The complete guide to buying a UK business

Key points

• Clear criteria save time: they decide which opportunities deserve a proper look.
• A short first review can filter out unsuitable businesses before you spend serious money.
• Value comes from maintainable earnings and risk. Structure – what is paid when, and on what conditions – matters as much as the headline price.
• Due diligence tests the figures your offer relies on. Its findings feed the price and the legal documents.
• The first 100 days after completion can have a material effect on whether the earnings you paid for are sustained.

Is buying a business the right route for you?

Buying an established business gives you customers, a team, systems and a trading record from day one. In exchange, you pay for that track record, and you take on its risks: dependence on the previous owner, on key customers, or on arrangements that may not survive a change of ownership.

Before searching, be clear about three things:

• Your role: will you run the business day to day, or put a manager in? That changes which businesses suit you and how you value them.
• Your capacity: the money you can commit, the borrowing the business could support, and the time the process will take.
• Your purpose: a first acquisition, a bolt-on to an existing business, or the start of a group. Each points to different targets.

How do you set acquisition criteria?

Criteria turn a broad wish into a short list of businesses worth reviewing. Typical criteria cover:

• sector and activities;
• size – turnover and, more importantly, profit;
• location;
• the role you will play;
• what you can fund;
• your deal-breakers.

Our guide to setting acquisition criteria goes through each in detail.

What this means in practice: write your criteria down and share them with anyone who may introduce opportunities. You can also register your acquisition criteria with Proplexo free of charge.

Where do businesses for sale come from?

• Brokers and online marketplaces list many smaller businesses for sale.
• Advisers – accountants, corporate finance advisers and lawyers – run sale processes for their clients, often with a limited number of buyers.
• Direct approaches to owners of businesses that fit your criteria, often by letter or through your network.
• Your own sector: suppliers, customers and competitors you already know.

Some businesses are sold confidentially and may never be publicly advertised. Being known to advisers, with clear criteria and credible funding, matters as much as searching listings. Proplexo's Opportunities page publishes anonymised summaries of owner-managed businesses for sale when any are listed.

How do you review an opportunity quickly?

Many opportunities can be ruled in or out with a short review of the information available before an offer. Our guide to reviewing an acquisition opportunity sets out seven checks. In summary:

1. be clear about what is actually for sale;
2. find the sustainable earnings;
3. check the quality of the information;
4. look at concentration and dependency;
5. understand cash, working capital and debt-like items;
6. sense-check the asking price;
7. write down your questions for the seller.

The aim at this stage is a confident "no" or a reasoned "worth pursuing" – not a full investigation.

Share purchase or asset purchase?

You can usually buy a business in one of two ways. The choice has legal, tax and commercial consequences, so take advice from your legal and tax advisers early. The financial and commercial differences are summarised below.

What you buy. Share purchase: The company itself, with all its assets and liabilities, including historical ones. Asset purchase: Selected assets of the business – for example equipment, stock, customer contracts and the name – and only the liabilities you agree to take on.

History. Share purchase: Comes with the company. Due diligence and the sale agreement protections matter more. Asset purchase: Largely stays with the seller's company, though some obligations can still transfer.

Contracts. Share purchase: Usually continue, unless they contain change-of-control clauses. Asset purchase: Usually need to be transferred or replaced, which may need the other party's consent.

Employees. Share purchase: Remain employed by the same company. Asset purchase: In the sale of a business as a going concern, employees usually transfer to the buyer under employment-protection rules (TUPE). Your legal advisers will advise.

Typical preference. Share purchase: Often preferred by sellers. Asset purchase: Often preferred by buyers where historical risks are a concern.

The structure also affects the price discussion, the due diligence scope and the legal documents, so it is usually settled early – ideally in the heads of terms.

How much should you offer?

An offer starts from the earnings the business can sustain under your ownership, and the risks you take on with it. Our complete guide to valuing a small UK business explains the method in detail. The essentials for a buyer:

• Maintainable earnings, not last year's profit. Normalise the figures, including the market cost of the role the owner currently performs.
• Value is for the business itself. The headline price usually assumes a normal level of working capital and no debt or surplus cash. What you actually pay is adjusted for those.
• Risk should influence what you are prepared to pay. Customer concentration, dependence on the owner and weak information all reduce what a business is worth to a buyer.
• What you can fund is a separate question from what the business is worth. Both limits apply.

Proplexo view: price from the business you will own, not the asking price

An asking price is the seller's opening position. It may be well reasoned, or it may reflect a figure heard about another business. Starting the negotiation from it anchors the conversation in the wrong place.

A buyer is on firmer ground starting from their own view of maintainable earnings under their ownership – including the cost of replacing what the owner does – and of the risks they will carry. That view also identifies what would need to be true for a higher price to make sense, which turns a negotiation over a number into a discussion about evidence.

What goes into heads of terms?

Once the seller accepts an offer in principle, the main terms are recorded in heads of terms (also called a letter of intent). They usually cover:

• the price and how it is calculated – including the cash-free, debt-free basis and a normal level of working capital;
• the structure – share or asset purchase, and what is paid at completion, deferred or conditional;
• key conditions, such as funding, due diligence and any consents;
• exclusivity – a period during which the seller will not negotiate with other buyers;
• the expected timetable;
• confidentiality.

Heads of terms are usually not legally binding, apart from certain provisions such as exclusivity and confidentiality. Your legal advisers will confirm the position and draft the document with you.

How can the deal be structured?

The headline price and how it is paid are separate decisions:

• Paid at completion: the simplest for the seller and the most certain.
• Deferred consideration: a fixed amount paid at agreed later dates. It is certain, but later.
• Earn-out: part of the price is conditional on the business's performance after completion. It is uncertain as well as later, and needs careful definitions.

