Buying a Business
Buying a business is great.
There are no startup risks; someone else did that for you. Customers have
already been acquired. A big plus. The best part is, the most businesses that
are for sale are profitable businesses, which means that you can take over an
operation and immediately start putting money in your pocket. This article will
examine what to expect as you buy an existing business. This is a very
complicated transaction, and is very similar to buying a piece of real estate.
There are many things for you to consider, and this article intends to provide
you with a brief overview of the process.
First, of course, the legal
disclaimer
Please note that the
information in this article is not to be used as consulting, accounting, or
legal advice. The following information is provided with the understanding that
this article is not a substitute for professional advice, and is merely for
informational purposes. BizPlanDB.com is not responsible for the use of any
information contained below or for the factual accuracy of any statements made
below.
The Article
As stated above, one of the
best ways to reduce the risk of owning your own business is to own one that is
currently profitable and has a market share. However, for this, you will pay a
price. This price is determined by the multiple of earnings that you will pay
for the business.
When you decide to buy a
business, you must first decide the type and industry that interests you. There
are many different ways to determine which industry is a good fit, but for the
sake of brevity we will assume that you have a business in mind, and are ready
to make an offer.
Once you contact the owner or
the owner’s business broker, you will be made to sign a confidentiality
agreement, which will provide legal assurance that you will not discuss or make
public any information you find about the business as you examine it. The
examination period is called due diligence, and once you submit an offer and are
deemed a serious buyer, you will be given two weeks to a month to examine the
past financial statements and operating history of the business. Some owners
will allow you to speak with employees and inspect premises. At this time, you
should have an attorney and an accountant working closely with you to ensure
that everything that the business owner provides you with is accurate and honest
information. Your attorney and CPA will assist you in determining that
everything is in order.
Once this has occurred, you
should make the decision whether or not to buy the business. At this point, you
will have probably submitted a preliminary offer, and now it is time to begin
negotiation. From here, you, your attorney, your CPA, his business broker, his
CPA, and his lawyer will begin to get to a fair price. Although that this seems
daunting, it really doesn’t take too much time.
One thing that you should keep
in mind throughout the process is how you intend to pay for the business. Are
you going to pay cash in full, or are you going to require financing? Most
likely, you will need some sort of financing to complete the sale. Many business
owners will carry back a note against the business to be paid back over a number
of years. These notes are usually for two to five years. The size of the note
depends on many things including your financial stability and ability to
continue to successfully run the business once you acquire it. Most seller
financings range from 20% to 50% of the total transaction. Typically, if the
business is highly specialized, you will receive more financing as you will be
required to have certain licensure or experience.
Once financing is in place, and
the final offer has been accepted, it is time to close the transaction. Your
attorney and the business owner’s attorney will draft a contract and the deal
will close. If a business broker was involved in the transaction, he or she will
be paid their commission at the closing as well. And then the business is yours.
In most cases, the owner will
stay with you for a period of time until the transitional period is complete.
The transition period includes meeting key customers, acquainting yourself with
the operations of the business, and working closely with the current employees.
Owners that provided you with financing will work diligently to make sure that
you will successfully run the business, as they are depending on you to repay
the debt they are holding. In some rare instances, owners will stay on for an
extended period with a consulting contract.
In conclusion, owning a
business is a very exciting opportunity to take control of something that you
can instantly start to make money with. However, there are many issues that you
will need to face as you purchase a business, and you should always hire the
proper counsel to guide you through the process.