Finding and acquiring the “right” Business
Once prepared the following will help you better understand the process of finding and successfully acquiring a small business.
Beginning the search for potential opportunities.
Locating a suitable business will be a frustrating experience requiring substantial time and effort, be patient and persistent. Begin your search by networking; speak with everyone you know friends, neighbors, accountants, attorneys, bankers and everyone you encounter in your business dealings. Do not underestimate the number of quality opportunities you may find through such contacts. You should watch the Internet listing sites, local newspaper classifieds and make contact with all local business brokers.
Working with Business Brokers or Intermediaries.
Utilizing the services of a business broker may or may not expedite the process and help ensure that you are properly investing your time and money. You must however contact brokers to get to the large inventory of opportunities they represent and because there is no multi-list equivalent to the residential Multiple Listing Service (MLS) for business opportunities you will have to call them all. A quality broker can be of great assistance, we recommend you review the information provided for the seller on this web site to gain a better understanding of a quality broker’s role.
Interview as many business brokers as you can, ask others for recommendations, check the brokers references from former clients and customers, and choose several you are comfortable working with. We believe you will find our philosophy, ethics, and professionalism atypical.
Evaluate potential opportunities.
When you find opportunities that pique your interest and meet your requirements, the broker or seller should assemble and provide a detailed package of information on business.
You should expect to receive at least the past three years financial statements (profit & loss and balance sheets), complete business tax returns, list of hard assets, copies of real property leases, and summaries of all leasing or financing commitments. In addition, you should be provided general information including sellers marketing material, product lines/services mix, number of employees, summary of customers, and competition.
With this data in hand do your own research on the industry, market conditions, competition, and specific businesses prospects. Determine the business strengths, weaknesses, opportunities, and challenges. Assess your abilities to improve upon current operations.
We have provided substantial information, regarding the valuation process run the numbers.
- Is there justification for the asking price, can you make the transaction work?
- Are you comfortable with the required down payment and understand the businesses working capital needs?
- Will the business provide you reasonable income after servicing any debt incurred to make the purchase and a reasonable return on the capital invested?
If at this point, you believe you can make the financial aspect of the transaction work and you feel you would be comfortable operating the business, it is time to meet with the seller. You are now well informed and prepared for meeting with the seller. Prepare an outline with a list of specific questions. We advise you approach the beginning of your first meeting with the seller much as you would a job interview. Considering the volume of information you have about the seller, you are an unknown to the seller at this point. A positive rapport and mutual trust is critical to the success of any transaction. Start the meeting by giving the seller a brief description of your background, reasons for looking to buy a business and why you have an interest in this specific business. Your questions should have two purposes, verification of facts learned through your research and an evaluation of the seller. Does the reason for selling ring true, is the seller being straightforward, honest and direct, do you feel you can work together. If you are uncomfortable with seller or feel you do not trust them, walk away from the deal.
Negotiation and transaction structure.
When you have determined the business fits your personal, professional, and financial needs, prepare an outline of the offer to purchase.
Include specifics; transaction structure, total price, financing terms proposed, conditions, allocation, included/excluded assets, liabilities assumed, familiarization period, non-compete agreement, and scheduled closing date. A quality broker can generally provide you with a comprehensive purchase agreement that will include all typical representations and warranties, as well as, necessary contingencies for all parties to the transaction. You should review this documentation with your legal and financial advisors. Understand the legal, accounting, and tax ramifications of the transaction structure.
Negotiate terms in good faith understand that win-win and fairness for both parties will result in the positive working relationship that is critical for a smooth transition after the purchase is completed. Avoiding unpleasantness will minimize costly mistakes that often accompany emotional negotiations.
Closing the transaction and due diligence.
In general, once contracts are signed, expect thirty to sixty days to complete the transaction. The contract will contain specific contingencies that need to be satisfied before closing. You need to take a proactive approach to ensure that all the necessary steps are completed in a timely manner. You will need to perform a detailed due diligence to verify the accuracy of the information provided by the seller, as well as, obtain financing commitment, receive consent to real estate lease and contract assumptions, form your business entity, acquire licenses, and coordinate efforts with all advisors, attorneys, accountants and bankers. You need to have a lien search conducted, verify all taxes are current, and have a substantial number of additional legal documents prepared and reviewed before closing.
After the closing your real work begins. The parties should mutually agree on a sensible outline, method, and schedule of your training. You will be on a very steep learning curve, the seller has extensive knowledge gained over many years that needs to be transferred to you in a relatively short time frame. You should approach your new business with a healthy “if it isn’t broke, don’t fix it” attitude, making changes early on is not in your best interest.