Buying a small business in the UK is an exciting opportunity to take control of your future. Whether you’re looking for financial independence, more career flexibility, or a way to grow your portfolio, knowing the ins and outs of the process is essential for success. In this guide, we’ll walk you through the pros, cons, and every step to help you make informed decisions. Let’s dive in!
What are the advantages of buying a small business?
Purchasing an existing small business comes with lots of benefits. Some of the main reasons people choose to invest in a small business include:
Established customer base
Unlike starting a business from scratch, buying an existing business gives you immediate access to a loyal customer base. It can often provide a steady income and a reasonable amount of cash flow from day one.
Proven business model
An established small business already has a working business model. The operational logistics have been set up and there are systems in place, reducing the trial-and-error phase that new start-ups often face.
Existing infrastructure
Acquiring a small business means inheriting assets like equipment, inventory and office space. Not only does this save time and money on setup costs, but it also often comes with an existing workforce.
Brand recognition
An existing business likely has brand awareness and a reputation in the market, which can give you a competitive edge. A small business can often have a strong brand image too, or a point of difference in the market.
Fewer historical issues
As the business is small, it may also be relatively new. This means processes and historical issues may be easier to change within the organisation. As a small business, there may also be more openness to change.
What are the disadvantages of buying a small business?
While buying a small business has many advantages, there are potential drawbacks to consider. Some of the most common include:
High upfront cost
Purchasing any business often requires a significant initial investment, especially if the business is already profitable or has valuable assets. If a business is doing well, there'll be a premium for it.
Limited control over legacy issues
You may inherit outdated systems, inefficient processes or a poor reputation that could take time and resources to improve. These historical problems can be big or small - think things like existing debts or high staff turnover to resolve.
Employee resistance
Employees accustomed to the previous owner’s leadership style may resist changes, potentially causing friction during the transition. There can often be an attitude of 'this is how we've always done things' that might need unpicking.
Regulatory compliance
Ensuring the business complies with all legal and regulatory requirements can be time-consuming and costly, especially in highly regulated industries.
Recap: Pros and cons of buying an existing business
Pros ✅ | Cons ❌ |
|---|---|
Loyal customers can provide income from day one | Significant upfront investment required |
Operations and systems are already in place | You may inherit outdated processes or debts |
Can include assets and a trained workforce | Employees may push back on change. |
Established reputation can offer an edge | Compliance can be time-consuming and costly |
Newer businesses are often more adaptable |
Step-by-step process of purchasing a business
Buying a small business is a significant investment and requires a methodical approach to ensure success. Below is a detailed guide that walks you through the essential steps in the process:
1. Find the right business
Start by defining what type of business aligns with your interests, skills, and financial goals. Some questions to ask yourself might be:
How much does the business cost?
How old is the business?
What industry is the business in?
How big is the business?
Where is the business located?
What is the growth potential?
What are your strengths and experiences as an investor?
2. Conduct preliminary due diligence
Due diligence is where a buyer assesses all elements of a business. It's like a fact-gathering process to work out a business' potential. Preliminary due diligence helps determine whether the business is worth further investigation.
As soon as you find an opportunity you're interested in, you can start to review publicly available information. You can also bring legal or financial advisors on board to help. Typically at this stage, you can ask the seller for things like:
Financial performance reports: These include profit and loss statements, balance sheets and cash flow data.
Customer and supplier relationships: Understanding these relationships will help assess the business’s stability.
Market position: Research the business’s reputation and its competitive standing within the industry.
3. Seek professional advice
At this point, you should start to engage professionals who can guide you through the process. Early professional involvement is crucial to avoiding costly mistakes later. Key advisors include:
Solicitors: A solicitor for buying a business can provide legal advice, draft agreements and ensure compliance with UK laws.
Accountants: They’ll review financial records, assess profitability, and highlight any financial risks.
4. Agree on a price
Once you’re satisfied with the initial information, you can start to negotiate the purchase price with the seller. To value a business, you can look at things like the history of a business, its current performance, future projections, why the business is being sold and any regulatory changes happening in the industry. You can also use methods like asset-based valuation, earnings multiples or market comparisons to arrive at a fair value.
💡Editor's tip: "The negotiation process is scarier than it sounds. My best advice is to put yourself in the seller's shoes. They want to be able to trust you, so do what you can to show them you're a credible buyer with transparent interests."
5. Draft a heads of terms
Heads of terms, also known as a memorandum of understanding, is a document that sets out the terms of a commercial transaction. It doesn't legally bind either party to the transaction, but it's evidence of serious intent. Think of it as a formal document of what's been agreed, like a shaking of hands between the two parties. The heads of terms will list things like the party's names, their solicitors, the sale price, assets included and a proposed completion date.
6. Perform detailed due diligence
Detailed due diligence is critical before committing to a purchase. This phase involves an in-depth examination of:
Financial health: This is where you examine the financial aspects of a business. You might want to look at company accounts and statements, annual reports, expense, debt, equity, VAT statements and projections for any future financial performance.
Legal status: This is where you evaluate the legal standing of the business. For example, the existing contracts it might have, insurance policies, ongoing legal disputes, regulatory compliance, and ownership clarity.
Business assets: Here you would review and assess the company assets you'd be taking on. This can be property, equipment, fixed assets, variable assets, as well as intellectual property rights.
