Having a general understanding of the business buying process, before you get started, can determine whether it’s a rewarding experience or a frustrating failure.
This brief explanation provided below, cover the major components of buying a business.
For more information, be sure to visit the Buying A Business FAQs and Financing a Business Purchase pages of this website.
Step 1: Evaluate your resources.
Then perform a reality check! Understand your own personal goals, objectives, and financial requirements. Be realistic about your expectations and financial resources. Keep in mind the following considerations: (1) Small businesses (under $300,000 in seller’s discretionary income) generally sell for 1.5-3x multiples of SDE, plus inventory; Lower middle market companies (over $300,000 in EBITDA) generally sell for 3-6x multiples of EBITDA, including inventory and a normalized manager salary; Lenders of SBA backed loans generally require a 20-25% cash injection; and you will need working capital in addition to your down payment.
Step 2: Commit.
Business ownership is not for the “faint of heart.” Successful entrepreneurs simply cannot spend a lot of time second-guessing themselves. This doesn’t mean they make rash decisions. Rather, they commit to the research, patience, and time involved in gathering their facts. Once those are in place, a decision is made, and they move forward. The same principals apply to buying. Get all your facts, expectations and resources in place. If ownership is right for you, commit to the work and patience involved in purchasing a business. It is a process that takes time to identify the right opportunity.
Step 3: Meet with a Touchstone Business Advisors professional business broker.
In your initial meeting, you will get to know your business broker. Don’t be afraid to ask about their background and experience. You should also expect them to ask you some specific questions. Be prepared to provide accurate information about your background, your financial capabilities, skills, goals and expectations. This information helps us zero in on the types of businesses for sale best suited to your requirements. Most business owners want the sale of their business to remain confidential, so you will also be asked to sign a Confidentiality Agreement, Buyer Profile and Agency Disclosure. The Confidentiality Agreement basically states that you will not disclose the identity or share details about any business you are shown to third-parties (without prior written consent).
Step 4: Business Search.
We will help you find suitable businesses for sale. Your Touchstone Business Advisors professional business broker spends a lot of time gathering specific information about the financials, processes, management and structure of each business for sale. We develop detailed profiles, which can be shared and reviewed with you.
Step 5: Visit the Business for Sale in Person.
If you like what you see on paper, and answers to your preliminary questions, we will arrange a confidential business meeting with the seller. This is your opportunity to get a feel of the business and ask any additional questions you may have. There are no stupid questions, and often times you think of addition questions after reflecting on this initial meeting. We will communicate those to the Seller and get the answers. Our job is to get you the information you need to make an informed decision on the purchase of the business.
Step 6: Letter of Intent.
If the business for sale seems to be a good fit, we will help you draft a Letter of Intent. Some buyers are concerned when they hear the words Letter of Intent. They think they are locked-in to buying the business, but this is not the case. A Letter of Intent defines the terms upon which you are willing to buy. These often include specific contingencies that will be included in a Contingent Purchase Agreement, such as obtaining a satisfactory lease, further satisfactory review of financials, and the ability to obtain financing. The accepted Letter of Intent specifies agreement between the parties on the terms and projected timing of signing a contingent Purchase Agreement accompanied by an earnest money deposit held in our trust account.
Step 7: Due Diligence Process (Books and Records Examinations).
The Contingencies to the Purchase Agreement trigger the due diligence process. In this process you have the opportunity to inspect the owner’s books & records. It’s an opportunity to verify prior representations and confirm their accuracy. For example, do the P&L’s or receivables match the information previously disclosed on the Tax Returns. Your Touchstone Business Advisors professional business broker will coordinate communications during this process and will provide ongoing updates. We will also “quarterback” the efforts of legal and accounting professionals with lenders and closing attorneys to insure that the process moves forward in a timely manner.
Step 8: Financing.
Meanwhile, if financing is necessary, we can assist you with connecting to lending resources.
Step 9: Sale Closing.
When every contingency has been met, final preparations to transfer the business begin. Closing documents are drafted, and every effort is made to transfer the business as seamlessly as possible. We work with each party to ensure communication on transition issues. A training and transition period, (defined by the Purchase Agreement), begins on the day of closing, and is structured to ensure your familiarization with the business operations, employees, clients and vendors; all with the Seller at your side.