This article was last updated 0 months ago and may not represent current law.
How do you buy a business in the UK? You find one that suits you, work out what it’s worth with your accountant, agree the main terms with the seller in heads of terms, check the business properly through due diligence, and then sign a purchase agreement and pay the price at completion. From agreeing heads of terms to completion usually takes two to three months for an owner-managed business, and longer if a regulator has to approve the deal.
Most buyers spend their energy on finding the business and agreeing the price, which is understandable, but a lot of the risk is in what happens after that. The seller knows what’s wrong with the business and you don’t, and once you’ve paid it’s hard to get money back. This guide goes through the whole process in the order it usually happens, with links to the pages where I’ve gone into each stage in more detail.
Before you start looking
It helps to decide early what you’re actually trying to buy. An owner buying a competitor or a supplier is in a very different position from a first-time buyer who wants to run a business of their own, and both are different again from a management team buying out the owner they work for, which I’ve covered on my management buy-outs page.
You’ll also need a small team: your accountant will deal with the financial side, the valuation and the tax, and a solicitor deals with the legal side, which means the heads of terms, the legal due diligence, the purchase agreement and completion. If you’re borrowing, the lender will have its own requirements and usually its own solicitors. If the business has premises, a commercial property lawyer will look at the lease or the freehold. It’s worth having the first two lined up before you make an offer, as the early decisions are the ones that are hardest to undo.
Finding a business to buy
Businesses come to market through business brokers and online marketplaces, through accountants and corporate finance advisers who act for sellers, and through direct approaches. A direct approach to a competitor, a supplier or a business you already know can work well, as you understand the sector and the seller is dealing with someone they’ve met.
Before a seller or broker gives you anything detailed, they’ll usually ask you to sign a non-disclosure agreement. That’s normal, but read it, as some are much wider than they need to be and a few try to stop you approaching the business’s staff or customers for a long time afterwards, even if the deal doesn’t happen.
Working out what it’s worth
Valuation is a job for your accountant or a corporate finance adviser rather than a solicitor. Smaller businesses are often valued as a multiple of profit, or of recurring income in sectors like accountancy and financial services, but the range is wide and the right figure depends on how reliable the profits are, how much of the business depends on the current owner and what you’d need to spend to keep it going. I’ve written about valuation from the seller’s side in how much is my business worth?, and most of it applies equally to a buyer.
Most deals are priced on a cash free, debt free basis, so the headline price assumes the seller takes out the spare cash and repays the borrowing, and is then adjusted for what’s actually there at completion. The price you agree is also only half of the deal, because how and when it’s paid matters as much as the figure itself.
Buying the shares or buying the assets
If the business is run through a limited company, you can either buy the shares in the company or buy the assets out of it, and which you choose affects almost everything that follows.
If you buy the shares, you get the company with its whole history, including its contracts, staff, tax position and any claims that haven’t been made yet. Nothing has to be transferred, so completion is simpler, but it’s why the due diligence and the warranties matter so much. The document is a share purchase agreement.
If you buy the assets, you choose what you take, such as the goodwill, stock, equipment, contracts and the name, and the liabilities broadly stay with the seller’s company. Customer and supplier contracts have to be moved across one by one, often with the other party’s consent, and the employees who work in the business will normally transfer to you automatically under TUPE, on their existing terms. The document is an asset purchase agreement. On an asset purchase of a going concern, VAT usually isn’t charged on the price if the conditions in HMRC’s guidance on transfers of a going concern are met, but that’s one for your accountant to check.
Sellers usually prefer to sell shares for tax reasons, so the choice has often been made before a buyer has had much say in it. It’s still worth understanding what it means for you, and my buying a business page goes through it in more detail.
Making an offer and agreeing heads of terms
Once you’ve agreed a price in principle, the main terms are written down in heads of terms (sometimes called a letter of intent or an offer letter). They cover the price and how it’s paid, what’s being bought, any conditions, and the timetable. Most of the document isn’t legally binding, but confidentiality and exclusivity usually are, and exclusivity is the part a buyer most needs, as it stops the seller using your offer to get a better one while you’re paying for due diligence.
Heads of terms set the shape of everything that follows, and it’s much easier to get a point agreed at this stage than to raise it two months later, so it’s worth taking advice before you sign them. I’ve explained what they should cover on my heads of terms page.
Paying for the business
Most buyers use a mix of their own money, bank or asset-based lending, and deferred consideration, where part of the price is paid to the seller after completion. The deferred part might be fixed instalments, or an earn-out that depends on how the business performs once you own it. A seller who agrees to wait for part of the price will usually want security for it, such as a debenture over the company or a personal guarantee from you, and you’ll want the right to hold back money if a warranty claim comes up. I’ve covered how those terms are negotiated on my page about earn-outs and deferred consideration.
Deals where nothing is paid up front do happen, but they aren’t common, and I’ve written about them in buying a business with no money. There’s more on lending and other funding in buying a business: how to raise finance.
