If you are thinking of buying an existing business, many steps must be taken to ensure that the sale goes smoothly. What follows is an outline of these steps:
Step 1 – Spot A Business You Can Purchase And Turn Into The Next Big Thing!
- Step 1 – Spot A Business You Can Purchase And Turn Into The Next Big Thing!
- Step 2: Determine The Value Of The Business
- Step 3 – Reach Out and Express An Intent to Purchase
- Step 4: Perform Due Diligence
- Step 5: Negotiate The Price And Submit A Letter Of Interest
- Step 6: Seek Out Financing
- Step 7: Close The Deal
We get it – You’ve got a great idea for a new business and your heart is set on buying an existing business. But what makes for a good business to buy? Here are some questions to consider when looking for your next venture:
- What kind of industry does the business operate in? Do you have any experience or expertise in that field?
- Are there other businesses nearby? If so, how do they compare? Is there room for more players in the market?
- How much competition does the business face from national chains and online retailers?
- Is there an opportunity for growth within the industry or market niche (or both)?
- How much does it cost to start up and run this type of business? What will be my ongoing expenses once I buy it?
Additionally, do your research:
Read reviews, check out their website, and call other customers. If they are in a good location and have enough foot traffic but don’t seem to be doing well then perhaps there are issues with their products or services that you can solve.
The whole point of this step is to find a business that is already established and can be improved. It doesn’t have to be a multimillion-dollar company, but it should be something you can make work for you.
Step 2: Determine The Value Of The Business
You must have an understanding of what this business is worth.
Because it will help you determine if the asking price is reasonable or not. Many people make the mistake of paying too much for a business and then end up losing money on it. Secondly, knowing the true worth of a business may also help you to negotiate a lower price for the business.
If you are planning to purchase a business, say a veterinary practice, for example, then a veterinary practice valuation would help you determine how much money the practice makes per month, how much cash flow it generates each month, how much inventory it has on hand and any other expenses that are associated with running the practice.
Generally, to determine the value of a company, there are three common methods: the income approach, the asset approach, and the market approach.
- The income approach is based on cash flow, which means that it takes into account all of the expenses associated with running a business and then subtracts them from sales revenue to get net profit. This net profit is then multiplied by an appropriate multiple to arrive at a fair market value.
- The asset approach determines a company’s value by adding up all the assets it owns. This includes things like inventory, equipment, and cash on hand.
- The market approach is quite simple – it simply looks at comparable businesses that have been sold recently in the same geographical region as yours.
Step 3 – Reach Out and Express An Intent to Purchase
Once you have identified a target business, the next step is to reach out and express your interest in purchasing it. You can do this by sending a letter or email to the owner(s) of the business. In your message, be sure to include:
- A brief introduction of yourself/company and why you are interested in buying their business.
- An explanation as to why they should sell their company to you instead of someone else ( e.g., you have greater financial resources, higher personal net worth than other potential buyers).
- A request for a meeting.
Pro Tip: If possible, try not to ask for too much information up front since this can seem intimidating – just get together with them so they know who they are dealing with face-to-face first before getting into details like purchase price or financial terms.
Step 4: Perform Due Diligence
Here’s an analogy to help you understand what due diligence is
Imagine you are buying a used car. You have done your research, you have checked the vehicle history report, and it has a clean title. But before you hand over your money for the car, you want to take it for a test drive.
That’s what due diligence is all about. It’s not just about checking out the physical aspects of the business. It’s also about investigating its financial and legal status.
You will want to make sure that any outstanding debt is being paid off on time, and that no lawsuits are pending against the business, and tax returns are being filed on time every year.
Customer lists should be reviewed as well to determine how much additional work you will need to do to keep them happy and loyal.
Supplier lists should also be reviewed as some suppliers may not want to do business with a new owner and it would also help you understand if they will best fit into your business model.
In addition, if there are any major changes going forward that could impact profitability (like an upcoming new product launch), then now would be the time to talk about them with your accountant or attorney so they can help make sure everything goes smoothly when it comes time to close the sale.
The title of this step is a bit misleading. The truth is that the due diligence process can take weeks or even months. You should conduct your due diligence in multiple phases to make sure you have time to learn about the business and evaluate it properly.
While you are doing that, the seller will probably be performing due diligence on you. They may ask for references from people who have done business with you in the past, they will want to know about your financial standing, and background experience. It is also not uncommon for sellers to check out the credit rating of potential buyers.
The goal of the due diligence process is to uncover any potential issues with the business so that they can be addressed before closing the deal. It’s better to get these issues out in the open now than to discover them after you have bought the business.
Step 5: Negotiate The Price And Submit A Letter Of Interest
For both sellers and buyers, the issue of money is a big one. The seller wants to get as much money as possible for their business, while the buyer wants to pay as little as possible.
Your initial offer should be based on the results of the business valuation and the information you have gathered during the research. If necessary, go back and revise your numbers based on what you learned during the process. The point here is not so much to get the seller down as low as possible but rather to try and make sure that both parties are satisfied when the deal is closed – after all, this is an important investment for both parties.
During negotiations consider the following:
- Be clear about what you can make and what you would like to pay, but don’t be afraid to ask for more.
- If they are not willing to budge on price, consider other factors that might be important to them – such as when they want to sell or how quickly they want to move on from the business.
- Is there anything about your offer that will appeal more strongly to the seller?
- Keep in mind that this is a negotiation, so don’t get too attached to any particular point of view.
- Have the seller sign a non-disclosure agreement (NDA) – this protects your confidential information from being shared with others until you have negotiated a deal and are ready to sign an agreement with the seller.
- Discuss a non-compete agreement during negotiations if it is important to your goals.
Next, submit a Letter of Intent (LOI) after negotiating an agreement on price and terms with the seller. The LOI outlines what was agreed upon in the previous step, but it is not legally enforceable.
Step 6: Seek Out Financing
Financing is one of the most important steps of buying an existing business because it will determine how much money you can afford to pay for the company and how fast you can take over its operations. There are several different types of financing available, including loans from banks or other financial institutions, partners or investors who will provide equity capital (money they put in), and grants from government agencies that assist if certain criteria are met.
Step 7: Close The Deal
Once you have made an offer on a business and the seller has accepted, it’s time to get down to brass tacks. You will need to hammer out the details of your purchase agreement, which is a legally binding document that will outline all of the terms of your deal.
Completing the transaction can happen in one of the multiple ways:
- Cash Purchase – This is the most straightforward option. You exchange your money for the business, and you are done.
- Stock Purchase – Stocks of a company are bought to own ownership – it could be all or some.
- Seller Financing – In exchange for giving up some control over how the company is managed going forward, the seller may agree to provide financing for your purchase with an agreed-on interest rate and term (say three years).
- Lease-purchase (lease-to-own) – In this scenario, you lease the business from the owner and then make monthly payments until you own it outright.
Also, be aware that there would be several standard documents that are typically signed at closing so you must have an attorney or other legally approved professional look over the deal.