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.
TheFinanceResource.com is not responsible for the use of any information contained
below or for the factual accuracy of any statements made below.
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
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.