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Buying an established business which has potential to grow can sometimes be easier than getting your own start-up off the ground. It’s not always a straightforward process though, so there’s lots to consider if you do decide to buy a business. In this article we’ll run through some of the basics.

What is the business worth?

While the seller is very likely to have had their business valued already, it’s essential that you conduct your own investigation into the business’ value as a potential buyer.

The existing owners should be able to provide financial records which detail the company’s assets, turnover and profits, and will usually be able to give an indication of future potential. Carrying out further research of your own will help you understand its value in the marketplace too. For example, does it have 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 with experience in valuing businesses, to help you make a sound decision on how much to offer.

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Who else is involved in the business?

If the business you’re thinking of buying is a limited company, then typically, 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.

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. This letter should 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.

Selling patents and intellectual property

When there’s the matter of patents and intellectual property, things get a bit more complicated. 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.

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 to chat to the team, and get an instant online quote.

About The Author

Lisa Hinton-Hill

I've worked in the accountancy sector for more than 15 years, and have extensive experience supporting sole traders, partnerships, and SME's. Learn more about Lisa.

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