Potential problems when buying a business

In this guide:

  • Potential problems when buying a business

    Be aware of potential issues that may affect your purchase of an existing business.

    Before buying a business, you should look out for any potential issues that may affect your purchase.

    The reason for selling the business

    Find out from the business owner why the business is on sale. If they don’t want to disclose this information, this could be cause for concern.

    If the owner’s reason to sell the business is related to financial problems, you may want to reconsider the offer. See make sure a business is worth buying: due diligence.

    Financial situation

    The financials of the business are one of the most important indicators that will help you determine if your investment is safe.

    It is sensible to take advice from professionals with experience of valuing businesses and their assets, such as accountants and solicitors. See legal and financial checks when buying a business.

    Credit scores and outstanding debts

    Lenders won't be willing to finance a purchase that represents a high level of risk so if the business has financial problems, you probably won’t be able to get a loan.

    You want to make sure the business you purchase is free of debts. Using a credit agency will provide you with access to databases with up-to-date financial information. You can find out the credit-worthiness of a business with Equifax or Experian.

    Employee turnover

    High employee turnover indicates underlying problems, such as poor employee management, a negative work environment, poor salaries, or difficulty attracting and retaining good employees.

    Employee satisfaction is key, as they are going to be your support in the business following the transaction. See factors affecting staff turnover.

    Business model structure

    You should be aware of the overall structure of the business. The reasons behind the apparent success of the company may be tied to the owner rather than good management of the company.

    Although the company may have enjoyed stability, it might not be prepared for future changes in the industry. You need to analyse whether the foundations of the company are solid, even when you take some factors out of the equation.

    Condition of included assets

    You need to know exactly what assets are going to be included in the business acquisition.

    You should look carefully at the condition of the physical and intangible items of your purchase.

    Company reputation

    Look into the reputation of the company and the general opinion of customers towards it.

    You can gain a better understanding of how people see the business by looking at Google reviews, social media posts, testimonials, and other sources.

    Legal issues

    A company that has past legal issues may not be the best option when buying a business. There may be some underlying issues that are not so easy to spot.

    Consider the help of a solicitor to ensure the company you are about to buy complies with required licenses and regulations, collection of customer data according to UK General Data Protection Regulation, and has its contracts in place.

    Trustworthiness of owner

    If an owner is un-cooperative, or reluctant to disclose information about the business, this could mean they are withholding information that could affect you.

    Another cause for concern is when the business owner puts pressure on you to close the deal. They should give you a proper amount of time to carefully conduct due diligence and examine every detail of the business you are about to purchase.

    If you have encountered one or more of the issues above, it doesn’t necessarily mean that you shouldn’t go ahead with the purchase. However, you should analyse your options and obtain legal advice. See choose a solicitor for your business.

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  • How to assess a company's assets

    Decide which assets you want to buy from the business and check the seller's intentions as regards those assets.

    Once you have found a business you are interested in, the first thing you should do is find out exactly what is for sale, or decide which parts of the business you are interested in buying.

    You may agree to purchase the whole business or just its assets, ie its equipment, stock and order book. If you only wish to buy the assets, you will need to determine whether the seller will sell them with or without compensation due to loss of tax benefits, for example from a share sale.

    What you need to check when buying a business

    Whether you want to make an offer to buy the whole business or to purchase just its assets, there are several important things to check, including:

    • Whether the business has full legal ownership of all key assets such as plant, equipment and property. Ask to see documentation that proves all equipment and stock you are purchasing has been fully paid for and is not purely leased by the business - for example, check computer software licenses.
    • If it has warranties and guarantees for any major pieces of equipment included in the deal such as computers, photocopiers, vehicles, etc.
    • Whether any intellectual property is protected and registered. The Intellectual Property Office or a patent lawyer can help you check.
    • What supplier and key customer contracts involve. Make sure you understand what these legally require from the business.

    You will then need to decide how much these assets are worth, although to value the business as a whole you will also need to look at documentation such as its profit and loss account.

    The above list is not exhaustive. There may be other things you need to check depending on the business you are considering buying.

    It is sensible to take advice from professionals with experience of valuing businesses and their assets, such as accountants, lawyers, chartered surveyors, business transfer agents, business brokers and corporate financiers.

    How to access company information from Companies House

    If the company is registered with Companies House, you can also obtain copies of the company accounts, the annual return and the other key documents filed by your target business using the Companies House WebCHeck service.

    The documents can be downloaded from the Companies House website, some at a small fee, helping you assess the value of the business and its assets. Find company information using Companies House WebCHeck.

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  • Legal and financial checks when buying a business

    Learn about the financial and legal checks you should make when considering buying a business.

    When considering buying a business, ask the vendors for any information you wish to see. They should be happy to provide this, although you may have to sign a confidentiality agreement. The seller will want to protect certain aspects of the business, so some information may be off limits until close to completion - despite your signing of a confidentiality agreement.

    The legal and financial items to check and where to get help with these include:

    Information about the business

    • Check the vendor has the legal right to sell the business as there may be more than one decision-maker involved. If the business is a company registered at Companies House you will be able to get the necessary information from Companies House. Find company information using Companies House WebCheck.

    The original business plan

    • Ask the vendor to see the original business plan. This will outline issues such as start-up finance which may notify you of any outstanding loans, for example.

    Financial commitments

    • Examine the business' accounts, including the detailed management profit and loss account and balance sheet. These and other documents may be available from Companies House if the business is legally formed as a company. Find company information using Companies House WebCHeck.
    • Ask for documentation regarding outstanding loans and debts. Get your accountant to look at any financial details.

    Ownership of assets

    • Check the business has legal ownership of its key assets and determine what the terms and conditions are for these assets. Ask your solicitor to check the property deeds for premises owned by the business, for example, or ask for the rental agreement and speak to the landlord if you want to continue to operate the business from its current premises.
    • You should also ask for information and documentation regarding the business' current employees, IT infrastructure and other technology as well as any issues relating to the environment.

    Legal actions

    Seek professional advice

    It is sensible to take advice from professionals with experience of valuing businesses and their assets, such as accountants, lawyers, chartered surveyors, business transfer agents, business brokers and corporate financiers. See seeking professional advice when buying a business.

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  • Employees, IT and environmental checks when buying a business

    What you need to know about a business' employees, IT systems and environmental responsibilities before buying it.

    Responsibility to existing employees

    One of the key considerations when thinking about buying a business is its existing employees. Normally a new business owner has to continue to employ the existing staff on their current terms and conditions under rules known as the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). Understand your responsibilities to employees if you buy or sell a business.

    Your main concern when assessing a business in the first instance is how much the current terms and conditions are going to cost on an annual or monthly basis. To do this you should:

    • Ask to see copies of employee contracts. However, you need to remember that these may differ for different levels of employee.
    • Look at employee costs such as the monthly wage bill, National Insurance contributions, pension contributions and any other benefits. This may include company cars, health insurance, gym membership, travel loans etc.

    Remember any documents you see are highly confidential. Many of the business' employees may not know the business is up for sale. Once you have bought a business you need to comply with TUPE and other employment laws.

    IT and other technology

    A business' IT system is often vital to its smooth running. You will therefore want to consider how old any systems and equipment are and whether it is being sold as part of the deal. You will need to ask questions such as:

    • What is the value of the IT equipment and other technology?
    • Are these assets under guarantee?
    • What is included? Does it all belong to the business?
    • Are there ongoing IT maintenance and service agreements/contracts essential to the business?
    • What contingency plans does the business have in place for data loss? Does it have policies and procedures in place? Who has access to this data?

    The environment

    Another consideration will be the business' effect on the environment. Depending on the business sector it may have to pay environmental taxes and have other obligations in this area. If you think the business may be affected, contact the Northern Ireland Environment Agency (NIEA).

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  • Confidential information and confidentiality agreements

    Understand your legal obligations when buying an existing business.

    Much of the information you'll want to know about a business you are hoping to buy will be confidential, while some will be publicly available.

    Information such as employee and customer records, for example, will be protected under the General Data Protection Regulation (GDPR) and the Data Protection Act 2018, while other details will just be commercially sensitive. See UK General Data Protection Regulation (UK GDPR).

    If a vendor is keen to sell then they should co-operate fully and give you all of the information you need to arrive at an offer. This may include looking at bank loan details, property rental contracts and intellectual property licences, for example.

    Confidentiality agreement

    It is likely you will be asked to sign a confidentiality agreement (see non-disclosure agreements). This protects the existing business owner and stops you from using any information you have learned about the way the business is run should negotiations breakdown.

    You should seek professional advice by getting a solicitor or lawyer to read anything you are asked to sign or check carefully for any clauses that could have a negative impact on any other businesses you own or are considering starting. You may already be looking at developing a product similar to one offered by the business, for example, and the confidentiality agreement may prevent you doing this if the deal falls through. See choose a solicitor for your business.

    Once a business has been purchased it is important to respect the Data Protection Act for any information transferred to you under the sale, such as employee records and client information. It is wise to seek expert legal advice or speak to the Information Commissioner's Office (ICO) to ensure you operate within the law. Follow the ICO's guidance on information and data protection for organisations.

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  • Seeking professional advice when buying a business

    Information on potential sources that help when buying a business.

    There are many different advisers that can help when buying a business but if you are buying a registered company you can do some checks yourself as many of the documents you require, such as profit and loss accounts, will be available from Companies House via their online WebCHeck service.

    It is possible to obtain copies of a company's accounts, annual return and other key documents. The documents can be downloaded, some at a small fee. Find company information using Companies House WebCHeck.

    Seeking expert advice

    Other professionals worth contacting for expert advice include:

    • Business transfer agents, business brokers or corporate financiers can help you through the process of due diligence from start to finish for a fixed fee or percentage of the sale price.
    • A solicitor or lawyer will be able to help by looking at any legal contracts, including property deeds, for example. Choose a solicitor for your business.
    • An accountant will be able to help you by looking at the business' finances, such as profit and loss accounts. Choose an accountant for your business.
    • You can get help with intellectual property protection issues. An intellectual property agent will be able to search for any intellectual property licences the business holds. The Intellectual Property Office can also carry out searches on existing patents.
    • A chartered surveyor will be able to help you assess the value of the business' property.

    Ensure advisers have relevant professional experience

    It is essential that the advisers you choose are experienced in business transfers and valuations.

    Word of mouth is the best way to find a good adviser. Always ask any potential adviser about the last five deals they have worked on in the relevant sector and ask for references from previous clients.

    You should also check that your advisers hold any necessary qualifications or certification and are members of relevant associations or trade bodies.

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Becoming an employee-owned company – White Ink Architects

In this guide:

  • Advantages of an employee buyout

    An employee buyout can help preserve your business and employees jobs, and deliver a fair price.

    If you want to retire, or to sell your business, you need to decide how to organise your exit from the business. Many business owners find that an employee buyout is an attractive option.

