How To Buy A Business in 8 Easy Steps
How to buy a business in 8 easy steps. Buying a business takes patience and determination. The main reason: there is a tremendous number of buyers out there looking for a good business. Unfortunately, there are not as many good businesses out there for these buyers. In order to be successful in your journey to buy a business, you need to be prepared and have a process. Below, we provide an in-depth outline of how to buy a business in easy to follow steps. Here are the 8 steps:
- Determine what type of business you want to buy and can afford
- Find and review available businesses for sale
- Filter through the data to find a good fit
- Meet with the owner
- Make an offer to buy the business
- Survive Due Diligence
- Get financing approved and close the deal
- Make the most out of the transition period
Before you start the business buying adventure, take time to think about what you want. Sometimes a buyer knows exactly what type of business they are looking for. Most of the time, they are more open to ideas.
Identify Business Attributes
When buying a business, the most important step is determining the type of business you want to buy. We often compare finding the right business to finding the right spouse. When looking for the right spouse, you don’t know exactly who that person will be. You instead have an idea of the attributes of the person like kindness and personality. When looking for businesses, it is best to identify the traits or attributes that matter most to you.
Determine Business Location
Often the first attribute to think about is business location. Do you need you to find a local business or are you willing to relocate? Do you want to be in a big city, the suburbs or a small town? Are you wanting a resort town or a booming metropolis? Do you want a business you can run remotely? Do you want the business to stay local or do you have plans for expansion? Location is the first step in finding the right business for you.
Next, think about the attributes of the business. Do you want a service business? Do you want to sell to businesses or end consumers (B2B or B2C)? Is recurring revenue important to you? How many employees do you want the business to have? How much income does your lifestyle require? Identify the attributes of the business that will best suit your needs. This allows you to know the right business when you see it.
What Business Fits Your Skillsets
Next it is important to examine your knowledge, skills, and abilities (KSAs). What experience do you have running a business and managing people? Do you have plumbing, automotive or some other trade skills? Often when buying a business, a buyer needs to replicate the skill set of the seller. This may only be for a short time while you learn the business, but self-reflection is important. This will be important because it is one of the prerequisites for a small business loan.
Lastly, think about the type of lifestyle you want your business to provide. Some businesses may require you to be on call 7 days a week. Others companies run in a completely passive manner. Most businesses are somewhere in between the two. As an owner, it may be difficult to change the culture and expectations of customers.
Be Realistic About What You Can Afford
It is also very important to be realistic in what you can afford. While it is possible to buy a business with no money down, it is very difficult. Most businesses will require money down, a small business loan, and/or owner financing.
20% of Purchase Price Liquid
When buying a business, it is safe to assume you’ll need 20% of the purchase price in liquid funds. These funds can come from a savings, home equity, or retirement funds. Multiply the amount you have by 5 to get an estimate of your top price range.
Owner Carry Options
A very realistic option is owner financing. Most owners expect they will need to finance a portion of the sale. An SBA loan often requires a 10-15% owner financing component. For deals smaller than $250,000, it is difficult to get a loan. These smaller deals often require a large owner financing component because other loan types aren’t available.
Small Business Loan
If you are serious about buying a business, I recommend talking with an SBA lender. This will help you understand the loan process and what will be expected along the way. Some lenders will pre-qualify you in a similar way to mortgage brokers when buying real estate.
The longest part of the journey to buy a new business is finding the right business. I know buyers who have looked at hundreds of businesses without closing a deal. It can be a frustrating process to say the least. There are a number of ways to find the right business.
Use Online Business Listing Sites
Before the internet rose became popular, business listings were in newspapers classified sections and shared by word of mouth. These days, to find businesses for sale all you need to do is perform a Google search. The most popular business listing websites are bizbuysell.com, bizquest.com and businessbroker.net. Each site allows its user to refine the search parameters to location, industry, keyword, and price. Some will also allow you to set up email notifications when new businesses come available.
Overall, these sites will give you access to the businesses that are listed for sale. The difficulty is that there are much more buyers than there are viable sellers. A great business does not stay on the market long so buyers need to be ready to act fast. Buyers are at the mercy of the listings. This is a very reactive approach.
Call Owners in the Industry
For a serious business buyer, there are a few more proactive approaches. The simplest approach is call business owners directly. Google search businesses that fit your profile. Do a little extra research to find the owner’s name. Sometimes the owner’s name is in the About page of their website. Other times, you can find it by adding “owner” to the end of the search. Do as much research as you can so you know as much as possible. When you call, take caution to not tell the receptionist why you are calling. If they ask the reason for your call, I suggest saying it is a personal call—that typically will get you through.
