The Buying Process 10 steps to Business Ownership
Buying a business may seem like a daunting task, and it can be; however, most business sales follow the same process. This process is not much different from the home buying process except much more in depth when it comes to inspections (due diligence). Below is a simplified version of the buying process. If you would like to learn more call and set up a time to meet with us – it’s free and educational!
1. Determine the type of business
At this step you must identify the key attributes of the business, industry and location. Be sure to review your strengths and narrow down the types of business that would benefit from your leadership.
If you are not passionate about making sales calls or cold calling prospects, then you may want to stay away businesses that live off outside sales. In buying my first business, I learned that what I thought was sales – socializing with clients and long lunches—was not really sales. Sales is having the ability to step out of your comfort zone and call on people whom you do not know and try to convince them to meet with you. And that is just the beginning of the process. Find a business that can grow from your inherent skills.
2. Determine the size of business
You want to make certain the business is big enough financially to make it a worthwhile investment and not too big that you are unable to maintain the capital requirements for investment in new equipment and other business needs. You should start by looking at your down payment. Take into consideration that your down payment will be 20-30% of the selling price of the business. Do if you have $100,000 you should look for business up to $500,000.
However, always broaden you search. The better business may be just out of you reach, but through deal structure you may be able to get exactly what you are looking for. I was looking for a business for less than $1M, when my broker asked that I look at a business that was $1.8M. I fell in love with it, and through some negotiations I was able to purchase the business at a fair price and with bank and owner financing. My down payment was 15% of the negotiated sales price. For planning purposes stick to 20-30%.
3. Start the search
It took me nearly 1 year from the time I began my search to the point at which I closed on the business. Nine months of this time was spent looking over confidential business memorandums and meeting with prospective sellers. You will learn a lot during this phase.
You may choose to look on your own going through the various web sites to locate sellers, or you can enlist the help of a business broker. If you are a good qualified buyer, you will soon have several brokers looking to find you a business. I looked over nearly 40 businesses before finding the one that I purchased. You may have to get out of your comfort zone a little in order to find a business that meets your financial, geographical and industry requirements. You will most likely have to compromise on at least one of your criterion.
4. Meet the Sellers
This is where you will get a good understanding of what the business really is. This is the first time that the buyer and seller meet, in as such, if the buyer or seller do not find each other as suitable partners in the deal – then it will not go any further. The buyer and seller must get along very well for the exchange of the business to manifest. I have met with many buyers and sellers, and no matter how attractive the business was nothing can make the stars align when the buyer and seller do not truly like each other. Go into this meeting with your eyes and ears open, and have a clear written agenda for the meeting. Get your questions answered. Even if you and the seller hit it off, do not spend the time socializing. You have work to do – get it done.
5. Decision time
Now is the time when you must consider whether this business meets your needs and whether you can work with the seller. If you have reservations, you may want to seek another meeting before moving forward. At this point you have a good amount of information to make a decision to move forward with a Letter of Intent or to just move on.
6. Letter of Intent
At this point you are letting the Seller know that you will pursue the purchase of the business. The letter of Intent is usually a one to two page document that tells the Seller that you have an interest and the means to purchase the business. You may go back and forth several times on the Letter of Intent, since it will be the catalyst to the eventual contract. Be sure to have an attorney skilled in this area to help draft up the LOI.
7. Due Diligence
This is the most important phase of the buying process and is the area where mistakes can be made. During Due Diligence you will have a chance to review the entirety of the business, its books, employees, vendors, contracts, leases, equipment and any and all other aspects of the business. You must be thorough and have the competency to complete the process or the assistance of a professional to conduct a thorough investigation into the business. If you are not an expert in accounting, then you may wish to have an accountant assist with assessing the books. You also may want to have a qualified attorney assist you with reviewing contracts and leases. This is where you will need to be organized and work quickly. Depending on the Seller, you may only have 10-15 work days to complete the Due Diligence and prepare to move to a contract.
This is also, the first time that you will have to begin truly investing in the business buying process. You should expect to pay a least $5,000.00 in professional fees to complete this process. Keep in mind, you are looking for problems in the business, and should try your best to find them. It is better to lose a little bit of money now than to make a poor decision. Do not assume anything, even if you trust the Seller, he may not even know what problems he may have. I purchased a business from a very trustworthy gentlemen who I am still friends with today. A year and a half after the purchase we had a Sales and Use tax audit from the State, and were fined over $10,000.00 because of some simple forms that were incorrectly filled out. This is about qualifying the business not the Seller.
8. The Contract
After a successful Due Diligence, the contract is drafted and sent back and forth for fine tuning. I would suggest that the buyer engage a good contract attorney to draft the contract and to make certain that it provides adequate protection. At this time, you may also want to establish your entity in a legal format; LLC, Partnership or Sole Proprietorship, it is important to work with your attorney and accountant to understand the tax and legal consequences of the type of entity that you organize under.
9. Closing Time
This is the point where the banks, attorneys and accountants begin to work to complete the required actions for closing the sale. This is also where things can become unwound. The financial institution will have the last say on the loan value of the business which could drive you back to negotiations. But do not fear, in most cases level heads will prevail and we will be closing in 45 -90 days. Be sure during this time to begin assessing your startup capital and working capital requirements as well as your transition strategy.
10. Business Ownership
You have made it through all of the hurdles to get here and now it is time to learn the business. The key at this point is to observe the operation, learn the basics from the previous owner, and document all of the processes that are in place. My first year of owning my business, I observed. I watched the employees interact, I spent much time documenting the way that things were done, and I asked many questions. Once I had all of the facts, I started making changes. I cut unnecessary expenses, I fixed broken processes and I implemented process and programs that would ensure the success of the business and that process never stops.