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Advice For The First Time Buyer Of A Private Company

Don't Forget The Training Wheels

Don’t Forget The Training Wheels

Advice for the first time buyer of a private company on negotiating some of the most common pitfalls, and avoiding the most expensive mistakes that buyers make.

As an experienced UK business broker one of the things that has always intrigued me is that a large proportion of the potential buyers we meet have never bought a company before. In a very real sense many buyers are learning on the job, hopefully not at the “School Of Hard Knocks” – a particularly expensive university. For smaller companies especially perhaps three quarters of enquiries are from first-time buyers.
 
The Contrast Between An Experienced and An Inexperienced Buyer
 
The contrast between an experienced and an inexperienced buyer is startling. Experienced buyers understand the basics – the difference between an asset and a share sale, what happens to the overdraft and other debt at completion, how to protect the value of working capital, how employee contracts transfer – and a whole raft of other issues. Inexperienced buyers just don’t know the right questions to ask.
 
How Can An Inexperienced Buyer Avoid An Expensive Mistake?
 
Find a Mentor

Lawyers and accountants have specific functions that come into play only after you are 100% sure you are intending to buy a business. But what about before you reach that point? It is hard for even a seasoned buyer to immediately spot the most important issues in each transaction, and almost impossible for a novice. What is needed is a mentor to help guide the way. The ideal mentor is someone from your own industry that has bought a business before. Many industries have retired owners and managers available for consulting at a reasonable price. Check references to make sure they have practical experience of buying or selling a company.

If you can’t find someone from you industry many business brokers and other corporate finance professionals will advise on a part time basis. Many small business owners go to their accountant for advice but this can be a mistake. Small firms of accountants are primarily tax advisors with limited experience buying and selling companies. Unless your accountants are a large firm with a partner that specialises in buying and selling companies they may not be the right choice.

Get the Right Professional Advisors

Once you have found the right company to buy, and agreed a price, two types of advisor are essential:

    An accountant to review the books of the target company and advise you on tax efficient structures.

    A lawyer that specialises in company sale and purchase contracts. Avoid the small practice generalist whose main focus is wills, small litigation and house conveyance.

Focus on the Future In Due Diligence

It is easy for an inexperienced buyer to get fixated on the companies past activities and in particular historic accounting records. Remember you are paying for the future profits of the company not its past. Put at least two thirds of your effort into understanding the customer base, products and contractual relationships with customers and suppliers. These are the source of future profit not last year’s accounts!

 

If you are interested in finding out more about these and other issues relating to the sale of a private company one of our business sale experts would be delighted to talk to you in complete confidentiality. Click CONTACT ME to book an initial phone conversation or call us on 01604 432964.

 
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