People go into business for various reasons, including but not limited to, financial independence, job security, control of destiny, investments, tax advantage, lack of suitable job opportunities, and freedom. As a prospective buyer, you have a vision of being your own boss and calling your own shots. It is important to find a business you like and with which you feel comfortable.
The steps to buying a business are as follows:
• Evaluate the basic information on alternative businesses that sound interesting to you. In addition to profitability, be sure to buy a business you like and would enjoy. Look at the proximity to you and how far you are willing to travel each day. Also, consider the longevity of the employees and their likelihood of remaining.
• When you see a business that catches your interest, request a marketing packet from the business broker. This will give the basic information about the business, including a cash flow statement for the previous three years. From this information, you can determine if you wish to take the next step. You can contact the listing broker for any business, but it will be easier on you to select one broker to get the packets from other brokers for you.
• Schedule an appointment through a business broker to meet with the seller, asking from general to probing questions on anything and everything, except actual price negotiations. Offers are only in writing, after which negotiations may take place. Make a list of questions before the meeting so you won’t forget to ask anything. This will enable you to see if it is a fit for you and improvements you think would be needed. Do your evaluation, based on the information provided to you by the seller and business broker. Other advisors with whom you may wish to consult are attorneys and accountants. This would be a good time to prepare a business plan using the information from the seller to project the next three to five years. The most successful businesses have good plans.
• Make a written offer through the business broker, assuming all of the information you have been provided is correct, but include contingencies, which allow you to confirm such information. You will make an offer based on the cash flow of the past three years and not on your projections for the next three to five years. You are buying based on the history of the business, and your projections are what you hope to make after you buy the business. If the seller is willing to finance the purchase, the terms will be included in the offer. If outside financing is needed, the business broker can direct you to sources; and a contingency to receive financing by a certain date will be included in the offer. That contingency will void the offer if the financing is not received by the specified date.
• Once a sales price is agreed upon, make a closer investigation of the business through due diligence, confirming to your satisfaction the validity of your offer. No information should be withheld from you at this point. Look for red flags in cash flow and any hidden problems.
• For closing, it is usually advantageous to both the seller and buyer to have documents prepared by an escrow attorney, based upon the agreement signed by the buyer and seller. Both parties may then have the documents reviewed by their own attorneys, if they desire. You will decide on your legal entity before closing. Your business broker cannot give accounting or legal advice but can guide you through the entire process.
• Close the transaction and begin your first day as the owner of your own business. The seller will give you the keys to everything. You must also notify your suppliers of the change of ownership and transfer all licenses and permits, as well as open a bank account, if you have not done so before closing. You walk into your ongoing business and start making money immediately. You and the seller meet with the employees at the business to explain the sale and to assure them their jobs will remain the same. The sale is not disclosed to the employees, customers, or anyone until after closing to prevent inaccurate information from getting out that could hurt the business. As part of the purchase agreement, the seller will work with you and train you for a determined amount of time and assist in an orderly transition.
You are part of the American dream. You are a business owner!
