Businesses are bought and sold for a variety of reasons just like any other commodity. There are, unfortunately, a number of severe problems involved in buying an existing business and it is essential that you have professional assistance from the outset. At the very least you will require a competent commercial lawyer together with an accountant who has experience in this field.In view of the complexities involved in buying an existing business I will not attempt to try to explain the process. What I will do is give you some idea of the problems that may be encountered. I will also make the assumption that you have identified a potential business to purchase.

Undertaking A Personal Inspection Of The Business

Having identified a suitable potential business to purchase you will need to make a significant number of visits. These should be conducted at different times, on different days, to gain an overall feel of how the business operates. They will also give you a chance to meet any staff and assess how well they work.

To a large extent the format of the visits that you make will vary from business to business. If, for example, you are considering the purchase of a retail shop you will not actually need to go inside on all visits. Some can be done by purely sitting outside to measure the number of customers who enter.

Whenever you do visit you must be alert and take in all that is going on around you. Do not spend all your time talking to the owner or the staff. This will merely distract you from the real purpose of your visits which is to establish just how active the business is. Some of the things that you should be looking for include:

• Is there a regular flow of customers?
• Is the layout of the business suitable?
• How tidy is the business?
• Does the telephone ring often?
• Are the staff courteous and efficient?
• Are all of the staff kept busy?
• What does the condition of the stock look like?

Valuing The Business

This is probably the most difficult aspect for you to consider. Obviously, the vendor will want as high a price as possible while you will want to pay as little as you can. There will probably be a number of components making up the final price. The first thing that you will need to do is establish exactly what those components will be. To do that you will require up-to-date audited accounts. Let us take a theoretical example.

Balance Sheet Of Xyz Engineering Ltd

Fixed Assets
Land and buildings	£100,000
Plant and machinery	£30,000
Tools and equipment	£15,000
Motor vehicles	£30,000
		£175,000

Current Assets
Trade debtors	£25,00
Raw materials	£10,000
Finished goods	£20,000
Cash at bank	£5,000
		£60,000
Total Assets		£235,000
Current Liabilities
Trade creditors:	£15,00
Other creditors	£10,000
Hire purchase	£5,000
Bank loan	£5,000
		£35,00
Long-Term Liabilities
Hire purchase	£15,00
Bank loan	£35,000
		£50,00
Net Assets		£150,000
Represented by:
Share Capital	£50,00
Profit and Loss Account	£100,000
		£150,000

On the face of it, this business is worth £150,000 – or is it? Remember these figures are all ‘book’ valuations. Further examination will be required to confirm the ‘book’ valuations as realistic. Let us break down the individual components and examine the reasons for possible distortion.

Fixed Assets

The fixed assets will more than likely have been valued at the original cost price less any depreciation that has been allocated. Their true value may, however, be substantially different. For example:

• Land and buildings – If the property was purchased some time ago it may have increased in value. By the same token, if it was purchased recently and property prices have since fallen, the true value may be less. The only way to establish the correct price is to have the property valued by a professional.
• Plant and machinery – The ‘book’ value will bear no relation to the ‘true’ value because resale prices are likely to be substantially less. Within the existing business, however, their value is pure conjecture. You will need to consider the condition of the items involved and whether the depreciation is realistic.
• Tools and equipment – The valuation of small items such as these will prove to be extremely difficult. It could actually be virtually impossible to identify all of the individual items involved.
• Motor vehicles – Just as with the plant and machinery, the ‘true’ valuation is likely to differ from the ‘book’ valuation. With a small number of vehicles, as in this case, it should be relatively simple to gain a valuation from a motoring organisation. With a large number of vehicles the situation is more complicated. It is probable that a number of the vehicles involved will be ‘on the road’ and away from the business premises.