    With an employee buyout, ownership of the business passes to the employees, either directly or through a trust. Unlike a management buyout, all the employees are involved.

    Advantages of an employee buyout

    • An employee buyout can be the best way of preserving the business and ensuring that employees retain their jobs.
    • Completing the buyout helps ensure that the new owners of the business - the employees - are highly motivated. For many owners, safeguarding the future of the business and its employees is an important objective.
    • An employee buyout can be a very effective way of organising your exit. It is usually less disruptive than alternatives, particularly as employees avoid the uncertainty of other kinds of sale.
    • A buyout can also be completed without disclosing confidential information to competitors.
    • Different financing options can allow the business to be sold for a fair price, even if the employees could not normally afford to buy it outright. Some business owners choose to sell their business to the employees for less than the full market value. See financing an employee buyout.
    • There may also be tax advantages if the buyout is structured in the right way.
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  • Alternatives to an employee buyout

    Family succession, new management, trade sale, flotation, MBO or liquidation as possible exits.

    There are several possible alternatives to an employee buyout and a number of advantages and disadvantages to these:

    • You may want to keep your business in the family. You need to be sure that you have a suitable successor. See transferring a business to a family member.
    • You could decide to carry on yourself - but this only postpones the succession problem. And working on after you want to retire is unlikely to be in the best interests of your business or yourself.
    • You could bring in new management from outside. But you would still own the business and retain ultimate control of how it is run.
    • Perhaps the most common method of exiting a business is a trade sale to another business. This can be time-consuming and disruptive, and involves disclosing confidential information to competitors. See value and market your business for sale.
    • Floating the business on a stock market can be an option if you have a strong track record and good growth prospects, though it's often a drawn out and costly process. See floating on the stock market.
    • Rather than selling your business to all the employees, you could opt for a management buyout. This can be more disruptive than an employee buyout and demotivating for employees, who do not participate in the buyout. An employee buyout can include all the employees and the management.
    • You might decide that the business is worth more if you close it down and sell off the assets. Of course, this means that employees lose their jobs, and your reputation could suffer. An employee buyout can sometimes save a business in this position.

    Ideally, you should think about the alternatives and plan your exit well in advance. It is a good idea to consider your exit strategy when starting up a business.

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  • Planning for an employee buyout

    Involving employees to create an ownership culture is key to a successful buyout.

    Changing from a business controlled by an owner-manager to a business owned by its employees can represent a big shift in culture. Employees may never have considered the possibility of becoming owners, or feel that it is too risky for them. They may also be reluctant to get involved in decision-making when they see that as your job.

    Getting employees involved in the buyout

    It's essential to involve employees in the whole process of moving towards an employee buyout. Communication is essential, you should look for ways to share information with employees, such as newsletters and regular meetings. You should also make sure you consult employees on key issues, particularly where this is a legal requirement. See inform and consult your employees.

    The more time you have, the easier it is to create an ownership culture like this. You also have more options for the way the buyout is financed and organised. For example, employees could be gradually awarded shares, or a trust could be formed to assist the buyout. See financing an employee buyout.

    Typically, final planning of an employee buyout takes anything from two to 18 months. Changing the way your business operates can be the most important - and challenging - part of the process. See more on change management.

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  • Forms of employee ownership

    Employee trusts, direct share ownership, co-operatives and other employee ownership options.

    Employees can own a business in various ways, either directly or indirectly.

    The choice is often determined by the size of the business and the number of employees. For example, a relatively small buyout might choose a co-operative model with an Industrial and Provident Society or a share company structure.

    Another common method is to set up an employee trust that holds shares on behalf of the employees. This can be a very flexible solution. The trust might hold the shares forever, or distribute them to individual employees, or a combination of the two. It can buy shares back from employees who want to sell (for example, when they retire).

    Putting shares into an employee trust can have tax advantages if the deal is structured in the right way. Using a trust may also be a good way of raising bank finance to acquire the shares. See financing an employee buyout.

    Direct ownership

    Employees can also own shares directly in their own individual names. One way is for employees to acquire shares over time, perhaps as bonuses or part of their remuneration. Some share schemes offer tax advantages to the company and employees. See set up employee share schemes.

    Alternatively, the shares in the company could initially be bought by an employee trust which later distributes them. Or some shares could be owned directly by individual employees, while an employee trust owns and keeps the rest.

    The employees may choose to form a co-operative that then acquires the business.

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  • Key stages in an employee buyout

    Assessing feasibility, planning, negotiating and completing an employee buyout.

    The first step is to check that an employee buyout is a realistic option. What are the objectives of the owner - and what do the employees want? A rough assessment of how much the business is to be sold for and its future prospects is important. Would a buyout be financially viable?

    If a buyout seems a possibility, more detailed plans need to be developed. The business plan is likely to need updating to take account of the planned changes and to help raise any financing. The proposed structure for the employee buyout needs to be decided, taking into account the tax consequences.

    You'll probably also want to agree a preliminary timetable for the buyout. At the same time, you should start developing plans for once the buyout has been completed. Involving employees is a key part of this process. Read more on planning for an employee buyout.

    Finance and price

    The price and terms and conditions of the deal can then be negotiated in detail. At this stage both owner and employees will need specialist advice, though they may well have involved advisers much earlier in the process. See help and advice for employee buyouts. At the same time, financing can be arranged.

    Final stage - deal is completed

    Once everything is ready, final documents are signed, financial arrangements are put in place and the deal is completed. The new owners take control of the business. Read more on running the business after an employee buyout.

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  • Financing an employee buyout

    Borrowing options, deferred payment and employee financing for buyouts.

    The financing of an employee buyout depends on the financial viability of the business and how the buyout is being structured. The right solution may involve a combination of several different options.

    Shares through an employee trust

    If shares are being bought by an employee trust, the trust may be able to borrow from a bank - particularly if the business has strong, predictable cashflow and good asset backing. The trust then uses future business profits to pay interest and make loan repayments.

    Specialist lenders for employee buyouts

    As well as banks, there are also a number of specialist lenders that finance employee buyouts.

    Alternatively, the owner of the business can help finance the business by agreeing to accept payment over time rather than all at once. Owners who have faith in their business - and support the idea of an employee buyout - are often willing to do this.

    Employees themselves can also help finance the buyout. They can finance the gradual acquisition of shares by taking shares or share options as part of their remuneration. Or they can invest their own savings.

    As the financing structure can also have important tax consequences, you may want to take specialist advice. Read more on help and advice for employee buyouts.

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  • Running the business after an employee buyout

    Training for employees, managers and trustees for their new roles.

    Once the buyout has been completed, the business normally continues to be run as a profit-making enterprise. In many cases, the same managers continue to run the business, and the same employees to work in the business - even though the employees are now the owners. But both employees and managers need to understand their new roles.

    Employees are likely to need training in their new role as owners. For example, they may be responsible for voting to elect directors to the board of the company. In a relatively small buyout, employees may be taking on new supervisory or management roles and need to learn new skills. See skills and training for directors and owners.

    Managers and directors also need training and support. They need to understand the crucial importance of good communication within the business to avoid conflict. They also need to maintain a culture of employee participation, which should have been developed when planning for an employee buyout.

    Managing ownership

    If shares are owned by an employee trust, the trust must have trustees - some of whom are likely to be employees. The trust may run an internal market in shares, allowing employees to buy or sell shares in the business. Or the trust might distribute dividends to employees.

    The trustees will need specialist advice. Read more on help and advice for employee buyouts.

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  • Help and advice for employee buyouts

    Sources of information, advice and specialist financing for employee buyout.

    There are several organisations that provide help and support for employee buyouts:

    Seek professional advice

    In addition, both the business owner and employees will need professional advisers such as solicitors and accountants to help negotiate the buyout. If an employee trust is being set up, the trustees also need advice. If you can, it makes sense to get advice from specialists with prior experience of employee buyouts.

    See choose an accountant for your business and choose a solicitor for your business.

    Owner, employees and trustees all need independent advice as their interests are not necessarily the same.

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  • How to achieve an employee buyout

    Becoming an employee-owned company – White Ink Architects

    Joan McCoy, co-founder of White Ink Architects, explains why they decided to become an employee-owned company.

    White Ink Architects is a RIBA Chartered Architectural practice. Founded in October 2001 by Sean Tunney, Claude Maguire and Joan McCoy, the company initially called Maguire Tunney McCoy was renamed White Ink Architects in 2003.

    White Ink Architects started as a partnership, converted to a limited company in 2005 and became employee-owned in 2021.

    Joan explains why they decided to become an employee-owned company and the process that they went through.

    Consider your options

    “Before employee ownership, the business was managed by the three directors who were also equal shareholders, owning 100 per cent of the shares between them.

    “We wanted to find a way of securing the future practice in addition to its culture and the prospects of everyone who has worked so hard to make it successful. Options considered included employee buy-out and sale - however, the advantages of employee ownership through the trust model made it a clear choice for us.

    “The Employee Ownership Trust (EOT) model means that effectively ‘money is off the table’ - this means that employees in future will not have to find excessive sums of money to fund the purchase of shares.

    “It was important to us, having set up the practice with nothing, that we could secure its future through talent. The future directors will be determined by leadership skills and talent, not by the ability to access funds to buy the owners out.

    “The EOT model also allows us to retain the ethos and culture of the practice – something not guaranteed with an external sale, where a buyer might introduce a different culture or seek to take the business in a direction not supported by the employees.

    “There are also tax advantages for sellers and for bonus payments to future employee owners (within tightly constrained rules) as part of the structure laid out by the government to encourage this model of succession.”

    Steps to achieve employee ownership

    “After we researched the options for succession, we received guidance from a specialist co-ownership consultant and companies who had successfully transitioned to employee ownership to help understand the tax, legal and operational issues.

    "Not only did our consultant handle all of the paperwork and legal aspects, but they guided us through the employee engagement process and employee-owner training for a successful outcome.

    “We obtained an independent valuation of the business, and our business plan assessed that the company was in good financial health to meet future shareholder payment obligations. We also obtained tax clearance for the proposal from HM Revenue & Customs.

    "We contacted the Employee Ownership Association and gained insight into the approaches of other companies running as an employee-owned businesses.

    “We then consulted with our employees and obtained feedback. We explained the rationale and how it would work. With the obvious benefits for everyone, it was well-received. We followed up with a guidance document on employee ownership and training sessions on the responsibilities and rights of employee-owners.

    “The transition process to employee ownership took six to seven months.”

    Measure success and plan for the future

    “The biggest challenge for the shareholders was the shift of mindset – moving on from the idea that White Ink would no longer be ‘ours'. I think the key to the success of this process is to be confident in advance of the transition that it is the right decision, both personally and also for the business.

    “Our employees now have a real stake in the success of their practice. We hope that they will benefit from the financial rewards of this long term plus enjoy the immediate benefits of increased engagement, knowledge, and consultation regarding the management of the practice and its future direction.

