Part of the benefit of buying a business is that there is likely a customer list, suppliers, knowledgeable employees in place and an established revenue stream.
Let’s address the steps specific to buying an existing business.
Identify the business
Assess the type of business and reason for ownership. First, think about the kind of business you would like to operate. Is it replacing a job in which you intend to spend a lot of time devoted to the business, or a business that you will have an ownership interest in, but not directly manage? Is it something that you are passionate about? It is said that 90% of first time business buyers do not buy the business that they initially inquired about. That may sound discouraging, but it should not be. However, a buyer could do a lot to improve on those statistics if he or she had a reasonable idea of the type of business that would suit him or her the best.
Contact a broker to identify a business. You can identify a business by contacting a broker. The broker has the agency relationship with the seller, but has the ethical obligation to treat the buyer with respect and integrity.
Provide qualifying information. If the buyer is interested in the business, the buyer will have to provide some qualifying information to the broker for the seller to determine if the buyer has the wherewithal to buy the business. Buyers should not be discouraged by this step. There are some imaginative ways to get the right person into the right business.
NDA. A qualified buyer will have to sign a Confidentiality / Non – Disclosure Agreement, (NDA) ensuring the seller that the shared information will remain confidential.
Confidential Business Review. At or around this time the seller or broker will share the Confidential Business Review Memorandum (CBR). This is prepared by the broker and approved by the seller as the seller’s representation of the business. It includes information on summary operating results, customers, customer concentration, assets owned and other relevant information.
Involve outside advisors. At this juncture, the buyer will likely want to speak to his accountant or attorney. This can likely proceed smoothly if the broker is a CPA as well.
Industry analysis. The buyer performs an analysis about the business and the area. The buyer also needs to assess whether the business provides an adequate return for the investment (asking price) and the effort that will be expended.
Meet the seller. It is perhaps a good idea to meet the seller before formulating an offer. It is likely important to have a good relationship with the seller since the knowledge transfer will only help the buyer’s success after he or she buys the business. Even if you think you can take the business quickly to the next level, you want to develop a good relationship with the seller to facilitate this process. This initial meeting might be offsite in the office of the broker handling the transaction. It gives you a good opportunity to speak to the seller and make inquiries on the business based on what you have learned from the CBR and industry information. It makes sense to bring your advisors to this meeting and the broker should be present as well.
Visit the location at a time that is also convenient with the seller. Remember that this is likely still a confidential situation within the company. If the buyer needs to see the business “in action” or during normal business hours that is a reasonable request, but arrangements need to be made by the broker.
Formulate an Offer
The offer quite likely will have contingencies such as an examination of the books and records. However, the contingencies should not be so outrageous that they are obviously not achievable. The offer might also include a knowledge transfer period that exists for a defined period after the transaction is closed.
Once the offer is accepted the parties can proceed towards due diligence.
The final area is the review of the details of the business or due diligence. This not only includes a review of books and records, but other information as well. The broker can assist in providing this information, but remember the broker represents the seller and these are the seller’s representations so it is up to the buyer to make sure that the information is satisfactory.
The buyer needs to finalize his or her financing, obtain necessary regulatory approvals, if necessary. The broker can be of assistance here.
The final step is to set the closing date and begin the experience as the owner of the business.
Execute on the knowledge transfer aspect of the transaction that was agreed upon prior to the closing.