What Should You Expect When You Buy a Business?
Finding a good business for sale can be a challenge, as can thoroughly analyzing it and closing the deal. The process can take months, consuming much of a buyer’s time. Below is the framework that most business purchases follow.
What should you consider when you choose a business?
A buyer needs to consider many facets of the business before purchase. What particular type of business is it? What kind of income does the business need to make? What locations are acceptable? The prospective buyer also needs to consider how the business will be financed — by the owner, the buyer or an outside lender? The buyer should also consider the risks he or she is willing to take and whether he or she can afford the time and energy to purchase and run the business.
Where can you find businesses on the market?
Entrepreneurs can look for businesses for sale in newspapers and trade publications, through networking or by enlisting a business broker. If a buyer uses a broker, the broker will review several businesses that meet the buyer’s criteria and financial qualifications. Buyers must sign a confidentiality agreement before seeing profiles summarizing business and financial information. A buyer not using a business broker will need to research the companies he or she has identified through various publications, business filings and discussions with the owners.
How do you find information on the business?
Once a buyer selects a business, the parties can schedule appointments to see the facilities and operations. The buyer and seller will discuss valuation of the business and the terms of the sale, which is confidential information. Depending on the buyer’s intentions, the buyer may wish to obtain an attorney to facilitate the discussion of key matters and to help complete an earnest-money agreement and begin the due-diligence process.
How do you perform due diligence on the business?
Due diligence is a thorough review of the business’s past and forecasted performance, assets, liabilities, personnel and other details. A business broker can coordinate document requests and meetings between the parties’ advisors, the business’s landlord, lenders and others. It can be very time-consuming for both the buyer and the seller and quite expensive.
Because of the expense and confidential information involved, before due diligence begins, the parties should sign an earnest-money agreement. The agreement provides the terms and conditions under which the buyer and seller are willing to transfer the business. The amount of earnest money required to cement the agreement varies, but it must be high enough to demonstrate a buyer’s serious intentions and to motivate the seller to take the business off the market for at least 15 to 30 days while due diligence is completed. A typical earnest money amount for small to mid-sized businesses is $5,000 to $10,000.
How do the parties close the deal?
When due diligence is completed and the buyer is satisfied with all aspects of the business, the parties can close the deal. The buyer will authorize an escrow officer to conduct lien searches and prepare final closing documents, such as a bill of sale, note and security agreement, noncompetition agreements, leases and other documents. Once the buyer and seller have approved the closing documents, they can schedule a closing date at which the buyer will present a cashier’s check for the full amount due.
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