    “The practice is now being run for the benefit of employees for the long term. The company directors are accountable to the employees via the Trustees of the employee ownership, which includes a staff member in the role of Staff Trustee. This elected position provides a voice to the staff at the highest level.

    “In due course, we also hope to make a first ‘Tax-free’ bonus to the employees - one immediate tangible benefit to the employees.

    “The move to employee ownership, whilst a big step, is only the start of the process. Figuring out what it means for White Ink moving forward will be a process that has many iterations over the future lifespan of the company.

    "Knowing that White Ink will continue as long as we have a group of employees working together for mutual success is a very satisfying achievement."

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Advantages and disadvantages of selling your business

In this guide:

  • Advantages and disadvantages of selling your business

    There can be benefits to selling your business but you should also be aware of potential disadvantages.

    Whatever reasons you may have for selling your business, while there may be benefits, there could be some disadvantages to consider.

    Advantages of selling your business

    Choosing to sell your business could bring the following benefits:

    • If the economic conditions and market trends create high demand and attract potential buyers, you could sell your business at a high price.
    • Selling your business could allow you to pursue other projects eg invest in another business or find work with an employer.
    • Any profit from selling your business could allow you to pay off personal debts.
    • The money you receive could fund your decision to take time off eg to spend more time with family or travel.
    • If your business is in decline or you have financial difficulties, selling the business may provide you with a way out.

    Disadvantages of selling your business

    There could be potential challenges to selling your business, these may include:

    • The process of negotiating the sale of your business could be lengthy and time-consuming.
    • The legal costs of selling a business can be expensive.
    • You could be required to sign a non-compete agreement which might limit your freedom in consulting with similar businesses or starting a new business in the same area within a given period.
    • Planning to sell your business will affect any staff you may bring a degree of uncertainty - at the very least it could affect their morale.
    • If your business is profitable, you could be giving up a lucrative revenue stream.
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  • Is selling my business the right exit strategy?

    How your objectives as the owner and manager, and for the business itself can help determine the best exit route.

    Before putting your business up for sale you must give careful consideration to your reasons for doing so. You will probably be asked about your reasons for selling by potential buyers, who will need to be comfortable with your motivation and answers.

    Why sell my business?

    You need to consider four key questions:

    • What are my objectives as the owner of the business? For example, you might want to realise some or all of your investment in the business to fund your retirement.
    • What are my objectives as manager of the business? For example, you might want to retire as soon as possible or prefer to have an ongoing involvement with the business.
    • What are my objectives for the business itself? For example, the business might need new investment in order to grow.
    • Who else will be affected and what will they want? For example, other shareholders, managers and employees, and even key customers and suppliers.

    Selling part or all of the business may be the best way to achieve your objectives. You might, for instance, want to sell your business outright, leaving you with no financial or management involvement. For more information, see ways to sell your business.

    But a sale may not always be the best solution. And, of course, it may not always be realistic either. See is it realistic to sell my business?

    Other exit options

    There are a range of other exit routes that may better suit your needs:

    For more information on your different exit options, see consider your exit strategy when starting up a business.

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  • Ways to sell your business

    Options for selling your business - partial sale, selling in instalments, sale of assets, sale to an equity buyer.

    There are various ways you could sell your business, with the options available depending on factors like your business' type, size and sector.

    Selling options

    Most businesses are sold in a trade sale to another business - usually to one operating in the same or a related field. Other options available to you could include:

    • finding a private-equity buyer
    • a management/employee buyout perhaps with the help of a venture capital firm or bank loan - see how to achieve an employee buyout
    • attracting a private investor

    How much of the business should I sell?

    There are several different sale options - the one best for you will depend on your individual circumstances and the legal status of your business. The buyer will also have an opinion on deal structure and how they wish to make an acquisition, so you'll need to establish at an early stage, what you want to achieve and how you would like to structure a sale. This will save time and money, and avoid unnecessary delays. See consider your exit strategy when starting up a business.

    Partial or full sale

    You may want to sell the entire business or keep a small stake in it. The buyer may prefer you to retain partial ownership and continue your involvement. This can give the business continuity and the buyer confidence that the business will do well.

    Sale of assets

    Instead of selling the business itself, you could sell assets like equipment, intellectual property or your customer list. This may be attractive to a buyer who doesn't want to take on liabilities and obligations.

    For example, the buyer might not want to take on your employees. You will be left with whatever assets and liabilities are not included in the sale. In this case, tax and legal advice is essential when deciding the most suitable deal structure. See expert financial advice or read more about transferring and selling assets.

    Immediate or phased payment

    You can ask for payment in full when the sale is completed, or you may be prepared to accept payment in instalments. The buyer may well prefer to pay in instalments. But you will be at risk, for example if the buyer cannot make future payments.

    Some buyers will want to make a series of payments based on profits, in which case you may be contracted to stay with the business for a period of time. This is often known as an 'earn out'.

    Your choices can affect whether buyers are interested and how much they are prepared to offer. They can also affect the tax treatment of the sale. You can get guidance from an adviser. For help in selecting one, see choosing advisers when selling your business.

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  • Is it realistic to sell my business?

    Key points you need to consider to make sure your business is financially healthy and attractive to buyers.

    You can only sell your business if someone is prepared to pay for it. If you can't identify strong reasons - that can be easily substantiated - why your business would make a good acquisition, it's likely to be difficult to find a buyer.

    Would my business be attractive to a buyer?

    Ask yourself the following questions:

    • Is the business healthy? A business in trouble is difficult to sell and potential buyers are likely to wait until they can get assets at a knockdown price - although sometimes financial distress can be a motivating factor to a buyer who can see a turnaround opportunity.
    • Are the basics in place to make the business attractive? Buyers like well-organised businesses with strong management. See streamline your business operations when selling your business.
    • Does the business have a good financial record? Buyers prefer a record of smoothly increasing profits with good growth potential. See show strong financial performance when selling your business.
    • Can you identify potential trade buyers and a good reason why they should want to buy your business? Buying a business can be disruptive and expensive. Potential buyers may prefer to concentrate on their existing operations.
    • Are the existing management team interested in buying the business? You may find that they are the only potential buyer and that they only offer a modest price.

    It usually pays to start planning a sale well in advance. This gives you time to groom the business - fixing any issues which could dramatically affect its value and making it as attractive as possible to potential buyers.

    You may also want to get a preliminary valuation before you offer it for sale. For more information see value and market your business for sale.

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  • When to sell your business

    The importance of planning ahead and what to consider to help you sell your business at the best price.

    Selling at the right time can have a significant impact on the price you get for your business.

    If possible, plan ahead so that you can pick the best moment and avoid being rushed into a quick sale. For example, if you plan to retire in five years' time, it's a good idea to start planning the sale of your business now.

    It's also wise to keep your plans confidential until the sale is imminent. This will prevent a negative reaction from customers and suppliers, and eliminate unnecessary worry for your employees.

    Economic and financial considerations when selling your business

    The general state of the economy - and your sector in particular - can have an effect. It's easier for a trade buyer to fund a purchase when their own business is doing well, interest rates are low and banks are keen to lend.

    The state of your business is a more important factor. Aim to sell when profits are increasing and look likely to grow further. Consider the impact of sales cycles or seasonal fluctuations in your business - you might have fuller order books at a particular time of year. For more information, see show strong financial performance when selling your business.

    Grooming your business

    Planning well in advance also allows you to groom other aspects of your operations to ensure your business is as attractive to buyers as possible. It can also highlight any issues which might have an impact on a sale. For example, you should ensure that:

    • equipment is well-maintained
    • key contracts are in order
    • there is no outstanding litigation or unresolved disputes
    • you are complying with all legislation

    For more information, see streamline your business operations when selling your business.

    Tax considerations

    The detailed timing of a sale may also depend on the tax consequences, and any forthcoming changes to tax rules. Therefore it is advisable to seek expert financial advice.

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  • Choosing advisers when selling your business

    The role of accountants, solicitors and corporate finance advisers in the sale of your business and how they charge.

    Experienced advisers are essential for an effective sale. The right adviser can have a big impact on the success of your sale and the amount you receive.

    Accountants, solicitors and tax advisers

    You will need an accountant and a solicitor. The accountant concentrates on the financial aspects of the sale - like preparing accounts for the business. The solicitor focuses on legal issues - like drafting a sale agreement.

    You also need to use a specialist tax adviser to handle business and personal tax planning. Your accountant may be a tax specialist, or may be able to introduce you to one.

    For more information, see choose an accountant for your business and choose a solicitor for your business.

    Brokers and corporate finance specialists

    Most businesses choose to use a specialist business broker or corporate finance adviser. These are involved at an early stage to take care of:

    • producing credible sales documents
    • researching, finding and vetting potential buyers
    • pre-sale grooming
    • negotiating a sale on your behalf

    These can all be very time-consuming - so the adviser can manage the whole process, leaving you free to continue running the business.

    To find a suitable corporate finance adviser, do research, look for recommendations and check that a broker has the necessary experience and proven track record. You can start by asking your accountant or solicitor if they can recommend someone who specialises in your sector. Maybe a business acquaintance, friend or colleague has had a good experience selling their own business.

    Making your choice and agreeing fees

    Always examine advisers' skills and expertise carefully. For example, you should look at:

    • what experience they have of selling similar businesses and how successful they have been
    • how they can help you to market the business
    • what contacts they have among potential buyers
    • what references they can provide
    • what the fees involved are and what they cover
    • how they will keep a sale confidential

    If you're using a firm of advisers, make sure you feel comfortable with the people you'll be dealing with. Make sure the firm you choose is suitable for your business. For example, a specialist in selling fish and chip shops or pubs is unlikely to help sell a recruitment agency or precision engineers.

    Fees

    You will have to pay your advisers. Many advisers charge an hourly rate or up-front fees. Alternatively, you may be able to negotiate a fixed rate for a particular piece of work. Some advisers, particularly corporate finance specialists and business brokers, are prepared to negotiate a success fee as part of their payment. For example, you might pay lower fees if you don't get your target price.

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  • Show strong financial performance when selling your business

    How to get your business finances in good order and present your accounts in a clear, attractive way.

    Planning well ahead helps you ensure that your business has a financial record that attracts buyers. A first step is to ensure that your finances are in good order. Although this should be the case at any time, planning to sell your business can push you to focus on this area.

    Financial considerations

    One major area is control of working capital, through reducing stock levels and controlling creditors. There may also be opportunities to cut costs, such as renegotiating supply contracts and eliminating unnecessary perks. You can also sell underused equipment to reduce debt.

    You will want to present your accounts as attractively as possible. Buyers usually prefer businesses that show increasing profits year on year. If possible, your financial performance should be reasonably stable throughout the year. You may be able to bring forward or delay purchases and sales to help with this. You may also want to change some of your accounting policies.

