How to purchase a business – An accountant’s guide

If you’re looking to expand your business, one way to do so is through acquisition of another firm.

The specifics of this will look different for all companies and industries, but there are common threads of advice and best practice which can be followed across all deals of this nature.

Do your financial due diligence

Before moving forward, you need to do thorough background research to find out whether the business you are considering purchasing will be the correct fit within your own organisation. This is known as due diligence. A major factor in finding a company that will fit with your existing organisations is through financial due diligence element.

Look at the accounts of the business to help guide you on what value is potentially in it. Accounts on public record are unlikely to give you the level of detail you’ll require to make an informed judgement, so communicate with the selling business to arrange the process of signing a non-disclosure agreement (NDA) to enable you to access more information.

Once an NDA has been agreed, the selling business can confidently disclose far more detailed financial information to you to support your research.

It’s important to ask a lot of questions throughout this process – so don’t be afraid to raise a query, however major or minor you think it may be. Equally, remember that the process is a negotiation and, if you’re not satisfied with the information you uncover, you are entitled to walk away from the deal at any time if you don’t feel that it’s right for you and your business.

What is due diligence in business acquisition?

For a business to go on the market, a lot of preparation should be done in advance. Anyone looking to sell a company should have three to five years of financial details such as turnover, profitability and the EBITDA (earnings before interest, tax, depreciation and amortisation) valuation of the business ready to share.

I would expect to see projections of cash flow forecasts to demonstrate that it was a good prospect and therefore a good acquisition. If an NDA has been signed between the two parties, these details can be released to you as part of the sale negotiations.

It’s important to gather as much information as possible to help you make a decision as to whether it’s appropriate to offer the sum which the business is being priced at.

Gathering information will help you to assess what you believe the market value of the business is – making an offer which is too low could risk making the approach not look serious and may turn off the sellers. Likewise, information gathering will prevent you from making an offer which overvalues the company, because you will be equipped with more of the facts.

The purpose of an acquisition is ultimately to support growth, and so the key aim is to find out enough information for you and your advisors to assess whether the business you’re looking to buy will deliver the maximum return.

How to purchase a business

There are various ways of entering into negotiations to purchase a business. One way is that the owners of a business may be looking to sell, for whatever reason – it could be retirement, they may be an entrepreneur looking to move into a new sector, or it may be due to changes in health or lifestyle.

Whatever the reason, if a businessperson is motivated to sell, they may approach your business – particularly if you work in the same or a complementary field – to ask if you’re interested in acquiring the company.

Alternatively, if you’re looking to expand in the field which your business is in, you may seek out an acquisition to make that happen. This would involve approaching another business to ask its owners if they would be interested in selling to you.

Make the necessary financial arrangements

While much of the process of buying a business will depend as much on the company being sold as it will on you, one element of the transaction which you can prepare for is financing the deal.

How ever you are looking to finance the acquisition – be it from your own funds, from capital already within your business, or by seeking external funding – making sure that the finances are all in order means you can go into the negotiations in a good position, prepared and confident.

Seek out good legal and financial advisors

The process of purchasing a business is, by necessity, a detailed one, and so it’s important to get advice from a trusted corporate lawyer and accountants/business advisers who truly understand the needs of you and your business.

As experienced accountants for SMEs, we’re here to help

At Prime Accountants Group, we work with businesses in various sectors who are based across the UK to help them execute their growth strategies through business acquisition. Speak to us for expert advice on your acquisition plans.