The way to buy a business on the best terms is to understand and aggressively deal with all the financial and practical details.
If you have never bought a business before, it is understandable to feel overwhelmed. Each of these steps can be understood if you deal with them one at a time. I will provide an understanding of the big picture in these seven steps.
1. Determine your budget – As a new buyer, you are excited about the thought of purchasing a business. You should begin looking at the realities of the dollars and cents from the start.
The most likely situation is that you’ll buy a business on an installment basis. Normally, you will make a down payment to the seller and then pay the balance in monthly installments over a number of years. There are many ways to come up with the money to purchase the business either personally or through a bank loan. Perhaps, you’re not used to thinking in broad financial terms. In that situation, you may want to speak with your accountant who can assist you through the process. As an entrepreneur, you do need a dose of financial reality to prevent you from putting yourself into a painful financial situation.
2. Finding the correct business for you – The most time consuming part of buying a business may be your search for the right business to buy. You will probably uncover many businesses for sale and the key is to narrow your focus to meet your criteria. In searching for a business to buy, it’s important to know what you want early in your search. Stay patient through this process to avoid making a poor business purchase. Listed below are some questions to consider before you buy.
· Are you interested in owning a service business, retail business, a light manufacturing business, or a distributorship?
· What type of products or services do you prefer to deal with daily?
· What businesses would be a good fit for your experience and skills and what would give you enjoyment?
· Is the location of the business an issue for you?
· How much can you afford to invest in the business?
3. Analyzing the sellers information – You will want to learn as much as possible about the history of the business before making any commitment to buy it. First, exam the financial data from the seller – financial statements (balance sheet and income statement) and tax returns. If the business has some real opportunities, you can dig into the details even more. One thing to consider, if you have never owned a business before, you may want to hire a CPA or small business consultant to help you understand the numbers.
4. Determine what a business is worth – You will need to spend a considerable amount of time and thought to the value of any business that you’re thinking about buying. Even if you have an idea about what you want to spend, you will want to talk with similar business owners, research trade publications, and speak with others in the industry. As you may have heard, valuing a business is both an art and a science. There are several textbook methods you can use: valuing the assets, calculating return on investment, basing the price on comparable sales or using a formula based on sales. Whatever method you decide, you will most likely end up with a range of values rather than just one number. It’s important to be able to defend the price you offer, in the end, the number you present to the seller won’t be as meaningful as the one the seller is willing to accept.
5. Negotiating the business deal – When you arrive at a business to consider, there will be plenty of enthusiastic meetings with the seller. Once you start digging into the business and you may learn about many operating issues. Also, you don’t want to assume liability for hidden problems like tax issues or a lawsuit. Most likely you will want to make installment payments and let the seller know about your entrepreneurial skills, creditworthiness, and how you will make a success of the purchase. Of course, there will be other legal and practical details to discuss.
· Sale structure - (Entity or just the assets)
· Transfer of assets – (Will the seller keep some of the assets)
· Terms of the payments – (Full purchase or installment payments)
· Protection for seller – (What kind of security interest will you provide the seller)
· Protection for buyer – (If there is misrepresentation by the seller, how will you be able to unwind the deal)
· Seller warranties – (What warranties will the seller make about the business or assets)
· Buyer warranties – (What warranties will you make to the seller)
· Liabilities – (How will you handle the current debts)
· Ongoing business connection – (Will the seller perform any services for the business in the future)
· Ability to compete – (Will the seller be able to immediately invest, own, or work for a similar business)
6. Signing the sales agreement – The most important document in the purchase of the business is a sales agreement. The document should capture all the details of the sale. If there is a dispute before or after the sale closing, the terms of your sales agreement will be the place you will investigate to resolve any issues.
7. Closing of the business purchase – Once you sign the sales agreement, there is one more step before the business is transferred to you. This takes place at the closing meeting and you will pay the sale price, or the agreed-upon down payment, and sign a promissory note and security agreement. In turn, the seller will sign LLC documents, or stock certificates, or a bill of sale for the business assets, plus all the additional paperwork needed to turn ownership over to you.
This is a checklist to provide you with some high level insight on what to expect before you purchase your business. Remember, do your research, meet with experienced professionals, and most importantly, follow your passion as a successful entrepreneur!
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided in this website is not all inclusive and such information should not be relied upon as being all inclusive.