A recent survey of over 200 business owners in San Diego showed that nearly half of the sample had not planned to transition their company despite the majority being over 50 years old.
If you are in the market for buying a business, having a clear plan of attack for the business buying process can lead to a profitable deal.
By developing your plan beforehand, you can win in negotiations with business owners and improve your bottom line.
There is a standard process for buying a business. There are a few important factors and terms that you need to understand.
In this article, we will walk you through everything you need to know about how to assess businesses for sale.
Buying a Business
When you are learning how to buy a business, you should take advice from thousands of business owners before you. There is a well-defined process that helps both company leaders and business brokers assess the company before acquisition.
Here are just a few of the most important steps you will need to take before making the transaction.
Putting Together a Solid Team
Ultimately, you will need to have a whole host of individuals well trained to analyze and simplify the changing of hands.
You want to get a certified public accountant or CPA. This individual can help you take a deep dive into the specific business financials.
They will likely be your foremost ally throughout the process. You’ll want to find an accountant that can work easily with your lawyer and the rest of your business team.
A lot of accountants are great at their analytical assessment and audits.
They may not be quite as good at giving business advice. You want to seek a middle ground of an accountant who can provide an assertive suggestion without overtaking input from your team.
You also want to team up with an attorney to help review documents needed before the sale takes place.
If your business can afford to pay out-of-pocket for the business, great.
However, many companies will need to partner with the lender to facilitate the purchase.
When you purchase a new business you also need to get advice from insurance advisors and set up a plan for business insurance and potentially malpractice insurance.
Finally, a business broker can greatly simplify the entire process. They work on commission from the seller that is paid out after the sale goes through.
Doing Your Due Diligence
You need to be able to answer some primary questions before you pull the trigger and purchase a business.
Due diligence is the formal name for the activities performed by the buyer before purchase. They let the buyer take a look at the company to be able to be fully informed before initiating a sale.
A business may look and sound great on the exterior, but when you look at the financials, your calculations may be incorrect.
Along with your advisors, you can take a deep dive into the business to see what is working and what isn’t.
Part of this process includes visiting the business in person. You want to talk to staff and customers to see if they are satisfied with their experience.
You also need to consider competition and how your business is positioned relative to them.
You may need to make physical upgrades to the location or housing, so you want to have a good sense of the business space before you buy.
There may be special regulatory requirements for the facility, and you also should ask for documents showing liens or judgments to help value assets.
It’s likely that the business will have some debts, so you need to look at all legal contracts and understand the position of the business in terms of its cash flow in and out.
Building Your Letter of Intent
The seller will very often require the buyer to sign a formal document signaling their intent to purchase. While this is a nonbinding agreement, it prohibits the buyer from sharing the information learned during due diligence with outsiders.
At the same time, it requires the seller to stop negotiating with other potential buyers.
This way you can purchase more time to thoroughly evaluate the business and plan for your negotiations.
Negotiation Before the Sale
The negotiation meeting is one of the most important steps in the whole process.
Remember that you are making a transaction with a person, not a robot. This means that there will be emotional factors involved.
Many business owners have been working their entire life at the business they plan to sell.
Many sellers may have an unrealistic vision of the worth of their business or misunderstand hidden profit.
The negotiation should include an official valuation of the business by a third-party appraiser. The valuation helps to set the terms for fair negotiation.
Ultimately the negotiation will determine the final price and terms.
Closing the Deal
Closing a business deal means sitting around the table with both parties and their legal counsel. Both parties have reviewed the final terms, and there is typically no more room for changes or last-minute negotiation.
During the closing, you will need to sign the bill of sale, the security agreement, and the purchase agreement. You may have already signed your purchase agreement as a part of the letter of intent.
Instead of a single payment, the purchase price may be paid out in several pieces.
There may be earnest funds that are already paid, which will be deducted from the price. Any down payment will also be deducted at this time.
If there is payment for the assumption of liability that can be deducted as well.
Finally, the remaining balance will appear in a promissory note.
Simplifying the Business Buying Process
When determining how to buy a business, business brokers can simplify the business buying process dramatically. There are standard steps and procedures that take place universally before a business sale goes through.
Business brokers can provide helpful insights to both buyers and sellers to make the process more smooth and increase value.
If you are interested in outside help for the purchase or sale of a business, Visionary Business Brokerage can help. We provide professional services that accelerate business deals and return massive value to clients. Please contact us today if you are interested in one of our offerings.