Employees: Though often overlooked, examining employee data is essential. This might include employee contracts, organisational charts, experience of directors, benefits (like pension plans), staff churn and more.
Marketing: Finally, it can be worth looking at a business' marketing channels. More specifically, what the current marketing budget is, KPIs, customer perception and the previous success of campaigns.
7. Draft and sign the sales agreement
Once due diligence is complete, your solicitor will draft the first version of the sales agreement. This legally binding document outlines the terms of the transaction, including:
Purchase price and payment schedule: Details of how and when payments will be made.
Assets included in the sale: Clarify whether inventory, equipment and intellectual property are part of the deal.
Warranties and indemnities: Define the seller’s assurances about the business and provisions for resolving disputes.
Post-sale obligations: Specify any transitional support from the seller, such as training or customer introductions.
The first draft will usually be created by the seller. The buyer's solicitor can help to make amends and ensure it covers everyone's best interests. There can also be additional clauses that the buyer insists upon, like a restraint of trade clause.
💡Editor's insight: "A restraint of trade clause is where you restrict what the seller can do once they have sold the business. For example, the buyer likely won't want the seller to try and create a very similar business model in the near future. The clause can be tailored to the buyer's needs - it could also include things like banning the seller from trying to poach staff to leave the business."
8. Transfer ownership
Finalising the transaction involves transferring ownership. Once ownership is transferred, you officially take control of the business. Depending on the business structure, this may require:
Updating records at Companies House: For limited companies, ownership changes must be recorded.
Transfer of assets: Legal ownership of assets like property, vehicles, or intellectual property should be registered in your name.
Bank account changes: Switch operational accounts to your control and update signatory rights.
9. Transition and integration
A smooth transition ensures the continuity of business operations. Key steps include:
Communicating with employees: Introduce yourself as the new owner, outline any changes, and reassure them about their roles.
Engaging with customers and suppliers: Build relationships with existing stakeholders to maintain trust and stability.
Reviewing operations: Assess the business’s processes, identify areas for improvement, and implement any necessary changes.
How to finance buying an existing business
Buying a small business is an exciting opportunity, but it often requires significant financial planning. Understanding your financing options is essential to make a sound investment. Here's a quick guide on how to finance the purchase of a small business. When in doubt, always consult a dedicated accountant for tailored advice.
Personal savings
Using your personal savings is one of the simplest ways to finance a business purchase. This option avoids debt and interest but requires careful budgeting to ensure you don’t deplete your reserves.
Bank loans
Banks commonly offer loans specifically for business acquisitions. You'll need a solid business plan, proof of income and possibly collateral to secure a loan. Interest rates and repayment terms will vary depending on your credit history and the bank's policies.
Seller financing
In some cases, the current owner may allow you to pay for the business in instalments, often with added interest. This can ease the financial burden upfront, but you must negotiate favourable terms and ensure clear agreements.
Investor partnerships
You can seek financial backing from investors in exchange for equity or a share of profits. This option can provide the funds you need while bringing in valuable expertise and connections.
Government grants or loans
In the UK, government schemes like the Start Up Loans programme may offer low-interest financing for small business acquisitions. These schemes typically require a business plan and proof of viability.
Business credit
If the business has a strong credit history, you may leverage its existing credit lines or secure new ones to cover part of the purchase cost. Choosing the right financing option depends on your financial situation and the business's value. Consult with a financial advisor to ensure you select the best strategy for your goals.
FAQs
What are the seven steps in buying an existing business?
The seven key steps are:
Identify the right business to buy
Conduct initial research and due diligence
Engage professionals like solicitors and accountants
Negotiate and agree the purchase price
Conduct detailed due diligence
Draft and sign the agreement
Complete the transaction
Do I need a solicitor to buy a small business?
Yes, hiring a corporate solicitor is highly recommended when buying a small business. A solicitor can help to draft sales agreements, ensure legal compliance and negotiate terms.
Is buying an existing business a good idea?
Buying an existing business can be a good idea if the business aligns with your skills and financial goals. It offers immediate access to customers, revenue, and infrastructure, reducing the risks associated with starting a business from scratch. However, it’s essential to conduct thorough due diligence to ensure the business is a sound investment.
How do I value a small business in the UK?
Valuing a small business involves assessing its assets, liabilities, revenue, profitability, and market position. Common methods include:
Asset-based valuation: Calculating the value of the business’s assets minus liabilities.
Earnings-based valuation: Estimating the business’s worth based on its profit potential.
Market comparison: Comparing the business to similar ones recently sold in the market.
What are red flags to look for when buying a business?
Though most businesses are legitimate, not all will be as transparent. Here are some red flags to spot when purchasing a business.
Sellers who refuse to disclose finances
Declining customers or sales figure
Poorly maintained premises
Negative reviews from reputable sources like Trustpilot
Unhappy staff
Poor business credit ratings
Final thoughts
Buying a small business in the UK can be a rewarding venture. It can offer opportunities for financial growth and huge career satisfaction. However, the process also requires careful planning, thorough due diligence, and professional advice to ensure a successful transaction.
If you're looking to buy a business, we're here to help. Get in touch today for a free quote and see how our network of national solicitors can help.
References
Help to start-up from Gov.UK
Disclaimer: This article only provides general information and does not constitute professional advice. For any specific questions, consult a qualified accountant or business advisor. Bear in mind that tax rules can change and will differ based on your circumstances.