Buying a business versus buying a house: What first-time business buyers need to know

Buying a business can be a complicated affair. There are ways of making it simpler, but first-time buyers need to be aware that this isn't like buying a property; there are many more factors to take into account.

It is inevitable that there will be holdups, conflicts and frustrations along the path to almost any acquisition. Questions like 'why is the process taking so long?', 'why are my advances being rejected?' and 'why can't I just find out how much the business costs?' are often asked by people new to the acquisition process.

These questions can stem from a general misconception that buying a business follows a similar process to buying a house. But in reality the two are very different.

Fortunately, the old adage of 'forewarned is forearmed' rings true and it doesn't take too much to simplify and smooth out the acquisition process. It essentially boils down to having as much information as possible at hand.

Even when you do everything possible to prepare, be aware that buying a business is not going to be as easy as buying a house. But below are some of the most common frustrations that people face and the best ways to keep stress to a minimum.

Time

The sheer length of time it can take for a deal to go through is one of the main frustrations to emerge during an acquisition. It can be hard to understand exactly why the process needs to take so long, especially if you're still pursuing a deal that began months or even years ago.

But patience is a virtue, or so they say, so keep your wits about you and remember that the right business will be worth the wait. If you want to cut down on the amount of time you spend chasing an acquisition, preparation is key. Make sure you are fully conversant with your financial situation and have a clear idea of what you are looking for before you approach the seller or business broker. You should know how much you are able to spend, be aware of your personal timescale and have paperwork ready to move ahead. Have a look through our guide 'Going for Gold with your Business Acquisition Strategy' for tips on everything you need to have in place when approaching a seller.

In addition to making your own preparations before approaching a target, as a buyer, you must research and learn about the acquisition prospect as early as possible. Even when businesses appear to change hands in just a couple of days, behind the scenes there will inevitably have been a huge amount of research carried out prior to the heads of agreement being signed. Serial buyers will often skilfully and quickly move to the Heads of Agreement (H of A) stage almost as soon as they are convinced that the purchase makes sense. The H of A will offer them a period of exclusivity whilst they complete their research and due diligence without the worry of a competitive offer being made.

But as a first-time business buyer, you will not necessarily have a sufficiently developed deal instinct to move headlong into an agreement without investigating nearly every area of a company at an early stage. This prudent approach, whilst time-consuming, means that you aren't wasting time pursuing a company that isn't suitable. This should avoid a situation in which you are forced to pull out at the last minute after finding a nasty surprise.

With this in mind, it is worth being aware that the M&A industry does not look kindly on time-wasters. If it is obvious that you have not done your preparation, i.e. know little about the business, the industry or even your own finance sources, you will quickly be labeled a time waster or someone who was never serious about making an acquisition in the first place. Of course, some allowance will be made for new buyers, but remember that if you consistently approach business vendors and brokers with poor preparation and vague aspirations, you’ll find it’s a small world, with brokers blacklisting you.

Preparing yourself for the long-haul is the first shock to the system when buying a business. You then need to get your head around the apparently unintuitive timescale of the whole thing.

If you're buying a house, the timescale of approach is pretty logical: 'Get in as soon possible', is the usual advice. The earlier you register your interest and make a bid the more likely you are to get the property. And once a property is ‘under offer’, nine times out of ten no-one else will get a look in. But this rule does not always apply to buying a business. Of course it can be useful to register an interest even when a company isn't officially on the market – when it's clear that it's going through some financial difficulties, for example.

But if a company is ‘under offer’, it does not necessarily mean it is off the market. In fact it is usually at this stage that a business will receive the most enquires from other parties. As mentioned earlier, many potential buyers will be using a Heads of Agreement as a tactic to take their time over due diligence. If a business you are interested is under offer, still lodge your interest as businesses often move from this stage to being back on the market within a number of weeks.

Valuation

Valuation tends to be the other key area that goes against many people's expectations of buying a business. When buying a house, unless it is a particularly high-end property, the owner or the selling agent nearly always provides a price upfront. There may be some room for negotiation, but as a buyer you have a ballpark figure of not only what the seller wants for their property, but also what the going market rate is. This is simple enough to work out through analysing the price of properties in the area of a similar size, style and condition.

But not so with buying a business. A business is more than bricks and mortar: there are employees, customers, suppliers, brand value and assets. There is a history of revenue and profits and there may be a forecast of future revenue and profits. All of which need to be considered when figuring out a market valuation. Put simply, there are too many variations to make it possible to establish a precise market estimate for an individual prospect.

Three different advisers will often come up with three very different valuations. It's true that some people have turned business valuation into an art form. But in most cases, it’s a matter of trying to match up the expectations of the buyer and the seller in order to make a sale. There is often no price listed and the owner is looking to sound out potential buyers to see what they will offer. This may be because they don't know what their company is worth or it could be that they're seeking to get an idea of the market and how much people are willing to pay for their company.

Buying a business is a complicated process and it needs to be approached with the right mindset. Try to see the positives in the system rather than the frustrations and make the most of the opportunities to investigate your potential acquisition. Buying a business allows you to make an offer that you see fit and the numerous opportunities for research and due diligence along the way should mean that any purchase you do make is guaranteed to be the right one with no nasty surprises waiting down the line.

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