How to Buy A Business

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So you want to buy a business.. That’s great! It is important to find a business that draws your interest, fits your ideal lifestyle and most importantly, profitability. Let’s run through the process.

Step 1: Understand yourself & your goals

Here are some questions you should consider asking yourself prior to beginning the search for the right business :

What are your desires? What’s your motivation? What is your why? What type of lifestyle do you want to create? Do you have a specific business in mind? Which industry draws your attention? Are you looking for a business in a field you’re passionate about? Do you see yourself spending most of your time running the business? Or do you want to operate the business in more of a hands off fashion? Have you taken a good look at your strengths and weaknesses? Are you knowledgeable about the industry you’d like to be in? Is it a business you have experience with? If not, do you have someone to help you run it?

These are just some of the preliminary questions you should ask yourself before beginning the search for a perfect match. A buyer should be clear about all of these points. Understanding yourself will help understand the type of business you can manage.

Step 2: Finding the right Business

It is said that “if you choose a job you love, you will never work a day in your life”. That is why it is extremely imperative you choose the RIGHT business. Here are some of the determining factors of the perfect match.

PRICE: Firstly, the price is the first thing to consider. How much capital is accessible to you? You should take a solid look at your finances in order to determine the price point you will be able to handle.

INDUSTRY AND TARGET MARKET: What are your strengths and passions? These two characteristics will play a huge part in the type of industry you choose. Once you’ve figured this out, it is important to do some research on your preferred industry or niche. It is time for some serious due diligence. Take into consideration the type of business you see yourself, but more importantly you must take into consideration who your target market will be. Consider if this business and this target market will thrive in different conditions.

LOCATION: Where are you located? Is the location easily accessible to you? Does it need to be accessible to you? Does the location you want to be in have a market that will support your business? Certain businesses will thrive in a certain location, others may not. A fancy, high priced clothing store with expensive brands may not be a good fit for a low-income neighborhood. What’s the demographic like in the area? These are all things you should consider. Research your target market.

LIFESTYLE: Do you want to be an operating owner, or absentee? An operating owner will earn more money than an absentee owner and make his investment back sooner. He will also have more control of the business. But he will spend more time there. Decide very early in the process which is best for you.

These are all some of the main dynamics that a buyer needs to consider when finding the right business. It is recommended to contact a professional that can help you with these things. As brokers, we have strong market insight and business understanding that will help you with your search to find the right business.

Step 3: Make An Offer

You’ve looked at your strengths and weaknesses, found the right price you’re willing to pay, found the location you want to be in, the lifestyle you want to live, and the industry you want to target. Good job! From here it is recommended you work with a professional to evaluate different opportunities. Once you’ve taken a look at different businesses and found the perfect match, the next step is making an offer. As intimidating as it seems, you should never be afraid of making an offer. Do not hesitate, you’ll be surprised at how flexible a seller can be once a buyer has submitted their offer.

Your offer will likely be based on these elements:

  • The amount of capital you have available for the purchase, or the type of financing you will need
  • The health of the business
  • The return on investment (ROI) this business will provide you at a specific purchase price
  • The amount of years it will take to get your money back
  • The amount of involvement you will have in the day to day operation

These are just a few elements that play a part in the offer you’ll provide. Every buyer is different. You can’t pay the same amount for a business as your friend can pay or vice versa. There are different moving parts in every buyer’s life that will determine what he can pay for a business.

Once you’ve decided on the price you’d like to pay, you should put your offer in writing through a broker. It is important to put your offer in writing as well as even a good faith deposit so that the seller knows you are serious and ready to buy. The offer will include the purchase price, down payment, terms and conditions etc. It is recommended that you work with a broker for this step, as well as negotiations. A professional broker will know exactly how to structure your offer for the best chances at approval from the seller as well as know exactly how to execute the right negotiations to get you the best deal possible. Remember, they do this for a living.

Step 4: Due Diligence

Here is where we take a microscopic look into the business to make sure the numbers the seller provided are accurate. It is also recommended to use a broker in this step as well. A good broker has been through this process hundreds of times. He will know what you as the buyer should look for in this process.

In due diligence, we must verify everything the seller represented, and then some.. Here’s a mini-checklist of what to review and verify in your due diligence:

  • Financials: income statements, cash flow statements, balance sheets, accounts payable and receivable etc.
  • Expenses, fixed or variable
  • Inventory
  • Business structure and operations.
  • Customer information
  • Employee information
  • Physical assets and real estate, if applicable.
  • Any contracts pertaining to the business
  • Licenses and Permits

The key here is to VERIFY, VERIFY, VERIFY.

Step 5: Financing and closing

You’re getting closer! The ball is on the 20 yard line and you have a clear view of the end zone.
Now is not the time to fumble. Getting the right financing and setting up the closing is detailed and requires someone with expertise to expedite and to advise. There are many types of funding, such as traditional bank lending, credit union lending, and even seller financing which has both benefits and negatives. When a seller finances for a set term, he has a vested interest in you succeeding. The equity of the business includes the amount he is lending you, usually in the form of a note that includes principal and interest. On the positive side, a business that has more equity should have a larger credit line to borrow if needed. But is it sometimes better to divorce yourself from the seller earlier rather than later?
Again, a broker can fully explain the pros and cons of each situation.

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