Buying a business: how to value and finance an acquisition as a first-time buyer
When you buy a business, you also buy its past.
In this topic: Your starting situation 4
When you buy a business, you also buy its past
Customers, revenue and staff from day one, with the previous owner's commitments attached: how to assess, value and finance the purchase.
Over coffee, the owner of the electrical installation firm where you work says he will stop next year, without a successor. The vans are on the road and you know the team. But when you buy a business, you also buy what you cannot see: a client who comes mainly for the owner, a lease about to run out, promises made to staff. Finding those is your job.
Buy an existing business or start from scratch?
Compared with starting from scratch, buying means paying up front for a business that already runs: less risk that customers fail to appear, more risk that you pay too much. A lender can at least look at real figures. In the US, the SBA's main loan programme, 7(a), lists changes of ownership among its uses, with a maximum loan of $5 million (source: US Small Business Administration, July 2026).
How to buy a business: from first conversation to handover
- 01
Search
Look close by first: your employer, a supplier, a customer or a competitor who is retiring. Decide the most you can pay.
- 02
First talks and an NDA
Ask why the seller is stopping and how long they will help. Figures usually follow a non-disclosure agreement (NDA).
- 03
Letter of intent
What transfers, the price range, the timetable and your conditions, such as financing. It is usually not binding on the deal, while its confidentiality and exclusivity clauses often are.
- 04
Due diligence
The investigation into figures, contracts, staff and legal position.
- 05
Valuation
What the business is worth to you, which is not the asking price.
- 06
Financing
Own money, a bank loan and often a loan from the seller, backed by adjusted figures and a forecast.
- 07
Purchase agreement
The price, what transfers, and the seller's warranties (statements about the business the seller stands behind), with what happens if they prove wrong.
- 08
Handover
Registrations, permits and insurance in your name, and the seller introducing you in person to the main customers.
Due diligence when buying a business: finding out is your job
A seller should answer honestly, but rarely volunteers what you did not ask. Ask at least for:
- Finance: three years of accounts and tax returns, recent management accounts and matching bank statements.
- Customers: revenue per customer, and which customers come mainly for the owner.
- Contracts: lease, suppliers and customers, including change-of-control clauses that let the other party end the contract when ownership changes.
- Staff: contracts, pay, pensions, holiday owed and disputes.
- Legal and assets: licences, intellectual property, loans, guarantees, claims, and the real state of equipment and stock.
Put the margins and costs next to your industry with the profit and cost benchmark. The strategic side of acquisitions is under strategy.
How to value a small business: pay for what transfers
A business is often worth more than its assets minus its debts. That extra is goodwill. Part of it belongs to the business, such as a brand, contracts and systems. Part belongs to the owner personally, such as customers who come out of trust in the owner, and that part leaves when the owner does. So calculate the transferable profit, what the business earns without the seller:
- Remove what leaves: customers or work that depend on the owner personally.
- Use market costs: rent for premises the seller owns privately, pay for family who help without a wage.
- Take several years: without exceptional orders or one-off windfalls.
Value with a multiple = transferable profit or EBITDA (earnings before interest, tax, depreciation and amortisation) x a multiple that reflects the risk
Value with cash flows = expected future cash flows, discounted for time and risk
Be careful with published multiples. In Aswath Damodaran's US data, business and consumer services companies with positive EBITDA were valued at 14.26 times EBITDA (source: Aswath Damodaran NYU Stern, January 2026). Those are large companies whose shares trade every day; such a multiple overstates a small business that relies on its owner.
How to finance a business purchase
- Own money: lenders want to see you carry part of the risk.
- Bank loan: based on the figures, your forecast and security; in the US, possibly under the SBA programme above, which covers complete or partial changes of ownership.
- Seller loan (vendor loan): the seller leaves part of the price in the business as a loan. If it is subordinated, repaid only after the bank, many lenders treat it almost as equity, and it keeps the seller committed to the handover.
- Earn-out: part of the price is paid only if agreed targets, such as customer retention, are met after the sale. Define target, measurement and payment date precisely.
Put price, costs and working capital (the cash tied up in stock and unpaid invoices) in your startup costs, then combine the sources in a financing plan. Other routes are in funding and grants.
