One of the most common questions asked by those who have never purchased a business (which is about 90 percent of those looking to buy one) is "How do I actually buy a business?". There is no right or wrong way, however, it is important that you get answers to all of your questions and that you have all the information necessary to make an informed decision.
Over the years, our experience tells us that the most efficient and practical approach is a deliberate process along these lines:
Get the Basic Facts
Get preliminary information on price, terms, income, cash flow, and general location. There is no point in continuing the buying process if the amount of cash necessary to buy the business is more than you are willing to invest. Although it's important, at this point, don't worry about the full price. A common misconception is that there is readily available financing from banks, etc; for those who are purchasing small and mid-size businesses. The reality is that is not the case. The great majority of business purchases are financed by the seller. Therefore the amount you are willing and able to invest and the minimum amount of cash the seller is willing to accept are the key issues. In general, the more cash you are willing and able to invest, the lower the full price; the less cash you are able to invest, the higher the full price.
The business has to be able to meet your basic financial needs. You always expect a business to improve under your ownership, but you have to able to meet your living expenses as well as the debt service requirements of the business. It is important to remember that almost all purchase prices and down payments are negotiable. In fact, most businesses sell for up to 25 percent less than the original asking price.
Visit the Business
Visit the business to see if you like the location and the looks of the business itself - both inside and outside. This is a visual inspection. There is no point in going any further if you don't like the physical location of the business or the appearance of it.
Get Questions Answered
If you like the business so far, it's time to get your questions answered. For example: What is the rent? How long is the lease? What have been the sales for the past few years? Can the seller support the figures you have been told? Now is not the time to have the seller's books and records completely checked. There will be plenty of time to do that and review other important issues during the due diligence phase. This is the time to visit with the seller to get those questions answered that have a bearing on whether you may want to own and operate this particular business. "What are the growth prospects of the business?", "Who are your best customers?", "Who are your competitors", "Are there key employees I will want to retain?", and so on.
Make an Offer
If you now have your basic questions answered and you want to proceed with purchasing this business, it is time to make an offer, subject, of course, to verification of all the information you have received. The main purpose in making an offer is to see if the seller will accept your terms, price, and structure of the sale itself. Remember, you will have the offer subject to your verification of the important information. It doesn't make sense to employ outside advisors and go through the time and expense of due diligence unless you can come to financial terms with the seller.
Due Diligence
At this point, you hopefully have arrived at an agreed upon framework with the seller, and you are ready to begin removing the contingencies, performing what is commonly called due diligence.
*Insider Tip
Unless you are completely familiar with the type of business purchased, it is beneficial to include as part of the agreement that the seller will stay with you (at least 30 days, and often longer, is fair with perhaps another 30 to 60 days of telephone consultation a sufficient length of time to teach you the business - at no charge.) If you want the seller to stay longer, it may be best to offer to pay him or her a consulting fee of some type.
Bring In Outside Advisors
Now is the time to bring in any advisors you may want to use to verify the information about the business. You should know most of the information, but you may want to have an accountant review the figures to verify them. You will want a lawyer to assist you with the legal paperwork and to look out for your interests. Keep in mind that outside advisors will most likely not tell you to go ahead with the purchase. They don't want the responsibility of telling you everything is just fine. And, in fairness, it is your business decision. The accountant can tell you that the numbers are versus what you thought they were. The lawyer can tell you that the paperwork is fine. If you're convinced that the business is right, you should instruct the attorney to put the deal together unless there is something illegal or unethical about it.
Once all the purchase conditions have been eliminated and the closing papers drawn and approved, it is time for the closing. Now the business is yours - Congratulations!
Is Buying Really Right For You?
An early step to buying your own business is to make sure it is the right move for you and your family. Owning one's own business is still very much "the great American dream," but it's not for everybody. Here are some questions that you should ask yourself before taking the next step. How long have you been thinking about buying a business? Many people are interested in buying their own business, but are not willing to make the commitment necessary to move forward. They continue to look just like those who continue to look at new and expensive automobiles, but will never spend the money necessary to buy. One veteran observer has said that the longer you look the less likely you are to buy.
What is your time-frame to find a business?
If you're thinking of buying a business in two years, it's good to start your education. The Oxford Capital Group, Inc. is a good place to start. Keep in mind that it really doesn't make much sense to start your search now, since any business you find now will have been sold by the time you are ready to buy. It's important, however, to arm yourself with all of the information and education available before you begin the search.
What is your primary reason for buying a business?
If you are not motivated to buy a business, you won't. You must go into business for yourself and for the right reasons. If you're tired of the corporate world, just have a "job-job," or perhaps even a dead-end job, then business ownership may be right for you. Certainly if you're unemployed or being transferred to a place where you don't want to go - buying your own business can be a viable solution.
Are you willing to invest a majority of your liquid assets in a business?
Buying your own business requires a serious financial investment. If you're the type who does not want risk, you might want to rethink owning your own business. It is not for the faint-hearted.
Are you independent enough to make your own decisions and be in control?
Operating a small business requires continual decision making. You're the boss, and you are in control. All of the decisions are yours - right or wrong. And, you will make a lot of wrong ones. The key is can you recover and keep going forward? If you brood about poor decisions or they keep you awake at night, owning your own business may not be for you.
Is your family supportive of you owning your own business?
If your family, especially a spouse, is not behind you 100 percent, then you should think twice about business ownership. It's very important that you have the support of your spouse. He or she has to understand that running a business can be time-consuming. On the plus side, however, many businesses do allow for flexibility so you can attend the afternoon little league game.
Are you open-minded about different opportunities, or are you looking for a specific type or business?
It's best if you are open-minded, especially if you are a first-time buyer. There are many types of businesses available, and you don't want to limit your choices. You should be looking for a business that will provide the income you need, (or has the ability to do so), that you can afford, where the numbers work, and, maybe most importantly, a business that you can see yourself running.
Do you have reasonable expectations?
Do you think that you can buy a business with lots of cash flow for $100? It's important that you have realistic expectations about what your money will buy. Many sellers are willing to assist in financing the sale of their business, but remember they're not going to give it away. Keep in mind that many business owners have spent years building their business and it may represent the biggest financial asset they have - they're not going to just hand it over to you.
Can you make the "leap of faith" necessary to buy a business?
Many prospective business owners do their homework, do everything necessary to begin the purchase process, and then back out of the transaction. They just don't have the courage to go forward. There is nothing wrong with that,
not everyone should buy and own their own business. However, if you don't think you can part with your money and take over operating the business on your own, you may want to take a second look at business ownership.
Do you need a guarantee?
If you are looking for a guarantee or a sure thing, then business ownership is not for you. You can and should look at all of the financials, tax returns, and all of the books and records. Remember, however, that they all represent history. You can't buy anyone else's history. A new owner makes changes, no matter how subtle. Their management style is different, and times change. You have to look at the business with the attitude of how you can improve things. The financial history of the business is certainly important, but it does not guarantee the future of the business - you do. |
