Eleven Steps in Buying a Business
Purchasing an established business can be a daunting and complicated course of action for many individuals. Understanding the steps involved in the acquisition and doing the necessary planning and preparation will permit the buyer to increase their chances for a successful transaction. Following an established and proven course of action will not only reduce the stress that often comes with chartering new territory but also eliminate many of the risks and unknowns that often derail a business acquisition.
- PERSONAL ASSESSMENT
The first step in buying a business starts with introspection. This course of action should be a thoughtful and honest examination of the candidates’ strengths and weaknesses, skill set, in addition as their likes and dislikes. This examination will assist in narrowing the selection for the logical and best choice of business enterprise to pursue.
What talents, skills, and experience do you bring to the table and what are the types of businesses that can excel with these attributes behind the helm. Here are a number of questions that the introspection phase should include:
- What kind of business do you want to function? Is it one where you are the owner/manager or do you prefer to have a management team in place?
- What hours are you obtainable to dedicate to the business? clearly, owning a small business will never be a 9 to 5 endeavor. Having said that, it will be important to determine the time obtainable to manage the business. Do you prefer a B2B business that operates M-F 8-6pm or are you more flexible and would consider a consumer oriented business that is open late or often over the weekends?
- Are you successful at sales, meeting with clients, and being the confront of the business or are you better appropriate to a managerial role and running the business from behind the scenes with an established sales force in place?
- Are you able to travel and be away from home for several days or do you require a business that keeps you close to the family each day of the week?
- Do you have a background and skill in the manufacturing of products or is it the service industry or dispensing form that is more your forte?
- Do you have any licenses or certifications that qualify you for a certain business? If not, are you prepared to acquire the necessary credentials required for successful ownership if the targeted business requires such certifications?
- What are the things that you really enjoy doing? What are the things that you prefer not to do? The best advice is to start considering businesses in industries that the buyer is passionate about.
These are a few of the questions that will help an individual estimate the types of businesses that they are best suited for and assist in narrowing the range of enterprises where the buyers skill set, experience, capabilities and passions can be leveraged.
- DEVELOP INVESTMENT CRITERIA
Now that you have established the kind of business that is a ‘good fit’ the next step is to put pen to paper and concisely define your investment criteria. If you will be seeking bank financing it will be important that the investment criteria match your begin again or the transferrable skills that you are bringing to the table. The investment criteria will state the following:
- What is the price range of the business that you can provide to buy?
- What is the geographic location for the business you seek to buy?
What kind of business are you looking for?
- What industry should the business be in?
- Management structure (owner managed or management team in place)?
Size of business. In terms of:
- Number of employees
- Number of locations
- Recurring revenue form vs. project based
If you plan to use bank financing to acquire a business it is important that you acquire a prequalification before your search course of action. Not only will this the ‘prequal’ provide you with the data as to how large of a business you qualify to buy but it will also demonstrate to the business broker and seller that you are a serious buyer. If you are serious about buying a business and will need to acquire financing, receiving a bank prequalification is a required step at some point in time. consequently, what would be the reason for procrastinating and not having this in place at the outset? There is zero downside and only important benefits. Contact your business broker as they will be able to recommend a financial institution that does business acquisition lending for the kind of business you are interested in purchasing. This is an area where having the right lender is basic.
- BUSINESS SEARCH (Individual or Retained)
What is the time of action that you are following to locate and qualify businesses for buy? Will you be conducting the search on your own or will you utilize the sets of a specialized business intermediary or broker. There are literally thousands of business for sale at any given moment. A course of action needs to be established for conducting the search and qualifying businesses. Few of these businesses are of the quality, quality, and profit level that discriminate them as being best in copy. What have you done to ensure that you will stand out and be given the proper consideration when engaging a broker regarding a business for sale? The business-for-sale marketplace is plagued by unprepared and non-serious buyers curious about any enterprise listed for sale. It takes the right preparation, message, and specialized team to establish contact and quickly get to the point where the business can be qualified as a authentic candidate or one that should be dismissed. Too many prospective buyers fall prey to the late business internet search course of action and clicking on any business that catches their interest. Unfortunately, serious buyers get lost in the field. This is where the prior steps come in handy – having a personal bio, an established investment criteria, in addition as a lender preapproval.
A business that is professionally represented for sale will have a number of documents obtainable for review by prospective buyers (e.g. Financials, Asset list, Business Summary, etc). Buyers will need to execute an NDA in addition to demonstrating that they are qualified both from a financial standpoint in addition as an experience standpoint to be considered a serious candidate.
At this stage the buyer should already have completed individual research or have first-hand knowledge on the industry. For those without direct industry experience there are trade magazines for just about any business sector not to mention the wealth of data obtainable on the World Wide Web.
The buyer should have a list of questions already prepared, designed for one purpose – calculating if the business meets the majority of elements within the investment criteria. The buyer should understand the value of the business. If the business is priced outside of their financial ability they should not be evaluating the business and wasting anyone’s time, most importantly their own. It will be important for a serious buyer to recognize that there is no such thing as a perfect business and each will have different strengths and weaknesses. Most buyers are seeking businesses with growing revenue, a stable customer base, excellent staff, established policy & procedures, and increasing profits. What are the most important qualities that you are seeking? Ranking the criteria is often helpful when qualifying businesses. Finding a business which meets some but not all of the criteria is more the norm than the exception. In many situations, the buyer may be positioned and experienced to enhance certain business aspects that are deficient. Following this approach will also permit the buyer to quickly and efficiently eliminate those businesses which will not be a appropriate fit, an endeavor that will save all parties important time. A quick no is far better than a slow no for everyone’s sake. Lastly, the buyer should recognize that the better the business is, the more they will be expected to pay.