When the owner answers, explain that you are interested in buying a business like theirs. Mention some of the items you discovered in your research that attracted you to the business. Explain that you want to reach out directly to see if they have given thought to selling their business. You’ll be surprised how many owners will be open to a discussion. If they are not interested in selling, they may know of someone in the industry who is interested.
Get Creative When Searching for a Business to Buy
Don’t be afraid to think outside the box. Perform industry searches with databases like referenceusa.com. Often, your local library will have a subscription you can use by providing your library card number. These databases will allow you to find businesses in certain industries. It also lets you refine by location, years in business, and approximate size (revenue and employees). Download entire lists and market to them in creative ways. You can send out personalized letters to the owners and then follow up with a phone call. Use your imagination and you’ll be able to find some real gems that fit your preferences.
Step 3: Filter Through the Data to Find a Good Fit
By looking through the details of a business, you gain access to often valuable information. If shared with the wrong people, it could cause damage to the business and its value. A buyer needs access to this information to make their decisions. In order to get access, a buyer needs to sign a non-disclosure agreement (NDA). These are typically pretty standard documents, but they are crucial to establishing trust.
Look at it from the Seller’s Perspective
For a business owner, the business is their baby. They’ve poured blood, sweat, and tears into its success. Their employees are like family. Their customers are their friends. Having a potential buyer look at the business creates feelings similar to having your daughter’s new boyfriend over for dinner. No one will ever be good enough for the daughter… or the business.
It is also important to understand the owner’s motivations when reviewing the financials. All owners I’ve ever met with do what they can to minimize their income tax payments. There will be ‘business expenses’ that are personal and discretionary. Getting to make these decisions is one of the benefits of owning your own business. Some of these ‘expenses’ can and should be added back to determine the true cash flow of the business. Other expenses shouldn’t be added back. Use your best judgement in determining if an expense is a true business expense or not.
What Documents to Request
Once the non-disclosure is signed, a seller will share the business profile and business financials with the potential buyer. We recommend requesting information in chunks. Start with the high-level information and decide if the business will be a good fit. Often you’ll be able to determine quickly if the business fits your desired attributes. Owners are often slow to want to share information so we typically encourage a face to face meeting next. After you’ve met in person, an owner should be willing to provide more detailed information.
Step 4: Meet with the Owner
If there is still interest in the business, we suggest either a conference call or face-to-face meeting with the owner(s). Here are some things to keep in mind and make sure you are prepared.
Respect the Confidential Process!
Even though you signed the NDA is signed, significant damage can still be done from a messy buyer. In order to establish trust with the owner, be careful to make your meeting secret. Make sure to not disclose your interest in buying the business to anyone you encounter. Employees often panic when they think a business is for sale. They think they will lose their jobs. Make it a point to try to meet when employees and customers will not be present.
What Questions to Ask
Come prepared to the meeting with a list of questions. Many of the questions will be standard to any business. Other questions will be more specific to the business and the information that was shared so far. Show the owner you respect his time by showing up prepared. The owner took time out of their busy lives to meet with you so make sure it’s worth it for everyone.
A key question to include is, “What is most important to you in a potential sale?” This will help you understand the key motivations of the seller. Understanding the motivation of the seller will help you later when drafting an offer. For additional questions, a quick Google search will provide you with more ideas.
Things to Look For
Pay attention to how an owner answers your questions. Do they pause or seem reluctant to answer any of them? Also pay attention to how the owner presents the business. What energy level do they have? Do they seem worn out or unexcited about the business? How do they speak about the employees? These are all important as you try to understand to motivations of the seller.
Step 5: Make an Offer to Buy the Business
The most important factor to closing a deal is early agreement on the key issues of the deal. This is where having a well-thought-out offer comes in. Many buyers get this part wrong.
Set the Deal Up for Success with a Well-Written Offer
Since a letter of intent is non-binding, some basic terms will suffice, right? Wrong! Ambiguity creates room for future disagreement which will often create mistrust. Deals fall apart because parties stop trusting one another. Your initial offer should include as many terms of the deal as possible. This provides a a starting point for high-level agreement on key issues.
A well written offer includes:
- Price and terms including terms of the note
- Amount of earnest money included with the offer (if any)
- Any assets to be excluded from the sale
- Amount of accounts receivable included (if any)
- Working capital amount to be included (if any)
- Timeline including key deadlines and closing dates
- High-level terms of the non-compete agreement
- Training period length and expectations of seller
Get General Agreement on All Key Issues
By including these terms in your offer, it provides room for the seller to share what’s important. Take the extra time to get general agreement on as many of the deal points listed above as possible. It may feel too detailed, but general agreement on these issues will create trust between parties. With agreement, it is far less likely a deal will fall apart because of an unexpected deal point. If a deal point needs to be amended, you have a point of agreement to move forward from.
