How To Buy A Business
by Steve Wright, Ph.d
When I was a small child my grandmother used to say, “As plain as the nose on your face.” My grandmother was a great communicator because she made nuance and detailed processing seem simple. If you have never purchased a business or if you need a refresher, this eBook is written for you.
Steps To Buying A Business
1. Building Your Team
2. Finding The Right Business
3. Meet The Owner
4. Make An Offer
5. Due Diligence
7. Post Closing
Building Your Team
Have you ever wondered why great athletes like Michael Jordan, Tiger Woods and Tom Brady have coaches? When there is a lot on the line you want others to surround you to make sure you aren’t missing something.
When people buy a house one of the first things they do is secure a real estate agent to show them houses. One of the first things a business owner should do is build a strong and trusted relationship with a business broker.
Many “really good businesses” are sold before they ever hit the public market. If you are a serious business buyer you need to request a face-to-face meeting with your business broker and so you can share your business preferences, your industry experience, and your financials.
This information will help keep you top of mind of your business broker and while he/she is listing new businesses. Beyond helping you find strong businesses your business broker is the one that will walk you through due diligence, secure the buyer/seller meetings, make connections for legal and accountant consults, help negotiate franchise transfer and new leases when applicable.
Let’s be clear: effective coaching during the business purchase process yields greater protection for business advisors. You will learn that there are thousands of moving parts with buying a business and someone has to quarterback and influence all the decision-makers along the journey.
The business seller is the one responsible to pay the business broker, not the business buyer. The commission paid to the business broker is generally paid by the business seller at the time of the closing.
Finding The Right Business
The process of searching for a business can be confusing and mind-numbing. Every business has blemishes. With so many businesses to choose from, how do you find the needle in the haystack? You may purchase one to three businesses in your lifetime whereas your business broker does 20-25 transactions every year. A mentor is someone who has been where you have not been and they have done what you have not done.
Your Business Broker will provide tons of information to assist you: listings comps, sold comps, review of the sold transaction and business similar to the target you are reviewing.
There are many places you a potential business buyer to start their searches like Bizbuysell, businessbroker, dealstream, businessesforsale, IBBa, BBFMLS, Globalbx, Loopnet, Mergerplace, Businessmart, and Bizquest. Which of these is the best to use?
If you are looking for a business in a specific area search our local page business listings. www.Tworld.com/Raleighwest. Our site is adding multiple new Wake County businesses every week. We typically have more local business listings than our top three competitors combined.
When you want to buy a house you decide on a general area, you get a financial qualification letter, you set a timeline and you then search within your budget. Once you begin searching for a house with your agent they begin to learn and know your preferences: number of bedrooms, lot size, open concept, house location, local school districts and much more. Working with a business broker works in a similar fashion: business industry, location, the price of a business that works for your budget and area business competition.
- The Asking Price – Very few businesses sell for their full asking price. If you have set aside $500,000 to purchase a business, you may want to include businesses listed up to $600,000.
- Bull’s-eye – Search for businesses according to profit or SDE (Seller’s Discretionary Income). At the end of the day, you have to eat and you are purchasing the businesses owner’s salary.
- Know Your Limitations – A good business broker can spot a good or bad business in seconds. Work with a broker with experience who knows when something isn’t right and they know which questions to ask.
- Be A Learner – Ask your business broker to meet with you and bring two or three different quality business listings to the meeting. This exercise will teach you a lot and it will allow you to compare and contrast different business listings.
- Set A Timeline – They say that one of the most important things that a first-time marathon runner has to do is select the race that they plan to run. This process sets a lot of things in motion for the potential marathon runner. I can promise, you this a person that has set a date by which to buy a business has looked at businesses with a different intensity.
Meet The Owner
To find out if you really want to buy a business or not you need to meet the owner. It doesn’t cost you any money to ask for this meeting. The way business brokers determine if you are serious about buying a business or not is by your initiation of asking for the buyer/seller meeting.
A buyer/seller meeting allows you to meet the owner, see the location, ask business-related questions and get a general feel of what is required to own this business. The financial reports are very important when buying a business but meeting the owner and hearing the business history allows you to see the business in a whole new light.
The Bottom Line - If you really want to buy a business ask your business broker to set up buyer/seller meetings for you.
Making An Offer
Here is where collective experience really matters. The expertise of working with Transworld Business Advisors and them having actually completed thousands of deals is not to be underestimated.
Once your offer is tendered (deposit may go with the offer or be put in post-acceptance) it can be countered, accepted, or declined. The amount of back and forth is usually minimal i.e. we don’t generally see it flying back and forth several times. When accepted and deposit is put in we go to the next step.
You will be asked to put a deposit down prior to due diligence. Not putting one down says you’re not serious. The deposit is going to be contingent on you signing off on the due diligence.
This is the period where you fully inspect the owner’s representations to ensure accuracy. Your broker will coordinate the efforts with your legal and accounting professionals and strive to satisfy all contingencies written into the contract.
The professionals helping you perform due diligence should have competency in the business industry you are buying. For example, if your CPA has no experience in the manufacturing business and does not understand work in progress (WIP) they may miss a critical element of the deal that is relevant.
Your business broker does not do due diligence. Most business buyers work with their legal and accounting firms to conduct due diligence. You will get an initial due diligence list from your CPA and Attorney. Try to make this list as complete as possible.
A definitive period should be set for due diligence. Open-ended timelines lead to deal fatigue and you must create urgency for CPA’s and Attorneys to move with a purpose and accountability (Time Kills Deals). Watch the clock and know when due diligence ends.
Final preparations will be made for lease transfer, franchise transfer, utility transfer, financing, merchant account transfer, licensing, inventory counts, and a ton of other items that all occur at the final minute.
The attorneys will make sure all the correct legal forms are prepared for the closing. At the closing, final payment will be made, legal forms signed and business documentation and keys will be delivered.
Congratulations, you are a business owner.
During the negotiations, there were certain things decided by both parties like training by the business seller. Immediately after the closing, the former owner needs to begin training the new business owner to run the business. The new business owner needs to meet their new employees.
Other important things that need to happen include: Meetings with clients, technical education, franchise training, computer updating, transfer of intellectual property and knowledge, transfer of utilities, transfer of websites & communications portals that help daily business operations.
If you are considering the purchase of a business in the Wake County or Raleigh business market we’d love the opportunity to earn your business. This eBook is a small way that we want to begin adding value to you in our relationship.
No one will work harder than us to help you find the perfect business. Let’s meet soon!