The Buying Process
One of the most common questions asked by potential buyers who have never purchased a business (which is about 90 percent of those looking to buy a business) is how the process works. It is important that the buyer is prepared with pertinent questions about the business to obtain information necessary to make an informed decision.
Here is a basic overview of what to consider when looking at buying a business opportunity. This is just a practical and general guideline to give you an idea of how the process works:
Get the Facts
Get preliminary information on price, terms, income, cash flow, and general location. There is no point in continuing the buying process if the amount of cash necessary to buy the business is more than you are willing to invest. While the price of the business is important, the key factor is the amount of cash that is necessary to buy the business, as it is very difficult in today’s market to obtain bank financing to purchase a business. A great majority of business acquisitions today are financed in part by the seller. This is why the amount you are willing to invest is a key issue.
Also, the business must meet your basic financial needs. You will expect the business to improve under your ownership, but until that happens, you have to be prepared to meet your living expenses, service the debt (if financed) and consider a return on the amount invested.
Visit the Business
Under the guidance of the broker, you may visit the business as a customer to see if you like the location and the look of the business itself. If the business is the type that does not lend itself to a visit, the broker will make an appointment with the seller to inspect the business at an appropriate time.
Meet with the Seller
If you like the business and think it could be a good fit for you, the broker will arrange for you to meet with the seller for discussion about the business itself. Inquire about the business history, current employees, what changes might be implemented under new ownership, condition of equipment, customer base, vendors, why seller is selling, etc. Ask questions that have a bearing on whether you may want to own and operate this particular business.
Make an Offer
If you now have your basic questions answered, you may want to proceed with a “Non-Binding Letter of Intent to Purchase”, subject to verification of all the information you have received. The main purpose of a non-binding offer is to see if the seller will accept your terms, price, and structure of the sale itself. Employing outside advisors, preparation of the contract and manuvering through the due diligence will be first subject to acceptance of the price, terms and conditions outlined in the non-binding Letter of Intent.
At this point, you hopefully have arrived at a meeting of minds with the seller, have signed a formal contract, and are ready to begin removing the contingencies by performing what is commonly called “Due Diligence”. This is the phase of the process that allows you to review the operation, further evaluate the books and records, talk with the landlord if leasing, and consider other important factors of owning this business. By the way, unless you are completely familiar with the type of business being purchased, it is beneficial to include as part of the contract that the seller will stay with you a sufficient length of time to teach you the business.
Bring In Outside Advisers
Another important part of the due diligence is to bring in any advisors you may want to use to verify the information about the business. You should know most of the information, but you may want to have an accountant or CPA review and verify the financials. You may also want a lawyer to assist you with the legal review of the purchase agreement to protect your interests. Careful consideration with outside advisors and thorough due diligence is vital to success. Then, if you’re convinced that the business is right, you can instruct the broker to have the closing documents prepared.
Once all the purchase conditions have been eliminated and the closing papers drawn and approved, it is time to finalize the sale with the title agency. You will find being a new business owner to be exciting and challenging…yet very rewarding, as you create new possibilities for your future.