If you are thinking of purchasing an existing business, rather than starting one from the ground up, here is what the purchase process looks like. Of course, each business and deal is completely different, but these are the general stages that you can expect to encounter in an average business sale. Being prepared and having the big picture in mind is always helpful when beginning a daunting process like this.
1. Prepare
It’s important to understand exactly why you are looking to buy a business in the first place. Setting clear and realistic goals for the business is the first step. You may want your business to generate an income for you every year. Or you might be more interested in something you can scale up, add value to, to sell again down the line. Having a clear goal in mind will help you more sensibly assess potential purchases. It will also be a useful tool for the business broker you enlist to help find you a suitable business.
2. Find a Business
You’ve decided to purchase an existing business. This is often preferable to starting one from scratch, due to the fact that the business is already earning money and you will have an instant income, rather than waiting several years for a new business to build that up. Now you need to decide exactly which business to buy. You can do this by searching the internet, talking to local business owners, or the easiest and most efficient way would be to work with a business broker. A broker has access to all businesses that are currently for sale, and can help you narrow your search and find the one that is right for you. Buyers do not pay a business broker’s commission, so it is COMPLETELY FREE to use one.
3. Confidentiality Agreement
Once you find a business you are interested in learning more about, you will be required by the seller to fill out a confidentiality agreement or non-disclosure agreement (NDA). You will have to do this for each and every business you inquire about, so be prepared to repeat the process. Confidentiality is very important to a seller, and it needs to be respected.
You will also need to provide the broker with your background and financial information. This will be something that you do alongside the confidentiality agreement. A listing broker of a business will be screening potential buyers, as to minimize risk of confidentiality and also to make sure that the buyer is financially able to purchase the business. Don’t be surprised when you are asked details about your professional and personal background as well as your financial situation. They will want to know up front how much cash you have to work with and whether or not you plan to use financing for the purchase. Being truthful and honest from the beginning is the way to a successful transaction.
4. Review the Businesses
Once you have had the chance to review all of the confidential details of the business, you need to evaluate whether or not it meets your goals, personally and financially. Will the profits and owner benefit be enough for you? How much does the current owner work in the business and does that match what you want to or are able to do? Does the business interest you? Do you see potential for growth?
5. Meet the Seller/Owner
If the answers to number 4 above are all positive, then it is time to meet the seller and tour their business (if applicable).
6. Make an Offer
If the seller meeting and/or business tour goes well, and you want to move forward in the process, you will then make an offer. The way an offer is structured is very important, in order to protect you and your interests. That’s why it’s a good idea to use a business broker to help you. They will have all of the contracts and forms you need, plus, they will know exactly how to structure terms that are in your best interest.
7. Accepted Offer or Counter Offer
Most often, an initial offer won’t be accepted. Usually there is some back and forth negotiations based on price or contract terms. Several counter offers back and forth are often done before an agreement is reached.
8. Mutual Acceptance and Meeting of Minds
Once all parties have agreed and signed, you are now under contract and the due diligence period begins.
9. Deposit
You will negotiate a deposit, which will be noted on the purchase contract. This deposit will need to be made to the closing agent who will be handling the closing of the sale.
10. Due Diligence
This is a set period of time (agreed upon in your purchase contract) that you have to dig deeper into a business’s financial records, lease, employees, physical location etc. This is the buyer’s chance to ask any and all questions of the seller. The buyer has the option to hire an accountant to review the financials and advise accordingly, if they require additional assistance. This is where you decide whether or not you want to keep moving forward in the process, based on what you see during this due diligence period.
11. Financing and Appraisal
If you are using financing, you will get your loan commitment after due diligence is complete. An appraisal may also be done at this stage as well if you are purchasing the real estate as well as the business. If you plan to use some form of financing, whether it be an SBA loan or private loan, you will have a financing contingency in your contract. Make sure your business broker knows EXACTLY what your plans are, so that they can best help you navigate this process.
12. Prepare for Closing
This is where you get all of your ducks in a row. This will be a very busy time of preparation for you, and it is time to collaborate with the seller to get much of this prep work done. During a business sale, buyer and seller work closely together to get the business prepared for the sale and the handover to the new owner. There are many things that need to happen during this process, and it is really down to the seller to communicate to the buyer everything you need to do and need to get set up, in order to be ready to take over operation after the closing date.
A third party closing agent will prepare all of the closing documentation. Depending on your state, this is normally done by a closing attorney or escrow company who has experience with business sales. You will need to review the settlement or closing statement that they send over to make sure everything is correct.
13. Closing
Once all contingencies are lifted, financing is in place, and funds have been sent to the closing agent, then the closing takes place. All parties sign the closing documents and then the business becomes yours.
14. Training/Handover
In your purchase contract, you will specify a certain amount of time that the seller will train you for. Normally it is a few weeks, but it depends on the business. Sometimes if there is a very capable manager employed, then they can handle much of the training themselves.
Interested in learning more about the buying process? Have questions about purchasing a business?
Would you like to speak with a broker who can help?