Buying a Business

Congratulations! You have decided to buy a business. It’s the start of your new life. Owning a business can lead to financial rewards and freedom; and eliminate what you don’t need in your future – a boss. But obviously it is a journey fraught with uncertainty and risk.

You should weigh two alternatives to buying an already up and running business. One, you can keep your job and be at the vagaries of your employer. Or, two, you can start a business from scratch. The first course provides a paycheck, but places you at the mercy of your boss who, as everyone knows, can limit your earning power and creativity. Besides you suffer if your boss makes a mistake, doesn’t adapt to changing market conditions, or doesn’t like you. The second is fraught with risk. We have all read about the dreadful statistics of the failure rates of small business start-ups. New businesses fail for lack of brand identity, poor business market design, or insufficient capitalization, to name a few reasons.

But buying a successful, up and running a business eliminates some, but certainly not all of these risks. The previous owner has created a brand, established a good location, hired knowledgeable and loyal employees, and most importantly developed a business model that works in today’s highly competitive business environment. In other words, the owner has taken the hits and stumbles to make the business successful

Getting Started:

Take a personal inventory: What are you good at, and what have you been trained for? You don’t have to do exactly what you have been doing at your job, but you should build on your strengths. Are you willing to relocate, and how far? How much money do you have and how much can you raise? Talk to your family: are they prepared to provide the emotional and financial support you will need? And, if you are currently employed, the most important question is: Are you willing to give up a steady paycheck in order to own your business?

Search for a Business: You may know one or two businesses that are for sale. But anyone’s knowledge is limited unless they are in the businesses for sale market full time. We suggest that you contact a business broker such as Summit Business Brokers, Inc. As you can see, we have many listings on our website, and we know of other businesses where the owner may be thinking of listing but has not yet done so.

Partner with a Business Broker: At Summit Business Brokers, Inc. we will ask you questions about your interests, experience and education. We will also want to know why you are motivated to buy a particular business. Also, we will inquire about your finances. We may ask you to complete several forms including a Buyer Profile, a Non-Disclosure Agreement, a Dual Agency Agreement and a Personal Financial Statement. These forms allow us to legally represent you in your search. We ask you to complete these forms not to be nosey or legalistic; we have to be able to be convincing about your personal and financial qualifications in order to be taken seriously by owners and their representatives such as brokers, attorneys and accountants.

Line up Your Finances: If you don’t have the necessary cash on hand, it is prudent to apply for credit before you start to look. You may want to get a home equity line of credit, or apply to a Small Business Administration lender to be pre-qualified. Once you locate a business you like, there may not be enough time to do this. And, a buyer looks much more credible if the financing is in place at the beginning and doesn’t become a contingency at the close of the purchase.

Locating the Right Business:

Start Looking at Businesses: On the businesses that interest you, Summit Business Brokers, Inc. will provide you with preliminary Business Profiles. Evaluate them and discuss with your broker why the businesses may or may not interest you. Remember that the information provided at this stage is very basic and more will be forthcoming if you are interested. If the business doesn’t interest you, explain why so the broker can refine the search for the right business. But keep in mind that no business is perfect; they all have flaws. You’re not so much buying a business as buying an opportunity. Besides, if the business didn’t have a few problems (that you can fix once you own it), it would be priced much higher.

Visit with the Owner: If you are truly interested in the business, a preliminary and confidential visit with the owner will be arranged. Often, these meetings are held at an off-site location such as a coffee shop. Usually the owner will only agree to a meeting if he or she is convinced that your professional background and finances make you qualified to buy the business. The owner does not want to waste time or risk breech of confidentiality with non-serious buyers. This meeting is a chance for the prospective buyer to ask general questions about how the business works and what skills and commitment are required to make it even more successful. Remember, the seller is just as skeptical and curious about the buyer as the buyer will be about the business and its owner. Both are contemplating making once-in-a-lifetime decisions that cannot be reversed.

Visit the Business: If the buyer and seller both feel the first meeting went well, a visit at the facility may be arranged. Often, this meeting is held after hours or on Saturday so employees are not alerted. The seller may provide additional information to answer questions that arose at the first meeting.

Make an Offer: Once you decide that the business is right, you can make a non-binding offer whereby you state the price you offer, the financing terms (including any requested seller financing), the expected seller’s consulting period after the closing, the amount of working capital to be included, and other details. The seller may accept, counter or reject your offer. The offer is non-binding subject to a Due Diligence period (usually about seven days) where the buyer can inspect the company’s financial records, customer accounts, employee data, and other relevant information. If the buyer feels the company is not what had been represented, he or she may “walk away” and any deposit money will be returned. Likewise, during the Due Diligence period, the seller may check the buyer’s background and credit capacity. The seller also may terminate if the buyer is not as represented. Keep in mind that the seller has non-economic considerations in addition to the price offered. For example, business owners care about the welfare of their employees so they want a buyer who will keep their interests in mind.

Completing the Transaction:

Closing. After the buyer and seller are satisfied with the information disclosed in Due Diligence period, a “Release of Contingencies” is signed by both parties. The offer then becomes binding and the closing period commences. If third party financing is required, Summit Business Brokers, Inc. may assist by introducing the buyer to bank or other sources. Often a loan guaranteed by the Small Business Administration is obtained. Or, seller financing may be offered. The buyer and seller usually enlist the assistance and advice of other professionals such as attorneys, accountants and financial advisors. California businesses are typically closed with the assistance of an escrow company knowledgeable in such matters. Escrow coordinates the documents and handles all funds.

Post Closing. Well done! You’re now a business owner with all of the inherent rewards and responsibilities. And you haven’t been abandoned. The previous owner will provide you with several weeks of free training, as stipulated in the purchase agreement. Often, the seller will agree to a consulting contract of several months or even years. But the terms of this contract are outside the purchase agreement and are negotiated separately.