If you’re borrowing, involve the lender early, as lender approval is one of the most common reasons a purchase runs late, and the lender’s conditions (security, guarantees and sometimes a valuation) need to fit with what you’ve agreed with the seller.
Due diligence
Due diligence is your investigation of the business before you commit. Your accountant looks at the accounts, the management figures and the tax history. I send the seller’s solicitor a set of legal enquiries and review what comes back, which covers the company and its share ownership, the main customer and supplier contracts, the employees, the premises, intellectual property, licences, data protection and any disputes. You’re the best person to do the commercial side, which means judging whether the customers, the staff and the market are what the seller says they are.
Most of what due diligence turns up isn’t a reason to walk away. It’s usually a list of things for the seller to fix before completion, things to reduce the price for, and things that need specific protection in the purchase agreement. My page on due diligence for buyers explains how it works and what you get at the end of it.
The purchase agreement and your protection
The law gives a buyer very little protection by default, so it has to be written into the agreement. Warranties are the seller’s statements about the business, for example that the accounts are accurate and there are no disputes, and if one turns out to be untrue you can claim for the loss. The seller qualifies the warranties in a disclosure letter, and anything properly disclosed generally can’t be claimed for, so a buyer should resist vague, sweeping disclosures. Indemnities deal with specific problems you already know about, such as an HMRC enquiry, so that the seller pays pound for pound if it turns into a cost. There’s more on all of this on my page about warranties, indemnities and disclosure letters.
The agreement will also include restrictive covenants stopping the seller from competing with you, approaching your customers or poaching your staff for a period, and the seller’s solicitor will be asking for caps and time limits on claims. If part of the price is being held back, the agreement sets out when it’s released and what happens if a claim is made in the meantime.
Consents and conditions
Some purchases can’t complete until someone outside the deal agrees, and the most common is the landlord, as a lease often can’t be assigned without consent and many leases also treat a change in the ownership of the tenant company as needing consent. I’ve written about the property side in commercial property considerations when buying or selling a business.
Key customers or suppliers may have contracts that can be ended if the company changes hands, which due diligence should pick up. A franchised business needs the franchisor’s approval and usually a new franchise agreement for the buyer, which I’ve covered on my franchise resales page. Regulated businesses need the regulator’s involvement, and buying a firm authorised by the FCA usually takes around six months because of the change in control process, as I’ve explained on my page about buying a financial services firm. Licensed premises, care homes and healthcare businesses have their own licensing or registration steps, which need building into the timetable from the start.
Completion and the first few months
Completion is when the agreement is signed (or, if there’s a gap between signing and completion, when the conditions have been met), the price is paid and ownership passes to you. These days it’s usually done electronically, with the money moving between the solicitors’ client accounts. On a share purchase there are board minutes, resignations and appointments of directors, and new bank mandates. Your accountant will deal with the filings at Companies House after completion, and stamp duty of 0.5% is payable on a share purchase where the price is over £1,000 (HMRC’s guidance explains how).
Many sellers stay on for a handover period, as a consultant or an employee, because customers and staff are used to dealing with them, and the terms of that arrangement are usually agreed alongside the purchase agreement. I’ve written about how that works in should the seller stay on after completion? It’s also worth diarising the deadlines in the agreement, in particular the dates by which any warranty claim has to be notified and when any retention is due to be released, as a buyer who misses those can lose a claim that would otherwise have succeeded.
How long it takes and what it costs
A purchase of an owner-managed business usually takes two to three months from agreed heads of terms to completion, and sometimes longer. The usual causes of delay are lender approval, a landlord’s consent and slow replies to due diligence enquiries. Deals that need FCA approval usually take around six months.
Your costs will normally include your solicitor, your accountant, any lender’s legal and valuation fees, and a property lawyer if there are premises. I work on fixed fees agreed in writing before I start. The fee depends on the size of the deal and how much work is involved. On a sale or purchase between £500,000 and £5m it’s usually between about 1% and 3% of the price, and the percentage falls as the deal gets bigger. Most full sales and purchases start at around £10,000 plus VAT. Franchise resales, client bank deals and most management buy-outs usually cost less, as there’s less to negotiate.
What to do now
If you’re at the start, decide what kind of business you’re looking for and how you’d fund it, and speak to an accountant and a lender before you make an offer, so you know what you can realistically pay. If you’ve found a business, ask the seller or broker for the last three years’ accounts and current management figures, find out whether it’s a share or asset sale and whether there’s a lease, and don’t sign heads of terms until someone has read them with you. If you’re already in exclusivity, get the due diligence moving straight away, as that’s the stage that most often holds up completion.
I act for buyers of owner-managed businesses on the heads of terms, due diligence, purchase agreement and completion, and you’ll deal with me throughout. Get in touch if you need some help.
Written by Steven Mather, a business solicitor acting on company sales and purchases. This is general information about the law, not legal advice on your situation. Law correct as at .