    Good sales forecasts will help to increase prospective buyers' confidence in your business - but you must ensure they're realistic and can be supported with evidence. A full order book is a good sign.

    It's important that buyers believe your accounts. For example, you should make realistic provisions for bad debts. Buyers and their advisers will usually see through any quick fixes you try to use to boost profits.

    To maximise short-term profits you can reduce longer-term investment. For example, you might avoid expenses like advertising heavily or taking on new staff. But avoid excessive cost-cutting - you need to maintain spending in essential areas, otherwise the business suffers and so does the price buyers will be prepared to offer.

    For advice on these and other options, consult your accountant and your corporate finance adviser. See choosing advisers when selling your business.

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  • Streamline your business operations when selling your business

    Steps that reduce the risk for potential buyers of your business and can increase the price they are willing to pay.

    The more confidence a buyer has in your business, the more attractive your business will become and the higher the price they are likely to offer. It's essential to set out a clearly defined strategy in your business plan.

    Management team

    You also need to show that you have got a strong management team in place. If your business is too dependent on your own skills, it might damage the price it can fetch - and could even make it impossible to sell. Appointing deputy or departmental managers can enhance a company's value by alleviating that risk. You may also want to encourage key employees to stay by considering appropriate incentive schemes.

    Customers

    Aim to reduce your dependence on too few customers or on one or two key suppliers. Show how your customer base is expanding and formalise any informal deals you have with customers and suppliers.

    Other considerations

    You should also:

    • ensure you're complying with health and safety, employment and other legislation - consider asking your legal advisers to review the business
    • settle any legal disputes
    • make sure you have clear ownership of any intellectual property - see our guide on protecting intellectual property
    • ensure property contracts are sorted out
    • put in place suitable management information systems
    • ensure your finances are in good order - see the page in this guide on how to show strong financial performance when selling your business 

    The sooner you start planning, the more effectively you can do all this. There is a strong case for setting out your exit strategy in your original business plan. This will prevent sudden or misguided decisions about leaving the business which could leave you financially worse off or make the business less attractive to potential buyers. See consider your exit strategy when starting up a business.

    Throughout the sale process, continue to demonstrate that you will be flexible and co-operative. Show that you would also be willing to spend some time after the sale helping the buyer get acclimatised to the business. If you think it will help the sale, be prepared to work for the company for a fixed period after the sale is completed.

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Succession planning in a family business - McKeever Hotel Group

In this guide:

  • Is family succession the right option?

    Analysing emotional, commercial and financial issues to find the best exit strategy from a family business.

    It may be your dream to keep your business in the family but you need to consider the commercial implications of doing so. It's important to balance your emotions with hard reality.

    Long before you intend to retire, you need to ask a number of key questions:

    • Does your intended successor really want to take over - or do they feel obliged to do so?
    • Does your intended successor possess the right skills and attributes?
    • Is someone else in the business - eg a non-family manager - better placed to take your business forward?
    • Will nominating your successor set up conflict in your business - perhaps between individual family members or with other employees?
    • Will family succession provide sufficiently for your future?
    • Will family succession be tax-efficient? Read more about tax implications of family succession.

    You need to consider both your management and ownership roles before coming to any firm decisions. It may be that instead of family succession you should be considering other exit options, such as:

    • a trade sale
    • a management buy-out
    • stock market flotation
    • winding up the business

    Read more about how to consider your exit strategy when starting up a business.

    It can help to involve a third party in these important decisions. For example, a non-executive director or your business adviser can provide objective advice.

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  • One family successor or more?

    Benefits of passing a family business to a single individual - and how to make financial provision for the others.

    The best way to hand your business over to your family is to nominate a single successor from among your offspring or other relatives involved in the business. This isn't always practical or realistic, however.

    In making your decision you must:

    • determine objectively who can best take your business forward
    • aim to reduce the potential for future conflict

    Successful communication with all family members is crucial to making any decisions.

    Remember that there are other ways of being financially fair to your offspring or other relatives without involving them all in the future management of the business.

    For example, you could take out a life insurance policy for those who won't benefit from inheriting the business. Or you could split your business' shares into two classes - giving full voting rights to your successor and restricted or non-voting rights to family members with no managerial involvement.

    If nominating more than one successor is your chosen option you should ensure the co-successors have a similar vision of the business' future and a similar commitment to it. To limit the potential for conflict - which could even lead to the break-up of the business - it can help if you:

    • determine separate areas of responsibility for each successor
    • put in place formal dispute-resolution procedures
    • appoint an independent board of directors
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  • Identify a potential family successor

    Assessing the skills and aptitude and checking the commitment of potential future managers of your family business.

    Any family member you nominate to take over your business must:

    • demonstrate leadership skills
    • possess the required skills and competencies to run your business
    • be fully committed to the role
    • have the full support of others in the business

    It's important to conduct discussions early on with possible successors. To help you put personal issues aside when considering the commercial future of your business, ensure you hold these discussions on business premises rather than at home.

    And remember that although you might dream of one of your children taking over, he or she may have other aspirations.

    It can help to take advice on who is the best person for the role from an objective outsider such as a non-executive director, business adviser or accountant.

    Your successor should have both strategic plans and a vision for your business - though you may need to accept that these may be different from your own. Skills that may, for example, have helped you set up your business won't necessarily be the same as those needed to develop it further.

    It can also help if your successor has at least a few years' outside experience. This will introduce fresh ideas into the business and is likely to make them more acceptable to non-family employees.

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  • Family succession: clarify your future involvement

    Stepping down from the business and getting the financial independence needed to give your successor a free hand.

    One of the hardest things to do in business is to step down. It can be particularly hard if your business is a family one you have been running for years.

    You can make things easier for yourself if you:

    • clearly determine any future role you may have in the business
    • accept that you're no longer in charge - though your advice and support will be invaluable, your successor may have ideas very different from your own
    • plan other activities to continue to lead a fulfilling life after you leave the business

    It can, though, still be hard not to interfere in the business if you are financially dependent on its success. If you're retiring, you may find it easier to take a step back if you have personal pension arrangements that are separate from the business.

    Another way of achieving this distance is by arranging a family management buyout, in which family members - either alone or with outside help - finance a buyout of your shareholding.

    Remember, it's very important your successor is allowed to assume their role freely. If they can't, they're likely to become frustrated and the business may suffer. It can help if you remember that change is often necessary for a business to develop successfully.

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  • Manage the family succession process

    Writing and communicating a plan, setting out goals and key stages for transfer of control to a family successor.

    The key to a successful management transition is effective succession planning. This process could start as much as 15 years before you intend to step down. It is good business practice to include a written succession plan within your overall business plan.

    This should contain:

    • your key goals
    • a timetable of the transition stages - from identifying a successor to the staged, and then full, transfer of responsibilities
    • contingency plans in case the unforeseen happens, such as your intended successor declining the role

    It's particularly important that you allow your successor an adequate training period. This time can be used for on-the-job and/or more formal training. You should also include time for the development of business and leadership skills.

    One way to manage the training programme is for your successor to gain experience in other businesses. This allows them to gain independence and bring fresh skills and ideas to the business.

    You might also allow them to gain knowledge of all aspects of your business by spending time working in each area of it. A key advantage of this method is that the successor is also meeting - and possibly being trained by - your key personnel.

    Also consider whether it's best for you to phase in your departure by gradually transferring some key responsibilities to your successor or possibly reducing the days you work in the business.

    Remember - communicating your plan to your family and management is essential and will help prevent misunderstandings and future conflict.

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  • Tax implications of family succession

    Pass shares to family members tax-efficiently, maximising relief for Capital Gains Tax and inheritance tax.

    Think carefully about the tax implications of family succession.

    Business Asset Disposal Relief

    You may be able to pay less Capital Gains Tax when you sell (or ‘dispose of’) all or part of your business.

    Business Asset Disposal Relief was known as Entrepreneurs’ Relief before 6 April 2020.

    Read more about Business Asset Disposal Relief.  

    Inheritance tax reliefs

    You may qualify for business-property relief from inheritance tax if you sell or pass to relatives:

    • your business
    • an interest in your business - your share of a partnership, for example
    • shares in your limited company

    Find out more about inheritance tax reliefs.

    Capital Gains Tax

    If you dispose of your business to a relative, other than your spouse or civil partner, you may have to pay Capital Gains Tax on any gains made on these 'assets'. Note that the open market value of the assets of the business may be used in calculating the taxable gains if the disposal of an asset is for less than this value, or for something that cannot be valued.

    Read more about Capital Gains Tax.

    When examining your options, always seek expert advice from your accountant and solicitor.

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  • Transferring a business to a family member

    Succession planning in a family business - McKeever Hotel Group

    How McKeever Hotel Group successfully manages family business succession planning.

    McKeever Hotel Group is a family-run business based in Newtownabbey, which owns five hotels.

    Eugene McKeever MBE founded the Group. He and his wife Catherine are Managing Directors of the company. Their daughter Bridgene Keeley holds the position of Marketing Director and their son Eddie McKeever is Operations Director.

    Managing Director, Eugene explains how they successfully run the family business and manage succession planning.

    How it started

    "I have been working in the hospitality industry since the age of 12. I started washing dishes at Corrs Corner and then trained as a chef, which led to me holding the position of Head Chef for 11 years."

    "In 1986, Catherine and I bought our first business, which was a small restaurant in Randalstown called Granagh House. In 1993, we returned to Corrs Corner as the owners. Four years later we added 30 bedrooms to the property turning it from a roadhouse into a hotel - this was our introduction to the hotel industry."

    "Today McKeever Hotel Group has five properties: Corrs Corner Hotel, Dunsilly Hotel in Antrim, Adair Arms Hotel, Ballymena, Dillons Hotel in Letterkenny, and in 2017 we took ownership of the Dunadry Hotel and Gardens, investing £4 million and achieving a 4 star accreditation from Tourism NI."

    Building on family expertise

    "Eddie, my son, and daughter, Bridgene showed an early interest in the business. Eddie has worked in many hotels in Ireland and Scotland having studied Hotel Management. Bridgene entered the family business after completing her Business Studies degree. We have three additional children who have followed different career paths and are not currently working in the business."

    Plan for the future

    "Having a strategy is central to succession planning in a family business. We knew that family succession was the right option for us as our children, already involved in the business, showed a passion for running it in the future."

    "The biggest challenge that we faced when starting the succession planning process was how family members would react, especially our children who weren't working in the business. We needed to balance protecting the business alongside maintaining the close family bond at the same time."

    "At the beginning, it was very emotional, as you don't know how other family members will respond. Thankfully, everyone was supportive of the idea and agreed."

    Seek advice and guidance

    "When we decided that family succession was the right option for our business, we attended a course to help us fully understand how to best approach it and the steps we needed to take."

    "We then engaged our accountant, who has handled succession planning for other family businesses, to help us start the conversations as well as guiding us through the process."