Legal and tax at transfer: asset purchase or share purchase
In an asset purchase you buy selected assets and agree which contracts and debts come along. In a share purchase you buy the company with its history, so buyers of shares ask for broader warranties. A sole trader has no shares, so there you always buy assets.
| Topic | What applies |
|---|---|
| Employees, EU | Rights and obligations from employment contracts transfer to the buyer, and the transfer is not in itself grounds for dismissal, under Articles 3 and 4 of Directive 2001/23/EC (source: EUR-Lex, March 2001) |
| Employees, UK | Under TUPE, jobs usually transfer to the new owner with their terms and conditions, and continuity of employment is kept (source: GOV.UK, January 2023) |
| VAT, UK | A business transferred as a going concern: no supply for VAT and no VAT charged, if the buyer carries on the same kind of business and other conditions are met (source: HM Revenue and Customs, May 2025) |
| VAT, EU | Member states may treat the transfer of a totality of assets as no supply, with the buyer as successor, under Article 19 of the VAT Directive (source: EUR-Lex, November 2006) |
| GST/HST, Canada | An election with form GST44 means GST/HST does not apply to the sale of a business or part of it (source: Canada Revenue Agency, April 2026) |
| Asset purchase, US | Buyer and seller of a group of assets that makes up a trade or business both file Form 8594 when goodwill could attach (source: US Internal Revenue Service, March 2026) |
This is not tax or legal advice, and rules change. Have the purchase reviewed by a lawyer, a tax adviser and your accountant, and choose your legal structure deliberately.
Worked example: an employee buys the business of their boss
Marta has worked for 12 years as an electrician at an installation business with four staff, run by its owner, Peter, as a sole trader. Peter is retiring and asks €130,000 for goodwill. Due diligence shows that two large clients come mainly for Peter, and that he owns the workshop privately without charging rent. They agree €80,000 of fixed goodwill, plus an earn-out of €20,000 if both clients remain after two years. Peter keeps the receivables and payables.
| Needed | Amount | Financed by | Amount |
|---|---|---|---|
| Vans and tools | €45,000 | Own money | €40,000 |
| Stock | €15,000 | Seller loan, subordinated | €45,000 |
| Goodwill, fixed part | €80,000 | Bank loan, five years | €85,000 |
| Advisers | €12,000 | ||
| Working capital | €18,000 | ||
| At handover | €170,000 | Total | €170,000 |
| Earn-out after two years | €20,000 | From profits | €20,000 |
Fictitious Firmfocus example. The logic works in any currency.
If the bank counts the seller loan as equity, the risk-bearing contribution is €85,000, half the amount at handover.
| Item | Per year |
|---|---|
| Average profit under Peter, three years | €118,000 |
| Less profit from clients who come mainly for Peter | - €16,000 |
| Less market rent for the workshop | - €15,000 |
| Transferable profit | €87,000 |
| Less interest on the loans | - €7,750 |
| Plus depreciation, not a cash expense | €9,000 |
| Less bank repayment | - €17,000 |
| Less Marta's private drawings, including income tax | - €60,000 |
| Left per year | €11,250 |
Fictitious Firmfocus example. Interest in the first year: 7% on the €85,000 bank loan and 4% on the €45,000 seller loan, which is interest-only until the bank is repaid. A new electrician replaces Marta at the same wage.
It works, but it is tight. If the two clients stay, the business earns €16,000 a year more, enough to pay the earn-out within two years; if they leave, Marta pays nothing extra. The fixed price of €140,000 for assets and goodwill is about 1.6 times the transferable profit, far from the multiples of listed companies.
A client list or a business with staff
Small: clients or a business without staff
A bookkeeper buys a retiring colleague's clients. The price is mostly goodwill, so tie part of it to clients who stay a year.
Larger: a business with staff
You become an employer overnight, and in the EU and UK the staff transfer on their existing terms; see your first employee. With a company you choose between buying shares or selected assets, and the bank asks for more documents.
Pitfalls when buying a business
- Paying for the owner: personal goodwill walks out with the seller.
- Spending before signing: until the agreement is signed, either side can walk away.
- No working capital: wages run while the receivables stay with the seller.
- Vague earn-out or seller-loan terms: define target, measurement, interest and dates.
- Overlooking change of control: a key customer or landlord may end the contract.
Buying with someone else? Read start with a co-founder. Want a tested concept instead? See buy a franchise. More starting points are in your starting situation, and the full theme in Start a business.
How much of my own money do I need to buy a business?
Do I have to take over the staff?
Do I pay VAT on the purchase price of a business?
How do I value a small business?
Sources
- US Small Business Administration: Main loan programme (July 2026)
- Aswath Damodaran, NYU Stern: Enterprise Value Multiples by Sector (US) (January 2026)
- EUR-Lex: Directive on employees' rights in transfers of undertakings (March 2001) and the VAT Directive (November 2006)
- GOV.UK: Business transfers, takeovers and TUPE (January 2023)
- HM Revenue and Customs: Transfer a business as a going concern and VAT (May 2025)
- US Internal Revenue Service: Asset acquisition statement (March 2026)
- Canada Revenue Agency: GST/HST election for the sale of a business (April 2026)
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