Why You Should Still Buy a Small Business in the UK

In short:

Economic headwinds have made business owners more receptive to offers
You don’t necessarily need large amounts of capital to buy a business
Around 75-85% of SME acquisitions use vendor financing

Looking to buy a small business?

Really? Are you mad?

Multiple economic headwinds have put paid to thousands of small UK businesses over the last few years. Whether it’s lockdowns, cost-of-living crises, or energy hikes, there’s been blow after blow to business owners trying to get by.

So why on Earth would you consider acquiring a company right now?

Well, there’s actually more than a few good answers to that. Read on to find out why we’re seeing more interested investors than ever before enquiring into the businesses we sell.

Owners more open to a sale

After a series of external socio-political threats to UK SMEs, the last thing they wanted was the National Insurance contribution changes and National Minimum Wage rises that the government announced.

Having to navigate so many obstacles in such quick succession has wearied business owners to the point that most are now extremely receptive to any offers that may come their way. But while there’s a growing number of owners open to exiting their companies, there are still many that enjoy the day-to-day challenges that owning a business throws up, and they can find some real gems on the market.

OK, boomer!

The Baby Boomer tag covers those born in the post-war period between 1946 and 1964. This era saw a huge increase in birth rates, and as such, this generation has been exploited by marketers and companies throughout the years as a large potential market.

Right now, however, the majority of Baby Boomers are in their 60s and 70s. As such, we find that there is an increased number of businesses up for sale with their owners looking to retire. This only makes for more choice for those actively looking to find suitable acquisitions.

You don’t necessarily need a large amount of capital to buy

You may think that the current economic climate works both ways. That is, that it’s just as tough for investors to put together the funding to buy companies as it for businesses to stay afloat.

The reality, however, is that few acquisitions actually involve being paid in full upfront.

There’s a plethora of financing options available to investors looking to acquire businesses. The most popular method among these tends to be vendor financing. This tends to take the shape of an investor paying the owner a lump sum up front and then paying the rest in instalments over the course of the next few years.

Forbes Burton Founder and M&A expert, Rick Smith explains that “this is an attractive way to fund an acquisition as the business practically ends up paying for itself out of its profits. A charge is normally put against the company as a form of guarantee for the seller, so they can potentially pull assets from the business should any payments be missed.”

You can utilise vendor financing

While using your target company to pay for itself may seem like some secret tactic only available to those in the know, it’s actually one of the most common ways to fund an acquisition.

Estimates suggest that between 75-85% of small business acquisitions use some form of vendor financing. Sellers are keen to use it to ensure a deal goes through, and there’s a raft of benefits to the buyer too.

Vendor financing allows buyers to access financing easily, negotiate low (if any) interest rates, focus available capital on growth, and have some comeback should the business have any skeletons in its closet.

Many vendor financing deals contain clauses that should there be anything wrong with the company, such as unpaid bills, then these costs can be offset against the buyer’s repayments.

Or find others that will benefit from the deal

If you already own a similar company to the one you’re targeting, you can potentially leverage your relationship with key suppliers to help fund the acquisition.

It’s not unheard of to ask suppliers if they’d be interested in helping you to finance an acquisition on the proviso that you shift all of the new company’s supply needs to them. Of course, the business in question would need to be a significant enough potential account for them to consider this, but it does happen.

The right opportunity can make raising capital easier

Purchasing a strong company that’s well-established and profitable can make sourcing the finances to buy it much easier. Banks and other lenders are much more likely to accept your loan applications if you can show that you’ll be able to pay them back with the profits of an already successful business.

Demonstrating the target company’s ability to generate income with accounts sheets will quell any lender’s concerns over repayment. The bigger and more well-established the business, the better.

It’s possible to accumulate businesses

Serial investors love the above method of financing acquisitions as it allows them to build a portfolio of businesses relatively easily. They often won’t expect to receive any money from a newly bought company for a few years, and will instead make more acquisitions in the interim with each business paying for its own cost.

Once paid for, the companies can then potentially start to bring in a considerable sum, and even be merged into one another to make a stronger overall business should they complement each other.

Smith mentions that the key to this strategy is “to purchase businesses with strong management teams in place that are able to run autonomously. Owners won’t be able to buy more businesses if all of their efforts are being held in running an acquisition that can’t run itself in the absence of its previous owner.”

Finding the right opportunity

Of course, buying a business is one thing, but finding a good business to buy in the first place is something else entirely.

We’ve written extensively on this topic before, but in general, investors should have the following on their acquisition checklist:

Strong accounts – While it’s possible to turn around companies with poor accounts, it’s far safer to build from an already strong foundation.
Local rather than online – Online businesses can quickly have their USP stolen by another company. By acquiring a local business, you limit your potential competition. Think hotels or a local attraction.
Running autonomously – If it can’t run without its current owner being involved, then the owner is the business.
Isn’t dependent on one or two clients – Should one of these clients leave, the business can quickly become vulnerable.
Lots of assets – These can be useful if cash flow is tight early on as they can often be refinanced to provide funds.

Where to find a great business for sale

Again, this is something we’ve already written about in some depth, but there are plenty of places where you can find a great potential acquisition. Even scouring the commercial properties on Rightmove can unveil a few hidden gems.

The best way to find good opportunities is to make people aware that you’re actively looking to buy. This way, you’ll have people coming to you instead of the other way around. Register your interest with business brokerages and detail what it is that you’re looking for. You should then receive regular correspondence describing businesses that match your criteria.

It’s still a great time to buy

Like stock market investors looking to pick up shares during a downturn, business owners can find some great acquisition deals during times of economic struggle.

With a range of financing options available, many buyers don’t even need large amounts of capital to acquire them either.

Speak to one of our friendly advisers on 0800 975 0380 or email advice@forbesburton.com to find out which businesses we currently have available for sale.