    "We also engaged a solicitor for the legal parts. We continue to keep up-to-date with forums, workshops and seminars on family business and succession planning."

    Document your plans

    "In addition to engaging with specialist professionals to help start the process, we developed a family constitution. This document formalises the succession planning process. It includes details including, which family members will take over the business. We also created a shareholder agreement."

    "These documents ensure that everyone is aware of the current plans in place from family members to the senior management teams. Ensuring a gradual handover is important for us."

    Communicate effectively

    "To help plan for a smooth transition to the next generation, we are open with each other as a family and continuously communicate."

    "We have formal Board meetings to help us reach decisions. Outside meetings, we constantly chat with each other about things happening within the business over a cup of tea at work or home."

    "We also run two annual family meetings. These meetings are for every family member, those working in the business and others sitting outside the daily activity. This is where we keep everyone up-to-date on company plans."

    "I have heard so many sad stories of how succession has ruined family bonds. We didn't want that to happen to us. I am glad we started it early."

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Business transfer agents and business brokers

In this guide:

  • What type of business should I buy?

    How to choose the right business for you.

    Ideally any business you buy needs to fit your own skills, lifestyle and aspirations. Before you start looking, think about what you can bring to a business and what you'd like to get back.

    List what is important to you. Look at your motivations and what you ultimately want to achieve.

    It is useful to consider the following points.

    Your capital

    How much money do you have to invest?

    Your expectations in terms of earning

    What level of profit do you need to be looking for to accommodate your needs?

    Your commitment

    Are you prepared for all the hard work and money that you will need to put into the business to get it to succeed?

    Your strengths and abilities

    What kind of business opportunity will give you the chance to put your skills and experience to good use?

    The business sector you're interested in

    Learn as much as you can about your chosen industry so you can compare different businesses. It's important to take the time to talk to people already in similar businesses.

    Online searches and your local library will also be good sources of information. Find out how to comply with all the regulations and licences that apply to your business sector in our licence finder.

    Location

    Don't restrict your search to your local area. Some businesses can be easily relocated.

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  • Advantages and disadvantages of buying an existing business

    An overview of the advantages and disadvantages of buying an existing business.

    If you get it right, there can be many good reasons why buying an existing business could make good business sense. Remember though, that you will be taking on the legacy of the previous business owner, and you need to be aware of every aspect of the business you're about to buy.

    Before you make a decision to buy, you need to consider the advantages and disadvantages of buying an existing business.

    Advantages of buying an existing business

    • Some of the groundwork to get the business up and running will have been done.
    • It may be easier to obtain finance as the business will have a proven track record.
    • A market for the product or service will have already been demonstrated.
    • There may be established customers, a reliable income, a reputation to capitalise and build on and a useful network of contacts.
    • A business plan and marketing method should already be in place.
    • Existing employees should have experience you can draw on.
    • Many of the problems will have been discovered and solved already.

    Disadvantages of buying an existing business

    • You often need to invest a large amount up front, and will also have to budget for professional fees for solicitors, surveyors, accountants etc.
    • You will probably also need several months' worth of working capital to assist with cashflow.
    • If the business has been neglected you may need to invest quite a bit more on top of the purchase price to give it the best chance of success.
    • You may need to honour or renegotiate any outstanding contracts the previous owner leaves in place.
    • You also need to consider why the current owner is selling up and how this might impact the business and your taking it over.
    • It's possible current staff may not be happy with a new boss, or the business might have been run badly and staff morale may be low.
    Also on this site
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  • Where to find a business to buy

    Newspapers, trade journals, adverts, magazines, websites and word of mouth will help you find businesses for sale.

    There are several sources you can use to find details on businesses you may be interested in buying:

    • Many national and local newspapers carry adverts for businesses and business premises for sale.
    • Depending on what sector you're interested in, you could look in trade association journals, eg Retail Newsagent, British Baker and The Grocer.
    • Some magazines specialise in buying and selling. These sources tend to be specific to certain kinds of businesses.
    • Business brokers, transfer agents and corporate financiers all maintain lists of businesses for sale.
    • Prepare a CV and information sheet about yourself and what you are looking for, your skillset and your ability to fund. Once prepared, circulate this to agents so that they can assist in matching a business with your requirements. This also shows the agent and their client that you are efficient, organised and serious.
    • You can also use listings websites where you can search for businesses or place 'business wants' adverts, sometimes for free. You could also try searching on social media. 
    • You could also use a business transfer agent or business broker. See business transfer agents and business brokers.

     

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  • How to calculate the value of a business

    How to find out whether the business you want to buy will be profitable and value for money.

    Valuing a business is an important part of buying an existing business.

    There are several valuation methods you can use. For specific advice on valuation methods see value and market your business for sale.

    Your accountant may be able to help you value the business, but a business transfer agent, business broker or corporate financier will be best qualified to provide valuation advice.

    Determine how healthy the business is

    To get a general idea of how healthy the business is, look at:

    • the history of the business
    • its current performance - sales, turnover, profit
    • future projections or a business plan
    • its financial situation - cashflow, debts, expenses, assets
    • why the business is being sold
    • any outstanding or major litigation the business is involved in
    • any regulatory changes which might have an impact on the business

    As part of your investigations, talk to the vendor and, if possible, the business' existing customers and suppliers. The vendor must be comfortable with you doing this and you must be sensitive to their position. Customer and suppliers may be able to give you information that affects your valuation, as well as information about market conditions affecting the business. Such research can also be done through Invest Northern Ireland's Business Information Centre.

    Valuing intangible assets

    The most difficult part is valuing the intangible assets. These are usually difficult to measure and could include:

    • the company's reputation
    • the relationship with suppliers
    • the value of goodwill
    • the value of licences
    • patents or intellectual property

    You should consider how the value of these assets could be affected if you decide to buy the business. Read more about business asset valuation.

    Other considerations when valuing a business

    The list below details other factors that will affect the value:

    • stock
    • location
    • assets
    • products
    • debtors
    • creditors
    • suppliers
    • employees
    • premises
    • competition
    • benchmarking - what other businesses in the sector have sold for
    • who else in the sector is for sale or on the market
    • the economic climate - will any new government legislation have an impact on the business

    Once you have considered all these factors you can then decide how much you want to offer, or whether you want to buy it at all.

    Conducting due diligence

    If you do decide to make an offer, and agree a price with the seller, a period of time is allowed for you to verify that all of the information you have been told is accurate. This is known as due diligence. See make sure a business is worth buying: due diligence.

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  • Business transfer agents and business brokers

    A business transfer agent or business broker could also help you to find the right business to buy.

    If you are looking for a business to buy, some websites offer databases of business transfer agents and business brokers. These act in a similar way to estate agents - they are experts in valuing, marketing and selling businesses. They can help you find the right business and can also put you in touch with possible sources of finance.

    When looking for a transfer agent ensure they are members of a trade organisation like the International Business Brokers Association (IBBA) or Propertymark. Members of such organisations are subject to a code of conduct and membership demonstrates that they possess the necessary professional skills, knowledge and experience.

    If the business you want isn't available, do some research and don't be afraid to make an approach to a business owner. However, an unsolicited approach may take the vendor off guard. You should also be respectful of the vendor's need to safeguard confidentiality. A business broker, transfer agent or corporate financier will be able to help you find a business that may not be obviously for sale.

    Also, don't forget word of mouth. Ask around among trade contacts, business associates, and at exhibitions and conferences.

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  • Make sure a business is worth buying: due diligence

    Research the new business to ensure it is right for you, use solicitors and accountants to help you.

    Having done your research, you should verify the information you have been given about your prospective new business. Once an offer has been made and accepted a period of time is allowed for you to access its books and records. This is known as due diligence. It should give you a realistic picture of how the business is performing now and how it is likely to perform in the future. It should also highlight any issues or problems which might need warranting or guaranteeing.

    Due diligence

    There are traditionally three types of due diligence you should do. You might need different advisors for each:

    • legal due diligence - as part of a sales and purchase contract, the lawyers can check that the business has legal title to sell, ownership of all the assets and that regulatory and litigation issues are fully addressed
    • financial due diligence - checking the numbers and making sure there are no black holes or hidden financial issues
    • commercial due diligence - finding out the business' place in the marketplace, checking competitors and the regulatory environment

    When to begin due diligence

    Don't start due diligence until you have agreed a price and terms with the seller. They may agree to take the business off the market during your investigation. This is known as an exclusivity period - and the seller will often ask for a down payment to secure it.

    The investigation period is negotiable - but most small businesses need at least three to four weeks.

    Where to get help

    Ideally you should get accountants and solicitors to help you identify risk areas but, if it is registered with Companies House, you can also obtain copies of the company accounts, the annual return and the other key documents filed by your target business using the Companies House WebCHeck service. The documents can be downloaded from the Companies House website, some at a small fee, helping you assess the value of the business and its assets.

    What you should examine during due diligence

    Due diligence is about much more than just the finances of a business. You need to come out of this period knowing exactly what you are getting into, what needs to be fixed, what it will cost to fix, and if you are the right person to take on this business.

    Key areas to cover are:

    • employment terms and conditions
    • outstanding litigation
    • major contracts and orders
    • IT systems and other technology
    • environmental issues
    • commercial management including customer service, research and development, and marketing

    Information sources

    Dig as deeply as you can and use whatever documents are available. For instance, if you're looking at employee records, you could check out:

    • payroll records
    • staff files
    • copies of pension and profit-sharing plans, plus financial statements, if relevant
    • employment contracts
    • the staff manual
    • union contracts, if relevant

    You may also need information from external sources such as the landlord, tax office or bank.

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  • Seven steps to buying a business

    All the steps you should take to find and buy a new business.

    An organised approach will help you find and acquire the right business.

    1. Get professional advice

    Professional help is invaluable as you go through the negotiation, valuation and purchase process. See choose a solicitor for your business and choose an accountant for your business.

    You can also access advice on buying a business through a business broker.

    2. Do your research

    Research the sector you're interested in, including the best time to buy, and shortlist two or three businesses.

    3. Initial viewing and valuation

    Be discreet - the owner may not want staff to know they are selling, but be thorough and record key findings.

    4. Arrange finance

    Lenders generally require:

    • details of the business/sales particulars
    • accounts for the last three years
    • financial projections - if no accounts are available
    • details of your personal assets and liabilities

    There are several possible sources of finance you could consider. For specific advice, see bank finance, financing from friends and family and equity finance.

    5. Make a formal offer

    If you make your initial offer by phone, follow this up in writing. Head your letter subject to contract and include this phrase in all written communication.

    6. Negotiate the deal

    Before completing the sale, it may be worth trying to negotiate an overlap period so you have time to become familiar with the business before taking over.

    You and your solicitor need to verify the information you have based your offer on. See make sure a business is worth buying: due diligence.

