Have you ever dreamed about owning your own business? If so, your not alone. Today, more than ever, people from all walks of life have come to realize the many financial and lifestyle benefits offered by business ownership.
What most people don’t realize though, is that it is usually much safer and more profitable to buy an existing business than starting a new venture. According to the Small Business Administration, over 60% of startup businesses fail due to unproven concepts, lack of working capital and poor management.
Purchasing an existing business can greatly improve your chances of acheiving success, and put you on the “fast track” to realizing your entrepreneurial goals and aspirations.
The Advantages of Acquiring an Existing Business
Some of the advantages in acquiring existing businesses include:
Being able to review a company’s existing track record as reflected in P & Ls, tax returns and other financial records can be very helpful in determining expansion plans. Growth potential can be measured based on actual experience rather than conjecture associated with startup ventures.
- The need for additional working capital is reduced due to the immediate cash flow being generated by the acquired company.
- Obtaining skilled employees who are familiar with the business operation and market.
- Gaining established customers significantly reduces the time it would otherwise take to attract an adequate number of customers to support the overhead of a new operation.
- Obtaining existing licenses and permits can often reduce the time and cost of making application, gathering information and conforming to required regulations.
- Sources of capital to purchase existing businesses are more readily available than startup ventures. It is very common for the owner of an acquired business to finance part of the purchase price. Banks and other financial institutions prefer to loan money for existing operations that have a proven track record.
The Sequence of Events
Buying a business is serious business and should not be taken lightly. Working with professional advisors is the key to successfully finding and purchasing a business. Friends and well meaning relatives are not usually qualified to provide the specialized advice needed for a business acquisition. Seek out an experienced business broker who can assist you in finding a business and coordinate the sequence of events. Utilize an accountant who can help you with the due diligence process and advise you on tax and record keeping issues. Obtain legal advice for business organizational requirements and legal documentation for your acquisition.
Finding A Business To Buy
While there are a number of ways to find businesses for sale, utilizing the services of a business broker can greatly expedite the process. When selecting a company that specializes in selling businesses, verify the following information which will help ensure that you are properly investing your time and money.
Are they full time business brokers, rather than a firm that handles business sales as a sideline? Are they a member of the New York Association of Business Brokers (NYABB) and the International Business Brokers Association (IBBA)? As a member of these organizations, brokers are obligated to adhere to practice standards and a code of ethics. Ask for references of former clients and customers or obtain a recommendation from other professionals.
When you meet with a Business Broker, be prepared to discuss your background, work experience and financial ability to purchase a business so that we can help you find a business that meets your needs. You will need to prepare a personal resume and financial statement which will be required by lenders, landlords and others who will be a party to the business acquisition. The following are examples of the questions a Business Broker will be asking you.
A. Why do you want to buy a business?
B. What are your special skills and educational background?
C. What is your work and/or business ownership experience?
D. What are your hobbies and areas of special interests?
E. What is the maximum amount of your personal funds you can invest as a down payment?
F. If you have an equity partner/investor, how much do you expect them to invest of their personal funds?
Define Your Acquisition Criteria
A. What business categories are of most interest to you?
B. Is there a specific type of business that you are interested in purchasing?
C. If you are not sure of the type of business you want, are there any businesses you do not want to purchase?
D. What is the minimum income you require from a business to meet your living expenses?
E. What is your preference for the location of a business?
F. How far are you willing to commute for a good business?
Review Businesses For Sale
Based on your qualifications and acquisition criteria, a Business Broker will review with you several businesses that meet your needs. Profiles that provide a summary of the business and financial information will be provided after you sign a Confidentiality Agreement which is required by the business owner.
Meeting The Business Owner and Touring The Facilities
After reviewing the information on the business profiles, a Business Broker will answer any questions you may have about the businesses or will obtain the answers from persons deemed reliable. Once you select those businesses that you believe best meet your investment criteria, the Business Broker will schedule appointments with the business owners so you can see the facilities and operations.
It is common for the business owners to require all meetings with prospective buyers be during nonoperating hours to avoid premature disclosure to employees and customers. The Business Broker will attend these meetings to introduce you to the business owner, facilitate the flow of information and provide guidance with regard to completing an earnest money agreement and the due diligence process.
When meeting with a business owner, you will be able to tour the facilities and ask questions regarding the operations of the business. It is best not to discuss the price and terms of sale with the business owner. The Business Broker should be able to explain the basis on which the business was valued and the terms of sale required by the owner.
Please remember to keep all proprietary information you obtain about the business confidential. Only discuss this information with your professional advisors and spouse, and remind them that the information is confidential and not to be disclosed to other parties. In most cases, the employees, customers, suppliers, landlords and lenders are not aware that these businesses are for sale. Premature disclosure could have a negative impact on the business being sold.
Due Diligence and Offering Process
At this point you have reviewed operating information and financial summaries of the businesses that meet your acquisition criteria, and you have met with the business owners and toured their business facilities. You should now be ready to select the business that you feel best meets your needs and begin your due diligence process. Checking out the business can be very time consuming for both you and the business owner.
Furthermore, costs may be incurred for such things as professional advisors, copies of documents, lien searches and closing documentation. The business owner does not want to go through a detailed due diligence process without knowing the buyer is serious and willing to make an acceptable offer to purchase the business. Therefore, before copies of tax returns and other business documents can be obtained and before any contact can be made with landlords, bankers, suppliers, employees, or customers, a Letter of Intent must be presented and accepted by the business owner. The basic steps are:
A. The Business Broker will help you complete the Letter of Intent. This Agreement provides the terms and conditions under which you are willing to buy the business and the seller is willing to sell the business. Final closing documents, such as a bill of sale, note and security agreement, closing statements, noncompetition agreements, leases and approvals from various parties will be handled by the buyers’ and sellers’ attornies prior to closing.
B. The amount of earnest money required to be submitted along with the Letter of Intent will depend upon the size of the business transaction. The amount needs to be sufficient to show your serious intent to buy the business and to encourage the seller to take the business off the market while you complete your due diligence. For most small to midsize businesses, earnest money of $5,000 to $10,000 is typical.
C. The Business Broker will assist in the negotiations between you and the business owner to secure a Letter of Intent that is acceptable to all parties.
D. The Standard Letter of Intent gives you 15 to 30 days to complete your review of the business financial documents, operating agreements, property leases and other aspects of the business after the agreement has been approved by you and the business owner.
E. During the due diligence period, the Business Broker will coordinate your request for documents and assist in arranging meetings with related parties to the transaction including the business owner’s professional advisors, your professional advisors, the landlord, lenders and others as needed.
F. If institutional financing is required, the Business Broker can usually recommend various lending sources depending upon the type of financing needed.
The Closing Process
When you have completed your due diligence and are satisfied with all aspects of the business, you will authorize your attorney to conduct lien searches and prepare the bill of sale and other closing documents for all parties to review. After the closing documents have been approved by the principals, a closing date will be scheduled. A cashiers check will be required at closing for the amount due. The Business Broker will coordinate with the principals and their advisors, landlord, lender, and others, to insure that all the necessary paperwork is completed by the closing date.
Buying an existing business can be a wise choice for entrepreneurs who desire to have their own business. A proven track record, skilled employees, established customers and suppliers, and the availability of financing make buying a profitable business easier and safer than other types of investments.
Utilize the services of Capital Business Advisors to help YOU fulfill the American Dream …owning a successful business of your own.