Warming economy creates fresh opportunities for business buyers

As the sun finally shone across the country, the economy also basked in warming rays as several sectors enjoyed an uplift in activity and confidence.

The UK economy grew by 0.6 per cent for the three months to June. The service industry, representing 80 per cent of output, showed particularly strong growth, lead by hotels, restaurants and distribution. Other areas showing significant improvement are construction, manufacturing and production.

Business leaders are feeling more confident according to a survey conducted by the Institute of Directors in June/July. No less than two-thirds of the Institute's members agreed that the outlook for the British economy is the brightest it’s been since the onset of the credit crunch in 2008.

As conditions start to ease after this long downturn, it is expected that more business owners will return to their plans for the future and look to sell up as they head towards retirement or in a new direction. For the past few years, many baby boomers have been keen on exiting to head into retirement, but have been holding off sticking the 'for sale' sign up, as conditions have not been quite right. This year we are now seeing retirement as the number one contributor to small/medium company sales. A major factor has been the reinvigoration of business buyers and sellers after a period of semi-hibernation.

Business owners are likely to sell as part of their efforts to gain fresh investment for their companies - a widely used method to stimulate growth during slow times. By selling off its online camera seller Pixmania, Dixons succeeded in raising its underlying profit levels by four per cent. Even on a smaller scale, a divestment strategy can enhance long-term enterprise value.

Starting out by buying an established business can be easier and quicker rather than setting one up, and it goes without saying that it is imperative to find the right business for you. As the economy slowly picks up, it may be easier to build on others’ efforts and successes to meet your own goals than starting from scratch.

Wise buyers use a mixture of gut instinct and logic to choose a business and see it through to beyond deal completion.

Here's a 10-point reminder of the steps to guide you through the process of buying a business and keeping hassle to a minimum.

1. Firstly, identify your abilities, strengths and the type of business that will enable you to shine. If it is to be a company acquisition, what are your organisation's core competencies? Consider the dedication, time and hard graft required to be successful in your venture.

2. Study your chosen sector. If you are not already an expert in this sector, you'll want to become one. Speak to business owners already in the industry. Any advice they can give could prove to be invaluable later on.

3. Probe into your finances and be realistic about how much money you can invest in a purchase. How much profit would you require to make to match your needs/desires?

4. Find a business to buy – there are numerous avenues to do this. Talk to peers in your sector, and any business contacts you have, including your accountant. Be opportunistic, keep your ear to the ground and persevere with your search. If there is nothing currently on the market that matches your requirements, there are services available (we run one at the Business Sale Report) whereby potential targets are approached to instigate an introductory meeting.

5. Once you have found a potential target, hire an adviser to assist you with a valuation of the business. They will drive the process for you, which will involve running the rule over tangible and intangible assets (e.g. equipment, intellectual property), the business’ finances and business plan.

6. Speak to lenders to source any additional finance as needed. They will want to see the details of the purchase, including long-term accounts and financial projections of the target, together with evidence of your personal finances. If it is a company acquisition, then your existing company's balance sheet, revenue statements and forecasts will be the prime focus of the lender. Smart buyers will have a report of their own financial position already in place before they identify a target.

7. An accountant or solicitor can assist you conduct due diligence once an offer has been put on the table. This crucial process will enable you to understand the details of the target’s legal, financial and commercial situation. Don't forget to ask for advice on how to structure the deal from a tax-efficient point of view, and be aware that the vendor's ideal deal structure will nearly always be different!

8. Start talking to the suppliers and staff to begin building your relationship with them. This is your last chance to ensure the business is the right fit for you. Remember that on those occasions when acquisitions do fail, it is usually because of poor handling and integration of management and staff.

9. The completion stage involves the final agreement on price and the terms of the sale and transfer of contracts, finance and any additional legal paperwork.

10. Find out if the seller can offer a handover period to assist you while taking the reins. Your first 12 months at the helm will be crucial to your ongoing success as you set about making your own mark on the business. Buyers of medium to large companies will often include handover terms as part of the deal contract, with earn-out clauses dictating how sales and/or profits in a defined post-sale period will affect the final amount paid for the business.

As the economy slowly improves, other opportunistic buyers will also be watching for new business targets to appear. There is only one way to beat them and that is 'Estote Parati' - be ready.

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