    If you're buying premises, you may want to arrange an independent survey and valuation, even if a lender is also carrying out their own survey and valuation at your expense. Find a surveryor who specialises in commercial property.

    7. Complete the sale

    Even after you reach an agreement on the price and terms of sale, the deal could still fall through. You have to meet certain conditions of sale to complete, including:

    • verification of financial statements
    • transfer of leases
    • transfer of contracts/licences
    • transfer of finance
    • transfer of existing or new VAT registration
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  • Existing employees when buying a business

    Your legal obligations towards staff already working for the new company.

    There are regulations that govern what happens to employees when someone new takes over a business.

    These apply to all employees when a business is transferred as a going concern, meaning employees automatically start working for the new owner under the same terms and conditions. For more information, see responsibilities to employees if you buy or sell a business.

    Employment tribunal awards

    When you buy an existing business, you might decide you need to employ fewer staff. But be careful about making any changes, as an employee might take a case to an employment tribunal for unfair dismissal or unfair selection for redundancy. It's best to consult a solicitor before making any such changes. For more information see dismissing employees and redundancy: the options.

    Inform and consult employees

    If you do want to discuss reducing employee numbers or reorganising staff, it's a good idea to do this once you have completed the due diligence period, but before you take over the business. As the new employer you should inform and consult all employees - including employee representatives - who may be affected. For more information see inform and consult your employees.

    Pensions

    Under the Transfer of Undertakings (Protection of Employment) (TUPE) legislation, pension rights were specifically excluded, but subsequent legislation has amended this situation and includes:

    • if you buy a business which runs an occupational pension scheme for employees, you have to provide those employees with access to a pension scheme that meets certain minimum conditions
    • if you buy a business from a public sector body, you must offer transferred employees an occupational pension provision that is broadly comparable to that offered by the public sector body

    Read more on buying or selling a business with a pension scheme.

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Part of My New Business

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Turn your business into a franchise - eight top tips

In this guide:

  • Franchising options

    Business format franchising, licensing, and agency and distribution agreements.

    If you have a successful business and are looking to expand, you might want to open additional outlets. Franchising your business can be a very effective way of doing this. Instead of financing and managing the new outlets yourself, you work with independent franchisees.

    Business format franchising

    With business format franchising, you put together a complete business package. You then licence this format to franchisees. They run their own businesses, but use your brand and proven business model:

    • you provide an operations manual, detailing how to set up and manage a new outlet - see develop your franchise format
    • you agree a contract with your franchisee setting out what rights and obligations you each have through the franchise agreement - see the franchise agreement for a franchisor
    • the franchisee pays you franchise fees and royalties for the right to use your business concept
    • you train and support the franchisee through their start-up period - support could include ongoing marketing, business growth help, regular regional meetings or how to negotiate purchasing contracts

    Other franchising arrangements

    This guide focuses specifically on business format franchising. However there are other business arrangements which are sometimes also referred to as franchising, including:

    • selling a licence allowing someone else to manufacture and sell your product, but without telling them how to run their business
    • using an agent, who sells your product on your behalf
    • setting up a distribution agreement, whereby you sell your products to another business that then sells them to their own customers

    For more information on using agents and distributors, see sales channels to reach your customers.

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  • Advantages and disadvantages of franchising your business

    The benefits and potential drawbacks of using franchising to grow your business.

    Franchising is an excellent way of expanding a business that is already successful. However you should be aware that franchising is not suitable for every business.

    Understanding the advantages and disadvantages of franchising will enable you to decide if franchising is a suitable option for your business expansion.

    Advantages of franchising your business

    Grow your business

    Franchising your business can be a cost-effective way to grow your business. You will not have to cover the cost of investing in new premises or staff. Additional sales lead to additional profit and if you retain this in the business, in the long-term, you should have a saleable asset for your future.

    Costs

    Each franchisee finances their own franchise outlet. While the franchisee meets all the costs and collects the income, you receive franchise fees and royalties or a mark-up on products sold by the franchisee.

    Easier management

    he franchisees also run their businesses therefore reducing the management demands placed on you. The best franchisees will be highly motivated and have local expertise, making your life much easier.

    Develop your brand

    The more franchisees you have the better known your brand becomes. Your brand benefits from the capital investment of the franchisee.

    Motivated franchisees

    Franchisees are likely to be more motivated than a manager as they have a vested interest in the success of their business and therefore the success of your brand.

    Purchasing power 

    A larger business is more secure and additional turnover and profit can provide access to better deals for office equipment, vehicles and other business purchases.

    Ideas for future success

    Franchisees can contribute fresh ideas for the future success of the brand maybe outlining opportunities that you might not have identified otherwise.

    Support from others

    Being a business owner can be isolating so having a franchise network can offer support and advice.

    Disadvantages of franchising your business

    Not a fix for a failing business

    Franchising is not a solution to provide injections of capital from other people when a business is in difficulty. You should only go down the franchise route if you already have a successful business up and running.

    Costs

    Franchising your business will involve significant financial investment at the outset in order to get a successful franchise model in place for future growth of the business including investment in preparing legal documents, operations manuals, marketing materials and recruitment.

    Time

    Franchising will take a lot of time investment especially when initially setting up the franchise model. You will also have to take the time to ensure you attract the right franchisees and control what they do.

    Training and support

    You will have to develop and deliver a suite of training and support for your franchisees to successfully sell your brand. Businesses need to have systems and procedures in place that can be copied by most people to run a successful business.

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  • Is franchising right for your business?

    Offering franchisees a successful business model, and having the right resources and skills.

    Many businesses have used franchising successfully, including well-known names like McDonalds, Clarks Shoes, Domino's Pizza, Reeds Rains estate agencies, Thorntons, Subway, Toni & Guy, Costa coffee and the Zip Yard. However, franchising doesn't suit every business.

    Successful business

    To start with, your business needs to be successful. Nobody will want to buy the right to franchise a business that doesn't make money. A franchised business needs to be profitable enough to make money for both the franchisee and you.

    Replicated in different locations

    Your business needs to be one that can be replicated in different locations by your franchisees. Businesses that need high skills levels or professional qualifications can be more difficult to franchise but a number of major optician chains have succeeded in doing so.

    An attractive franchise

    At the same time, you need to offer your franchisees something that makes it worth their while paying you, instead of simply setting up their business independently. For example, you might have a recognised brand name, provide equipment or supplies they need, or help with training and marketing support.

    Having a well-organised and well-run franchise helps you recruit franchisees and is a strong incentive for franchisees to remain part of the franchise at the end of the initial franchise period.

    It's worthwhile gaining an understanding of what franchisees look for when assessing opportunities to buy a franchise.

    Your resources

    You also need to think about the demands franchising places on you. You need to invest in developing and marketing the format. If you have limited financial resources, or are already working flat out running your business, you may not be able to do this.

    Skills and motivation

    Finally, you need to have the right skills and attitude to make franchising a success. You need to be able to sell your concept to potential franchisees, and to work with and control them. Rather than dealing directly with customers yourself, you profit by helping your franchisees to be successful.

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  • Develop your franchise format

    The franchise operations manual, and protecting your brand.

    To franchise your business, you need to convince potential franchisees that they will make money. Franchisees will want to see evidence that the business model is sound, that you deliver what you have committed to in the franchise agreement and that they can make a good living running a franchise. You do this by having a successful business, and an operations manual that shows how franchisees can replicate it.

    Demonstrate demand for your product or service

    Market testing is an important part of this. If you cannot prove that there is a demand for the product or service your franchisees will be offering, they will be doomed to failure.

    If you can demonstrate a clear demand for your product and service, you then need to prove that the franchise model works through the establishment of a pilot franchise operation. The pilot franchise operation will establish that all the back-up systems including training, operating manuals, financial support and marketing campaigns are effective. It will also give franchisees an indication of likely set-up costs, break-even points and how long it will take to become profitable.

    Franchise operations manual

    The franchise operations or operating manual gives detailed information on how to set up and manage a new outlet. It highlights key information such as:

    • company information, key personnel and history
    • identifying the franchisee's responsibilities
    • how a franchisee sets up a franchise including staff recruitment and office equipment
    • main operating requirements
    • main management requirements
    • how franchisees ensure quality and consistency within their franchise
    • customer service standards
    • performance reporting and benchmarks
    • training and support
    • pricing, sales and marketing

    The work involved in writing your franchise operations manual is quite extensive. Read British Franchise Association guidance on franchising.

    Protecting your brand

    Your brand is likely to be an important part of what you offer franchisees. Even if they know how to run a successful outlet, they stay with you because your brand helps them attract customers. Protecting your brand is essential. Read more on branding for your business.

    It is important that you put in place relevant protections to prevent your intellectual property (IP) being infringed (for example by registering your trade marks and company name or obtaining patents for your products). Once you have adequate protections in place you can then benefit from licensing your intellectual property. It is also easier to protect your IP if it is registered and you can prove ownership.

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  • The franchise agreement for a franchisor

    A clear contract sets out what rights and obligations you and the franchisee have.

    When you franchise your business, you - the franchisor - enter into a legal agreement with the franchisee. A clear, written contract known as the franchise agreement is essential.

    The franchise agreement sets out what rights and obligations you each have. Key issues include:

    • what geographical location the franchisee can operate in and whether they have exclusive rights in that location
    • what rights the franchisee has to use your intellectual property - eg your trade marks
    • what restrictions there are on what the franchisee can do
    • what fees the franchisee will pay
    • how you will support and train the franchisee initially
    • what continuing support you will provide - eg national marketing campaigns or administrative support
    • how long the franchise lasts and what happens at the end of the term
    • what happens if either of you wants to end the agreement to an end or if you wnat to sell your business

    Agreements tend to be in favour of the franchisor. However, if the agreement is too one-sided in the franchisor's favour, it will be difficult to attract potential franchisees.

    Seek legal advice

    Franchise agreements involve complex legal issues. You should take advice from a solicitor with franchising expertise. Search for a legal advisor. You can also search for a solicitor.

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  • Franchise fees and royalties

    Initial franchise fees help recover development and marketing costs while continuing royalties or mark-ups provide your profit.

    When you franchise your business, you make money from fees the franchisee pays you.

    Initial franchise fees

    You charge an initial fee for the purchase of the franchise. This fee contributes towards the costs you have in developing and marketing the franchise concept.

    Most companies charge an initial fee, which can vary in cost. The fee is based on the cost of setting the franchisee up in business. This initial fee enables the franchisee to invest a larger percentage of their capital in setting up and developing the business.

    Continuing franchise fees

    Your profits come from the continuing fees that franchisees pay you. Typically, they pay a management service fee based on turnover. If you are supplying them with products or other supplies, you can also profit from the mark-up on the prices at which you sell to them. Both these methods give you a common interest: the more the franchisee sells, the more profits you both make.

    Setting the right level of continuing fees requires careful judgement. If the fees are too high, the franchise will not be attractive to new franchisees and existing franchisees might struggle to keep going. Fees should be based on the services provided by the franchisor and the costs incurred in providing them.

