There could be many reasons for you to buy an existing business. You may be an entrepreneur wanting to diversify or have surplus cash to invest in a business. Whatever be the reason, you need to consider certain things before buying a business. These include long-term growth potential, current cash inflows, outstanding creditors and assets of the business.
All this can be challenging if you’re buying a business for the first time. In this post, we’ll discuss six steps that should be part of business buying process.
1) Decide which type of business you want to buy
Buying a business is one thing and running it is different. The financial aspect of a business can be intimidating but you also need passion and experience to run it. When deciding to buy an existing business, consider the things you are passionate and experienced about. The business you buy will need your expertise, resources and commitment to grow.
Once you know what type of business you want to buy, identify businesses in your area of interest. They should have positive cash flows, a strong customer base and promise long-term growth. You can contact local attorneys, brokers or online broker sites to find out which businesses are up for sale, and then evaluate them.
2) Find the Value of the Business
After identifying a handful of businesses, the next step is to find the worth of the business. You can do this yourself or hire a professional. If you’re not familiar with the process of valuing a business, we recommend taking the help of a business consultant.
Valuing a business is critical to understanding what the fair purchase price of the business is. You will not purchase businesses at a higher price than their fair value Typically, the valuation is calculated based on the net earnings, assets and liabilities of the business. A professional business consultant can do this for you.
3) Make and Discuss an Offer
After valuing and narrowing down on a business, proceed by making an offer to the business owner. This will let you know what price the seller is looking for. If your offer is close to what the seller expects, you both can begin negotiating.
The negotiation will be a back and forth process because you’ll be discussing the all different terms of the purchase. You can decide what components of the business you want to buy or keep – assets, employees, patents or creditors. Some sellers may be willing to give you a discount if you agree to a full takeover of the business.
4) Letter of Intent (LOI)
Now that you have discussed the terms of the sale and have come to an agreement, give a letter of intent to the seller. LOI is a non-binding agreement that includes details regarding the purchase price and conditions agreed upon. The letter shows the seller that you are interested in buying their business.
A letter of intent gives you the exclusive rights to buy the business and is usually valid for 90 days. No one else can buy the business during this time.
5) Perform Due Diligence
Before completing the final purchase of a business, the most important step is to perform due diligence. In due diligence, you’ll get to know about the operations, existing contracts, lease and rent agreements, marketing strategies and pending litigations of the business. You should also review all the crucial documents like past income tax returns, balance sheets, registration, and license certificates.
6) Execute the Purchase
If there are no discrepancies in due diligence, you can go ahead with purchasing the business. You can use a combination of cash and debt – raise loans to finance the deal. Conventional business loans, SBA Loans or Rollover for Business Startups are some ways to raise capital at low-interest rates.
Once you have raised the funds, prepare a final purchase agreement. For this, you should hire a lawyer to review and make sure the agreement is in your best interest. Then both the parties can sign the agreement and finalize a closing date. Your lender will transfer the money to an escrow account and transfer it to the seller on the closing date.
After completing the purchase, check to see if you need to apply for certification or license. This will depend on the state your business is located in.
All these things can be challenging to manage alone but taking professional help can make things easy. Our business consulting firm can guide you in identifying the right prospective businesses and complete takeovers. Contact us to know more.