After the initial information exchange the buyer should prepare a second set of questions based upon the particulars of the specific business. After receiving this information the time has been reached where the buyer knows whether their basic criteria has been met. The buyer is clear on the business valuation, the financials, and the business operations and the seller (by the broker) should be clear on how the candidate will be financing the transaction.
A teleconference should be arranged by the business broker to fill in any gaps of information and to allow specific business questions to be asked by the buyer and answered directly by the seller. Should this interaction satisfy the requirements of all parties a personal meeting and site visit is often arranged. During this meeting the buyer, seller, and broker can discuss the framework for a transaction that will satisfy the needs of each party. Only serious contenders should be involved at this point. Now is not the time to waste anyone’s time as a tire-kicker if the goal is not to proceed. Buyers should be clear that in spite of of signing the NDA, data such as names of specific clients will not be divulged, not just at this point, but until the transaction closes.
- LETTER OF INTENT – TERMS SHEET
A Letter of Intent (LOI) and Terms Sheet are typically non-binding documents which are used for one basic purpose… to determine if there is a meeting of the minds between the buyer and seller on the price and terms of the sale. The LOI will outline the strategic points of the agreement. Investing time at this stage and preparing a more detailed document will avoid misunderstandings and prevent meaningful terms from being renegotiated later. Some of the general points that should be addressed include:
- Who is buying the business?
- What is being acquired (Assets, Stock)
- Transaction price and how that money is being paid
- Loan commitment letter date.
- hypothesizedv closing date.
- Is there a consulting agreement and if so, what are the terms?
- What are the contingencies for the transaction to close?
- LOAN COMMITMENT LETTER
With an executed (signed) LOI in hand the buyer will now need to acquire a ‘Loan Commitment Letter’ from the lender. A loan commitment letter is produced by the bank and will confirm that the buyer is approved for financing to acquire the business. The Loan Commitment Letter is generated after a thorough review of both the buyer’s data in addition as the target business’ data.
- DUE DILIGENCE
Most business acquisition transactions will require bank funding. The bank will have a proven, structured, and very detailed due diligence course of action and it is this methodology that the buyer should rely upon when acquiring a business. Why attempt to recreate the wheel? The bank works solely on behalf of the buyer and their basic interest is in ensuring that the buyer is acquiring a business that has the required financial framework for the new owner to be successful and positioned to repay the principal and interest on the acquisition loan. The bank will provide a DD checklist that covers a wide variety of documents, including but not limited to the following areas:
- Financial Statements & Tax Returns
- Asset & Inventory List
- AP & AR
- Corporate Books & Records
- Contingent limitations
- Sales & Marketing Materials
- Employee Agreements & assistance Plans
- Equipment, means, & character Leases
- Customer and Supplier Contracts or other Agreements
- Insurance Policies
- buy CONTRACT
The business for sale contract aka Definitive buy Agreement (DPA) is typically drafted by the Buyer’s ‘Transaction Attorney’ after the LOI is in place. If the proper care was taken in developing the LOI, the DPA should be a much easier document to produce. In circumstances where the major deal elements were not properly negotiated or addressed in the LOI, the DPA becomes much for complicated and a higher risk level is associated with the transaction closing.
Upon execution of the LOI, the DD period commences and the DPA should begin being drafted. The DPA is the binding contract covering all aspects of the transaction. The DPA will cover all assets that are connected to the buy, including but not limited to:
- Assets/Stock being acquired
- Price, Terms, & Payment
- Representations & Warranties
- Non-Competition Agreements
- Lease Assignments
- Landlord Consents
- Consulting Agreements
- Asset Allocation
In most transactions the DPA is executed at the closing table but this is not a requirement. In certain circumstances, the buyer and seller will elect to execute this Agreement prior to the actual close.
The DPA is the actual contract that consummates the sale of the business. It will include a number of Schedules and displays detailing all of the terms of the sale. This is a custom Agreement and the level of detail, length, and companion schedules and attachments is predicated on the particular business.
During this stage the buyer should already have their new business entity established (assuming it is not a stock sale), business bank accounts produced, insurance policies prepared, merchant credit card accounts (if applicable) in place, etc.
- THE CLOSING
The closing should be the easiest part of the time of action. Why? Because all of the above steps have been followed diligently by both parties. For business-for-sale transactions the “closing” is simply the time of action by which both the buyer and seller execute (sign) all of the documents that have already been discussed and agreed to. Having the right transaction team in place from the start (transaction attorney, business broker, and lender) will make this a smooth course of action. Each of the advisors has their role and when done properly the closing becomes an uneventful step.
The terms and conditions of the business change will vary based upon the kind and complexity of the individual business. clearly, the specifics will have already been spelled out and agreed to in the DPA. For some businesses, a customary 4 week change period is all that is required. For others, the Seller will assist for an extended period of time, often under an employment or consulting contract. When bank financing is involved, especially the SBA, the Seller is typically restricted to a consulting or employment contract that does not extend beyond 12 months. The change period is the stage where the seller and new owner implement the change of ownership and how that is communicated to employees, customers, suppliers, etc.
The change of ownership represents a big change and the goal is (often) to make it as seamless as possible. To be effective, this course of action must be planned in improvement with all stakeholders in agreement