    You need to work out:

    • How much is the loyalty fee?
    • How often is it to be paid?
    • Is it a percentage or fixed amount?
    • If it is a percentage, what is this based on?
    • How does it compare to other franchise systems?

    Advertising and marketing fees

    Advertising and marketing fees are also usually charged as a fixed percentage of the sales achieved by franchisees. These can range from 1 per cent to as much as 5 per cent of gross sales. These fees are used to fund the regional and national marketing, advertising and brand awareness initiatives that you carry out on behalf of your franchisees.

    Your bank may have specialist franchising advisers who can work with you on your franchising business plan and the fees you plan to charge. You may also want to take franchise finance advice from your accountant or a specialist consultant. See choose an accountant for your business.

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  • Marketing your franchise opportunity

    Deciding who you want to franchise with and how to advertise and promote your business to attract potential franchisees.

    You need to be realistic about how quickly you can grow your franchise. Although new franchisees usually provide the capital for their operations, you will be involved helping them set up. For example, you will have to run initial training, or provide hands-on support when they first start trading.

    This means that you may only be able to cope with one or two new franchisees at a time. You may also prefer new franchisees to be relatively nearby, making it easier to visit them. Many new franchising companies aim for a gradual roll out across the country in this way.

    What to include in your franchise offering

    Once you have decided what to offer franchises, you need to prepare a franchise prospectus or brochure and update your website. This tells potential franchisees what you are offering and what they can expect. It should include:

    • an explanation of your product or service
    • what franchise territories you are offering
    • what the franchise fees are
    • what financial returns the franchisee might expect
    • information about your experience, franchise package, training, timescales, next steps and application form

    Bear in mind that you are generally competing with other businesses to attract potential franchisees. At the same time, think carefully about what kinds of people you want to apply. They should have the finances needed to invest in the business, and the right management skills and attitude.

    How to advertise and promote your franchise

    To attract franchisees, you may want to:

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  • Managing your franchisees

    Supporting and motivating your franchisees to grow sales and increase franchising fees.

    Franchising your business isn't about selling franchises and then forgetting about them. You have a continuing relationship with your franchisees.

    Providing support to your franchisees

    You must provide the support detailed in the franchise agreement. This can include:

    • helping them with initial set up of their franchise
    • providing training in how to run the business
    • running national promotional campaigns to increase sales
    • helping them manage their business effectively
    • innovating to keep your product or service ahead of the competition
    • monitoring their performance and processes against the standards contained in the operations manual

    Doing all this isn't just a matter of fulfilling your contractual obligations. By supporting franchisees, especially ensuring they have a solid foundation of support and training to prepare them for running the franchise, you help them succeed - and increase the fees you receive.

    Motivating franchisees

    Although it isn't included in the agreement, you also have a role to play in motivating franchisees. New franchisees can find the early months difficult and may become discouraged. Successful franchisees may reach their own comfort level and stop trying so hard to increase sales. Again, by motivating them you help yourself.

    Encourage consistency from your franchisees

    At the same time, you need to ensure that they are running their businesses the way they should. One of the keys to building a successful brand is consistency. If different franchisees run their businesses differently, your brand can suffer. Your operations manual should give clear information on the correct procedures.

    Last but not least, you need efficient administration to ensure that you collect the right franchise fees.

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  • Turn your business into a franchise - eight top tips

    Our top tips outline how you can successfully franchise your business.

    Franchising can be a very effective way of growing your business.

    Our top tips outline how you can successfully franchise your business:

    1. Explore the options

    There are a number of franchising options. The most popular route is business format franchising. This is when you put together a complete business package for a franchisee. Read more about franchising options.

    2. Consider the advantages and disadvantages

    Gain an understanding of the advantages and disadvantages of franchising. This will help you to decide if franchising is a suitable option to help you expand your business - see advantages and disadvantages of franchising your business.  

    3. Market test your franchise format

    To franchise your business, you need to convince potential franchisees that they will make money. A good way of proving that your franchise business model is sound is by market testing to show demand for your product or service. It is also advisable to test a pilot franchise operation to find out if your franchise model works. This will also give a franchisees a good indication of likely set-up costs, break-even points and how long it will take to become profitable.

    4. Develop a franchise operations manual

    A franchise operations manual should give detailed information on how to set up and manage a new outlet. It will highlight key information to help the franchisee establish their franchise outlet. The manual will help to ensure that quality and consistency is maintained. See develop your franchise format.

    5. Produce a franchise agreement

    A formal legal contract is one of the most important aspects when franchising your business. It will clearly set out the rights and obligations for both the franchisor and the franchisee. You should seek legal advice when drawing up your franchise agreement. See the franchise agreement for a franchisor.

    6. Set your fees

    When you franchise your business you will make money from the fees the franchisee pays you. You will normally charge an initial fee for the purchase of the franchise and then charge continuing fees. It is important that you set the right level of continuing fees. If the fees are too high the franchise will not be attractive to new franchisees and existing franchisees might struggle to keep operating. Find out about franchise fees and royalties.

    7. Market your franchise

    You should prepare a franchise prospectus or brochure to inform potential franchisees what you are offering and what they can expect. You should include details of your products or services, franchise territories, fees and financial returns. Read more on marketing your franchise opportunity.

    8. Manage your franchisees

    Franchising your business isn't about selling franchises and then forgetting about them. You must maintain a continuing relationship with your franchisees. You should provide ongoing support to your franchisees and help motivate them to sell your products and services. See managing your franchisees.

    For further information see our guidance on franchise your business and our video case study turning my business into a franchise - the Zip Yard (video).

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    Turning my business into a franchise - the Zip Yard (video)

    Brian Kielt, director and co-founder of the Zip Yard, explains in this video how he turned his business into a franchise.

    Brian Kielt, director and co-founder of the Zip Yard, explains how he turned his business into a franchise.

    The Zip Yard is a clothing alterations franchise. The first shop opened in Belfast in 2005, and the first franchise store opened the following year. Zip Yard stores can now be found throughout the UK and Republic of Ireland. The Zip Yard franchise has plans to enter new markets including Europe, the United States and Australia.

    Here Brian explains how he started the Zip Yard, and the support offered to new franchisees. He shares his experience of running a franchise - including the importance of offering training, signing a franchise agreement and having a strong business brand.

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Turning my business into a franchise - the Zip Yard (video)

In this guide:

  • Franchising options

    Business format franchising, licensing, and agency and distribution agreements.

    If you have a successful business and are looking to expand, you might want to open additional outlets. Franchising your business can be a very effective way of doing this. Instead of financing and managing the new outlets yourself, you work with independent franchisees.

    Business format franchising

    With business format franchising, you put together a complete business package. You then licence this format to franchisees. They run their own businesses, but use your brand and proven business model:

    • you provide an operations manual, detailing how to set up and manage a new outlet - see develop your franchise format
    • you agree a contract with your franchisee setting out what rights and obligations you each have through the franchise agreement - see the franchise agreement for a franchisor
    • the franchisee pays you franchise fees and royalties for the right to use your business concept
    • you train and support the franchisee through their start-up period - support could include ongoing marketing, business growth help, regular regional meetings or how to negotiate purchasing contracts

    Other franchising arrangements

    This guide focuses specifically on business format franchising. However there are other business arrangements which are sometimes also referred to as franchising, including:

    • selling a licence allowing someone else to manufacture and sell your product, but without telling them how to run their business
    • using an agent, who sells your product on your behalf
    • setting up a distribution agreement, whereby you sell your products to another business that then sells them to their own customers

    For more information on using agents and distributors, see sales channels to reach your customers.

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  • Advantages and disadvantages of franchising your business

    The benefits and potential drawbacks of using franchising to grow your business.

    Franchising is an excellent way of expanding a business that is already successful. However you should be aware that franchising is not suitable for every business.

    Understanding the advantages and disadvantages of franchising will enable you to decide if franchising is a suitable option for your business expansion.

    Advantages of franchising your business

    Grow your business

    Franchising your business can be a cost-effective way to grow your business. You will not have to cover the cost of investing in new premises or staff. Additional sales lead to additional profit and if you retain this in the business, in the long-term, you should have a saleable asset for your future.

    Costs

    Each franchisee finances their own franchise outlet. While the franchisee meets all the costs and collects the income, you receive franchise fees and royalties or a mark-up on products sold by the franchisee.

    Easier management

    he franchisees also run their businesses therefore reducing the management demands placed on you. The best franchisees will be highly motivated and have local expertise, making your life much easier.

    Develop your brand

    The more franchisees you have the better known your brand becomes. Your brand benefits from the capital investment of the franchisee.

    Motivated franchisees

    Franchisees are likely to be more motivated than a manager as they have a vested interest in the success of their business and therefore the success of your brand.

    Purchasing power 

    A larger business is more secure and additional turnover and profit can provide access to better deals for office equipment, vehicles and other business purchases.

    Ideas for future success

    Franchisees can contribute fresh ideas for the future success of the brand maybe outlining opportunities that you might not have identified otherwise.

    Support from others

    Being a business owner can be isolating so having a franchise network can offer support and advice.

    Disadvantages of franchising your business

    Not a fix for a failing business

    Franchising is not a solution to provide injections of capital from other people when a business is in difficulty. You should only go down the franchise route if you already have a successful business up and running.

    Costs

    Franchising your business will involve significant financial investment at the outset in order to get a successful franchise model in place for future growth of the business including investment in preparing legal documents, operations manuals, marketing materials and recruitment.

    Time

    Franchising will take a lot of time investment especially when initially setting up the franchise model. You will also have to take the time to ensure you attract the right franchisees and control what they do.

    Training and support

    You will have to develop and deliver a suite of training and support for your franchisees to successfully sell your brand. Businesses need to have systems and procedures in place that can be copied by most people to run a successful business.

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  • Is franchising right for your business?

    Offering franchisees a successful business model, and having the right resources and skills.

    Many businesses have used franchising successfully, including well-known names like McDonalds, Clarks Shoes, Domino's Pizza, Reeds Rains estate agencies, Thorntons, Subway, Toni & Guy, Costa coffee and the Zip Yard. However, franchising doesn't suit every business.

    Successful business

    To start with, your business needs to be successful. Nobody will want to buy the right to franchise a business that doesn't make money. A franchised business needs to be profitable enough to make money for both the franchisee and you.

    Replicated in different locations

    Your business needs to be one that can be replicated in different locations by your franchisees. Businesses that need high skills levels or professional qualifications can be more difficult to franchise but a number of major optician chains have succeeded in doing so.

    An attractive franchise

    At the same time, you need to offer your franchisees something that makes it worth their while paying you, instead of simply setting up their business independently. For example, you might have a recognised brand name, provide equipment or supplies they need, or help with training and marketing support.