Step 6: Survive Due Diligence
As business brokers, it is our issues with the business need to be disclosed as early as possible. We at Exit Brokers perform pre-sale due diligence with all business owners we work with. We ask the tough questions and get all the information out on the table. It is our belief something disclosed by a seller is far better than something found by a buyer. If it’s disclosed, it can be dealt with. If it’s found later—and it almost always is—it creates mistrust. Mistrust kills deals. If a seller discloses issues upfront, due diligence will be much smoother than if they don’t.
What Should You Request
There are several lists online and in books that will provide detailed list of what should be requested. Generally, due diligence is where you request any information needed to verify the information shared by the seller. Most requests will fall into either financial, legal, and operational information.
Key Things to Look For
You’ll want to follow advice from your advisors on how detailed you should get. High level, look for discrepancies in the information. A key place to start is to verify that the profit and loss statements line up with the business taxes. Next take a look at deposit summary on the monthly bank statements. Do some quick math to make sure deposits add up close to the declared business revenue. Review the operational information to make sure there aren’t any surprises. Take a closer look the contracts the business has in place. Are they assignable and what are the requirements for assignment? Perform a lien and UCC search on the business and the owner. Have your counsel perform a search for any pending lawsuits.
Towards the middle of due diligence, have your counsel start preparing the definitive agreements. This includes all the official documents needed to finalize the sale. Keep in mind that your counsel works for you, and you hired them to help you get a deal done. While they may stand firm that certain clauses need to be included here or there, remember you are in charge. Do what you can to make sure a stubborn attorney doesn’t kill a deal while they are preparing documents. Don’t hold it against them, they are only doing what they were trained to do.
Step 7: Get Financing Approved and Close the Deal
Financing for a deal will often take the longest and be the cause of pushing back the closing date. If you need financing for the deal, start as early as possible. Also share information only as requested by the banker.
Start as Early as Possible
A good SBA lender should be able to get a loan approved in 45 to 60 days. Some may take longer. A buyer needs to do all they can to help streamline the process. Get pre-qualified with the banker before you start looking at businesses. Once you have a business you are interested in, ask if the business has been pre-qualified. If not, ask the seller if you can have your SBA lender review the business. When the banker requests a document, do everything in your power to get the document to them quickly.
Don’t Overshare with Your Lender
Many of our banker friends may give us a hard time for this, but it needs to be said. Look at your banker as a resource for funds. They will need certain information to do their job, but they do not need access to all the information. Provide only what is requested. This doesn’t mean hide things. It simply means don’t overshare information that isn’t relevant to them approving your loan.
Step 8: Make the Most Out of the Transition Period
Most business sales include a training period where the seller helps the buyer learn the ins-and-outs of the business. Many buyers come into a new business fired up and ready to get the seller out. We encourage you to make the most out of this training period to set yourself up for success.
Set Expectations Early and Don’t Burn Bridges
Be very clear with sellers what you need from this training period. Make a list of what you need to learn from the seller and what you expect from them each day. A seller is used to being the boss so the more you can set your expectations for them the better. A seller spent considerable time building the business and all of the relationships that made it successful. Use this time to get introduced so you can carry on those relationships.
Lastly, do what you can to maintain a workable relationship with the seller. Sometime after the purchase a problem will arise. If you maintain a positive relationship, the seller may have dealt with the problem in the past and have a quick solution. Have an issue with a customer? It’s likely the seller had the same problem and knows the best solution. The seller will be a valuable resource as you take the reins of the business.
With a Plan and Patience, You Can Buy the Business that’s Perfect for You
The process may take several months or over a year, but these steps and you’ll soon own your own business. Start with identifying your ideal business and start your search. Develop a system to review the business profile and information. This will allow you to review businesses quickly to determine if they are a good fit. If a business is a good fit, move quickly to set a meeting with the owner.
Remember that a good business doesn’t stay on the market long. When you make an offer, take your time to get agreement on as many key issues as possible. A well-written offer will with agreement on key issues saves tremendous time and energy later. Find a thorough due diligence process online and follow it to identify red flags. Get your financing approved and the official documents drafted and agreed upon. After closing, leverage the seller as much as you can as you take your new business to the next level. Best of luck on your adventure to buy a business. If you have questions, feel free to send us a message.