Our guide to deferred consideration and earn-outs explains how each works, the commercial points to consider, and the matters for your legal advisers.

Proplexo view: structure and certainty matter as much as the headline

Two offers with the same headline price can be worth very different amounts to a seller, and carry very different risks for a buyer. A larger share paid at completion gives the seller certainty and usually strengthens an offer. Deferred or conditional elements can bridge a gap in price expectations, but they also create obligations and, with an earn-out, scope for disagreement.

A structure is easier to agree when each element has a clear purpose – for example, linking part of the price to the transfer of a key customer relationship – rather than being used simply to make a headline figure look larger.

How do you fund the purchase?

Most purchases of owner-managed businesses are funded from a combination of the buyer's own money, borrowing, and part of the price paid later to the seller (deferred consideration). The starting point is a clear view of the total cash requirement – not just the price.

Illustrative example E: sources and uses of funds

Illustrative example. The purchase is fictional. The price is a round figure chosen only to make the arithmetic easy; it is not derived from any earnings or multiple and says nothing about what any real business is worth.

1. Price for the business: 900,000
2. Professional fees (legal, financial, other): 45,000
3. Taxes and duties on the purchase (ask your tax adviser): 5,000
4. Working capital headroom after completion: 75,000
5. Total uses: 1,025,000

1. Buyer's own funds: 300,000
2. Deferred consideration payable to the seller over two years: 200,000
3. Borrowing: 525,000
4. Total sources: 1,025,000

What the example shows:

• The cash needed is more than the price. Fees, taxes and working capital headroom are easy to overlook.
• Deferred consideration reduces the cash needed at completion, but it remains the buyer's commitment to pay the seller, so the buyer needs to plan how it will be funded when it falls due.
• Borrowing must be supported by the business's cash flows, after the cost of running it under new ownership. Lenders will assess this themselves; a buyer should understand it first.

Our guide to funding a business acquisition explains how to prepare the numbers lenders ask for. Proplexo's role is financial modelling, funding readiness, forecasting and the preparation of lender information. Where specialist regulated advice is needed, we may work alongside appropriately authorised advisers.

What does due diligence involve?

Due diligence tests the figures and facts your offer relies on. It usually starts once heads of terms are agreed and covers financial, legal, tax and commercial areas. Financial due diligence focuses on:

• quality of earnings;
• working capital and the normal level;
• net debt and debt-like items;
• cash conversion;
• forecasts;
• the reliability of the information.

Our complete guide to financial due diligence for buyers covers each area, with worked examples, and how findings change the price and terms. Get our buyer's information request list by email.

The sale agreement and completion

The sale agreement – drafted and negotiated by your legal advisers – sets out exactly what you are buying, the price mechanism and the seller's protections to you, such as warranties and indemnities. Financial due diligence findings feed into it.

The final price is calculated using one of two mechanisms:

• Completion accounts: the price is adjusted using a balance sheet drawn up at completion.
• A locked box: the price is fixed by reference to an earlier balance sheet, with protections against value leaving the business in between.

The choice is a matter for negotiation and for your legal advisers. Completion usually takes place when the documents are signed and the funds transferred, once any conditions are met.

What should the first 100 days look like?

The earnings you paid for depend on what happens straight after completion:

• Customers and staff: communicate early and personally. Secure the relationships the previous owner held.
• Handover: use any agreed handover period from the seller to transfer knowledge, relationships and routines.
• Cash: know your cash position weekly at first, including deferred consideration and borrowing repayments.
• Management information: put monthly management accounts and a rolling cash-flow forecast in place from the start, so you see problems early.
• No sudden changes: improve deliberately, once you understand why things are done as they are.

How long does it take to buy a business?

It depends on the business, the parties and the deal. Finding the right business can take many months. Once heads of terms are agreed, due diligence, funding and the legal documents typically run in parallel. The timetable is driven by:

• the quality of the seller's information;
• the speed of responses;
• the funding process;
• the complexity of the legal work.

A realistic timetable, agreed at heads of terms and reviewed regularly, keeps the process moving.

What are the most common mistakes buyers make?

Proplexo view: decide your walk-away conditions before you are committed

As a deal progresses, time, money and emotional commitment build up, and it becomes harder to step back. The most useful protection is to decide early – before heads of terms – what would make you stop:

• earnings below a certain level once normalised;
• a customer concentration above a certain share;
• working capital needs your funding cannot meet;
• an issue in due diligence that cannot be resolved in the price or the documents.

Written down in advance, those conditions turn a difficult judgement late in the process into a check against a decision already made.

Other common mistakes, each covered in the guides linked above:

1. Starting from the asking price rather than your own view of maintainable earnings.
2. Ignoring the cost of the owner's role, which overstates the earnings available to you.
3. Underestimating the cash requirement: fees, taxes and working capital as well as the price.
4. Treating structure as an afterthought, when it affects both value and risk.
5. Narrow or late due diligence that leaves findings too late to influence the price or the documents.
6. No plan for the first 100 days, when key relationships are most at risk.

How Proplexo can help

We work with buyers at each stage:

• First look: an Acquisition Opportunity Review, a focused first look at a business you are considering buying.
• Offer: an Acquisition Assessment, deeper analysis once an opportunity becomes serious, including financial and commercial input into your offer and heads of terms, alongside your legal advisers.
• Diligence: Financial Due Diligence, focused or comprehensive, tailored to the size and complexity of the deal.
• A programme: Full Acquisition Partner support for buyers pursuing a structured acquisition strategy.

You can also register your acquisition criteria free of charge.

This article is general information for owner-managed businesses, not advice on your circumstances.