    Having a well-organised and well-run franchise helps you recruit franchisees and is a strong incentive for franchisees to remain part of the franchise at the end of the initial franchise period.

    It's worthwhile gaining an understanding of what franchisees look for when assessing opportunities to buy a franchise.

    Your resources

    You also need to think about the demands franchising places on you. You need to invest in developing and marketing the format. If you have limited financial resources, or are already working flat out running your business, you may not be able to do this.

    Skills and motivation

    Finally, you need to have the right skills and attitude to make franchising a success. You need to be able to sell your concept to potential franchisees, and to work with and control them. Rather than dealing directly with customers yourself, you profit by helping your franchisees to be successful.

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  • Develop your franchise format

    The franchise operations manual, and protecting your brand.

    To franchise your business, you need to convince potential franchisees that they will make money. Franchisees will want to see evidence that the business model is sound, that you deliver what you have committed to in the franchise agreement and that they can make a good living running a franchise. You do this by having a successful business, and an operations manual that shows how franchisees can replicate it.

    Demonstrate demand for your product or service

    Market testing is an important part of this. If you cannot prove that there is a demand for the product or service your franchisees will be offering, they will be doomed to failure.

    If you can demonstrate a clear demand for your product and service, you then need to prove that the franchise model works through the establishment of a pilot franchise operation. The pilot franchise operation will establish that all the back-up systems including training, operating manuals, financial support and marketing campaigns are effective. It will also give franchisees an indication of likely set-up costs, break-even points and how long it will take to become profitable.

    Franchise operations manual

    The franchise operations or operating manual gives detailed information on how to set up and manage a new outlet. It highlights key information such as:

    • company information, key personnel and history
    • identifying the franchisee's responsibilities
    • how a franchisee sets up a franchise including staff recruitment and office equipment
    • main operating requirements
    • main management requirements
    • how franchisees ensure quality and consistency within their franchise
    • customer service standards
    • performance reporting and benchmarks
    • training and support
    • pricing, sales and marketing

    The work involved in writing your franchise operations manual is quite extensive. Read British Franchise Association guidance on franchising.

    Protecting your brand

    Your brand is likely to be an important part of what you offer franchisees. Even if they know how to run a successful outlet, they stay with you because your brand helps them attract customers. Protecting your brand is essential. Read more on branding for your business.

    It is important that you put in place relevant protections to prevent your intellectual property (IP) being infringed (for example by registering your trade marks and company name or obtaining patents for your products). Once you have adequate protections in place you can then benefit from licensing your intellectual property. It is also easier to protect your IP if it is registered and you can prove ownership.

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  • The franchise agreement for a franchisor

    A clear contract sets out what rights and obligations you and the franchisee have.

    When you franchise your business, you - the franchisor - enter into a legal agreement with the franchisee. A clear, written contract known as the franchise agreement is essential.

    The franchise agreement sets out what rights and obligations you each have. Key issues include:

    • what geographical location the franchisee can operate in and whether they have exclusive rights in that location
    • what rights the franchisee has to use your intellectual property - eg your trade marks
    • what restrictions there are on what the franchisee can do
    • what fees the franchisee will pay
    • how you will support and train the franchisee initially
    • what continuing support you will provide - eg national marketing campaigns or administrative support
    • how long the franchise lasts and what happens at the end of the term
    • what happens if either of you wants to end the agreement to an end or if you wnat to sell your business

    Agreements tend to be in favour of the franchisor. However, if the agreement is too one-sided in the franchisor's favour, it will be difficult to attract potential franchisees.

    Seek legal advice

    Franchise agreements involve complex legal issues. You should take advice from a solicitor with franchising expertise. Search for a legal advisor. You can also search for a solicitor.

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  • Franchise fees and royalties

    Initial franchise fees help recover development and marketing costs while continuing royalties or mark-ups provide your profit.

    When you franchise your business, you make money from fees the franchisee pays you.

    Initial franchise fees

    You charge an initial fee for the purchase of the franchise. This fee contributes towards the costs you have in developing and marketing the franchise concept.

    Most companies charge an initial fee, which can vary in cost. The fee is based on the cost of setting the franchisee up in business. This initial fee enables the franchisee to invest a larger percentage of their capital in setting up and developing the business.

    Continuing franchise fees

    Your profits come from the continuing fees that franchisees pay you. Typically, they pay a management service fee based on turnover. If you are supplying them with products or other supplies, you can also profit from the mark-up on the prices at which you sell to them. Both these methods give you a common interest: the more the franchisee sells, the more profits you both make.

    Setting the right level of continuing fees requires careful judgement. If the fees are too high, the franchise will not be attractive to new franchisees and existing franchisees might struggle to keep going. Fees should be based on the services provided by the franchisor and the costs incurred in providing them.

    You need to work out:

    • How much is the loyalty fee?
    • How often is it to be paid?
    • Is it a percentage or fixed amount?
    • If it is a percentage, what is this based on?
    • How does it compare to other franchise systems?

    Advertising and marketing fees

    Advertising and marketing fees are also usually charged as a fixed percentage of the sales achieved by franchisees. These can range from 1 per cent to as much as 5 per cent of gross sales. These fees are used to fund the regional and national marketing, advertising and brand awareness initiatives that you carry out on behalf of your franchisees.

    Your bank may have specialist franchising advisers who can work with you on your franchising business plan and the fees you plan to charge. You may also want to take franchise finance advice from your accountant or a specialist consultant. See choose an accountant for your business.

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  • Marketing your franchise opportunity

    Deciding who you want to franchise with and how to advertise and promote your business to attract potential franchisees.

    You need to be realistic about how quickly you can grow your franchise. Although new franchisees usually provide the capital for their operations, you will be involved helping them set up. For example, you will have to run initial training, or provide hands-on support when they first start trading.

    This means that you may only be able to cope with one or two new franchisees at a time. You may also prefer new franchisees to be relatively nearby, making it easier to visit them. Many new franchising companies aim for a gradual roll out across the country in this way.

    What to include in your franchise offering

    Once you have decided what to offer franchises, you need to prepare a franchise prospectus or brochure and update your website. This tells potential franchisees what you are offering and what they can expect. It should include:

    • an explanation of your product or service
    • what franchise territories you are offering
    • what the franchise fees are
    • what financial returns the franchisee might expect
    • information about your experience, franchise package, training, timescales, next steps and application form

    Bear in mind that you are generally competing with other businesses to attract potential franchisees. At the same time, think carefully about what kinds of people you want to apply. They should have the finances needed to invest in the business, and the right management skills and attitude.

    How to advertise and promote your franchise

    To attract franchisees, you may want to:

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  • Managing your franchisees

    Supporting and motivating your franchisees to grow sales and increase franchising fees.

    Franchising your business isn't about selling franchises and then forgetting about them. You have a continuing relationship with your franchisees.

    Providing support to your franchisees

    You must provide the support detailed in the franchise agreement. This can include:

    • helping them with initial set up of their franchise
    • providing training in how to run the business
    • running national promotional campaigns to increase sales
    • helping them manage their business effectively
    • innovating to keep your product or service ahead of the competition
    • monitoring their performance and processes against the standards contained in the operations manual

    Doing all this isn't just a matter of fulfilling your contractual obligations. By supporting franchisees, especially ensuring they have a solid foundation of support and training to prepare them for running the franchise, you help them succeed - and increase the fees you receive.

    Motivating franchisees

    Although it isn't included in the agreement, you also have a role to play in motivating franchisees. New franchisees can find the early months difficult and may become discouraged. Successful franchisees may reach their own comfort level and stop trying so hard to increase sales. Again, by motivating them you help yourself.

    Encourage consistency from your franchisees

    At the same time, you need to ensure that they are running their businesses the way they should. One of the keys to building a successful brand is consistency. If different franchisees run their businesses differently, your brand can suffer. Your operations manual should give clear information on the correct procedures.

    Last but not least, you need efficient administration to ensure that you collect the right franchise fees.

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  • Turn your business into a franchise - eight top tips

    Our top tips outline how you can successfully franchise your business.

    Franchising can be a very effective way of growing your business.

    Our top tips outline how you can successfully franchise your business:

    1. Explore the options

    There are a number of franchising options. The most popular route is business format franchising. This is when you put together a complete business package for a franchisee. Read more about franchising options.

    2. Consider the advantages and disadvantages

    Gain an understanding of the advantages and disadvantages of franchising. This will help you to decide if franchising is a suitable option to help you expand your business - see advantages and disadvantages of franchising your business.  

    3. Market test your franchise format

    To franchise your business, you need to convince potential franchisees that they will make money. A good way of proving that your franchise business model is sound is by market testing to show demand for your product or service. It is also advisable to test a pilot franchise operation to find out if your franchise model works. This will also give a franchisees a good indication of likely set-up costs, break-even points and how long it will take to become profitable.

    4. Develop a franchise operations manual

    A franchise operations manual should give detailed information on how to set up and manage a new outlet. It will highlight key information to help the franchisee establish their franchise outlet. The manual will help to ensure that quality and consistency is maintained. See develop your franchise format.

    5. Produce a franchise agreement

    A formal legal contract is one of the most important aspects when franchising your business. It will clearly set out the rights and obligations for both the franchisor and the franchisee. You should seek legal advice when drawing up your franchise agreement. See the franchise agreement for a franchisor.

    6. Set your fees

    When you franchise your business you will make money from the fees the franchisee pays you. You will normally charge an initial fee for the purchase of the franchise and then charge continuing fees. It is important that you set the right level of continuing fees. If the fees are too high the franchise will not be attractive to new franchisees and existing franchisees might struggle to keep operating. Find out about franchise fees and royalties.

    7. Market your franchise

    You should prepare a franchise prospectus or brochure to inform potential franchisees what you are offering and what they can expect. You should include details of your products or services, franchise territories, fees and financial returns. Read more on marketing your franchise opportunity.

    8. Manage your franchisees

    Franchising your business isn't about selling franchises and then forgetting about them. You must maintain a continuing relationship with your franchisees. You should provide ongoing support to your franchisees and help motivate them to sell your products and services. See managing your franchisees.

    For further information see our guidance on franchise your business and our video case study turning my business into a franchise - the Zip Yard (video).

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  • Franchise your business

    Turning my business into a franchise - the Zip Yard (video)

    Brian Kielt, director and co-founder of the Zip Yard, explains in this video how he turned his business into a franchise.

    Brian Kielt, director and co-founder of the Zip Yard, explains how he turned his business into a franchise.

    The Zip Yard is a clothing alterations franchise. The first shop opened in Belfast in 2005, and the first franchise store opened the following year. Zip Yard stores can now be found throughout the UK and Republic of Ireland. The Zip Yard franchise has plans to enter new markets including Europe, the United States and Australia.

    Here Brian explains how he started the Zip Yard, and the support offered to new franchisees. He shares his experience of running a franchise - including the importance of offering training, signing a franchise agreement and having a strong business brand.

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