due diligence’ mean when buying a business?

You’ve likely heard the phrase ‘do your due diligence’. It refers to the process of thoroughly checking a business’s finances, contracts, assets and liabilities before completing a purchase, so you know exactly what you’re buying. It typically happens after a price has been agreed in principle, and gives you the right to renegotiate or walk away if something doesn’t stack up.

Once you’ve agreed a price in principle, due diligence is where you properly kick the tyres. The seller should give you access to management accounts, contracts, supplier agreements and anything else relevant to how the business runs day to day.

It’s worth taking your time here – a few weeks is normal, and most sellers expect it. Things to look at closely:

• Outstanding invoices and who’s responsible for chasing them after the sale
• Any gaps, vagueness, or reluctance around sharing financial information
• Recent dips in takings or customer numbers, and whether revenue is too dependent on a small number of clients
• The condition of premises, tools or equipment
• Online reviews – often a more honest picture than the seller will give you
• Staff turnover and morale
• The business’s credit rating

If any of this throws up something serious, you’re still entitled to renegotiate the price, add conditions, or walk away entirely.

Letter of intent

A letter of intent is an important part of any business sale. It’s a formal agreement between a buyer and seller regarding their plans, intentions and terms of the business sale, so as such it tends to go into detail about what you as the buyer plan to do with the business.

It should also cover exactly what the seller is selling, and any conditions that need to be met before the sale can go through. This is so everyone has a clear picture of the deal laid out before agreeing to it.

These documents can be as varied as they need to be, covering anything from which assets will be sold as part of the deal, to whether or not VAT registration can be transferred to the new owner.

How do you finance buying a business?

Common ways to fund a business purchase include bank loans, seller financing (where the seller allows you to pay in instalments), asset-based lending, and, for larger deals – venture capital or private equity investment. Most buyers use a mix of these rather than relying on a single source.

• Bank loans: The most common route. You’ll typically need a solid business plan, personal guarantees, and a meaningful deposit
• Seller financing: The seller agrees to be paid over time rather than in one lump sum, which can make a deal more achievable without a big bank loan. It will probably lead to other negotiations around who owns or manages what part of the business until the payments are complete.
• Asset-based lending: Borrowing against the value of the business’s existing assets, such as equipment or property
• Venture capital or private equity: Usually only relevant for larger acquisitions, and typically means giving up a share of ownership and control in exchange for funding

Whichever route you’re considering, it’s worth speaking to an accountant early because the way you finance the purchase can affect your tax position for years afterwards.

Buying patents and intellectual property

Things can sometimes get a bit more complicated when patents and intellectual property are involved. You could decide to buy a patent, or simply buy the license to use the inventions in question. Buying it outright might be the simplest option, but it still comes with its fair share of paperwork (and cost).

Licensing is more of an ongoing process which many sellers prefer as it’s a constant stream of income for them. In this case, the patent owner will earn royalty payments on future sales involved with the patent.

What are the tax implications of buying a business?

Buying a business can trigger several tax considerations, including Stamp Duty Land Tax on any property involved, VAT treatment of the sale, and how you claim capital allowances on assets you acquire. The tax treatment often differs depending on whether it’s structured as an asset sale or a share sale.

This is one area where it really pays to get advice before you exchange anything, rather than after. A few things worth flagging to your accountant early:

• Whether Stamp Duty Land Tax applies, if property is part of the deal
• Whether the sale can be treated as a Transfer of a Going Concern (TOGC) for VAT purposes, which can mean VAT doesn’t need to be charged on the sale
• What capital allowances you can claim on any equipment or assets included in the deal
• How the deal structure (asset vs share sale) affects your ongoing Corporation Tax position

Getting this wrong isn’t just costly – it can be difficult to unpick after the deal’s gone through, so it’s worth building tax advice into your due diligence rather than treating it as an afterthought.

Hire a professional to help

When it comes to selling or buying a business, it’s tempting to forgo all the formal paperwork to save money and time, but this might backfire if you’re not entirely sure of every single detail involved.

There’s so much that can go wrong in a business sale, especially as these could turn into issues which grumble on for years. Get everything written up with legal guidance when it comes to shares, patents and business values.

Learn more about our online accounting services for businesses. Call 020 3355 4047, or get an instant online quote.