One of the pillars of the American dream is owning a business. Many people weigh the options between starting a business, which can be intimidating, and buying an existing business. When you buy a business, you are eliminating many of the risks that come with starting a business and one of the big advantages is that you will potentially be walking into an existing cash flow. Here are things to consider and be prepared for when you are ready to buy a business.
Know your strengths
As a buyer, you should know the strengths and skills that you possess. These may be a result of your prior work experience, education or personal or familial experience. Each business is unique and has nuances in the way it operates. It could be that you do not directly have experience in the area that a business is specialized in; however, the strengths and skills you have will determine whether you have the capability to buy the business and operate it successfully. In addition, should you need a bank loan to buy the business, the bank will want to know that you have transferable experience.
When you start your search, be sure to keep an open mind and look at multiple businesses that line up with the skills you have. Certain businesses are in high demand and you will be competing against numerous buyers. With an open mind, you will find a business that is a good fit for you even if it means that it is in a different industry than what you first imagined.
Additionally, do not fixate on the financials of a business. While financials are important, there is more to a business than just the numbers. Many times, a seller has reached the end of their road with the business and has not made an effort to market or grow the business. However, they know exactly what it would take to grow revenues and the bottom line and can help the new owner build a strategy to enhance the business and its value.
Know your finances
Buying a business is a big investment and you should know what you can afford. Having your personal financial statements in order will help the process go smoother once you get to the point that your offer is accepted by a seller.
Know the Process
You should know what kind of process to expect when you buy a business. Setting your expectations about the process will reduce frustrations.
1. Meet with a business broker to discuss your interests and expectations. Be prepared to complete a profile and confidentiality agreements.
2. Review offering books on the businesses that you are interested in. Offering books give you more detailed information on a business and are confidential.
3. Meet the seller. The seller is the best person to tell you about the business and answer your questions. The meeting will allow you and the seller to get acquainted with each other and let you determine whether the business is one you want to pursue and make an offer on.
4. Tour the facility. If a tour of a facility is needed, the broker can set up a time before or after business hours to do a tour.
5. Make a non-binding, contingent offer. At this point in the process, you should have all the information you need to make an offer. Remember that the offer is non-binding and contingent on whatever stipulations you make in the offer. You will get a chance to review profit and loss statements, balance sheets, tax returns, leases and all other relevant documents in due diligence. This is usually a highly negotiated process, especially for good businesses, and you should be prepared to be up against other offers.
6. If your offer is accepted, you will need to deposit earnest money. The next step is due diligence. During due diligence, you will have the ability to review all relevant documentation and you will have to provide documentation that proves that you can buy the business. Due diligence takes 45 to 60 days on average; it may take longer depending on other factors like the lending process.
7. Closing occurs when due diligence is satisfactory and a binding asset purchase agreement is signed.
8. After closing occurs, there will be a transition period that takes place which would have been negotiated beforehand.
You will be required to sign a confidentiality agreement before receiving any confidential information on a business. Remember to maintain confidentiality at all points in the process. If you absolutely have to discuss the deal in detail with someone, have them sign a confidentiality agreement too. Maintaining confidentiality helps the business retain its value and protects you from liability for breach of confidentiality.
You will not need an attorney at the beginning of the process, but you will need an attorney during due diligence. Retain an attorney that specializes in business transactions. Having any other type of attorney will only slow down the process and maybe even result in the deal falling apart.
As you start your search for a business to buy, keep these tips in mind. Being familiar with the process and setting your expectations of what you need to do and what you need to be prepared for will help you be more efficient in your search and will help you avoid certain bumps in the road.
If you are ready to start your search, contact us at (773)-243-1603 or email us at [email protected] to speak with one of our business brokers.