The process of buying a business broken down, step-by-step
What does buying a business really involve? What are the different stages that you the buyer can expect to take? There are many questions you will have to ask and many hurdles you will have to overcome in buying your business. In partnership with BusinessesForSale.com, here's bCentral's step-by-step guide to the main stages.
Decide what you want
If you want to buy a business, you have to ask yourself some searching questions to decide what your priorities are. Make a list of where your strengths and interests lie, how much capital you can access and what types of businesses really excite you. Here are some questions to consider:
Find a business
Ask around your own networks – your relatives, friends, neighbours, current co-workers, lawyer, accountant or banker. You should also check out trade associations and trade magazines if there is a specific type of business you are interested in.
Evaluate the business
Once you've found a company you like the look of, try and learn as much about it as possible. Find out:
Please note, it may be wise to hire an independent business evaluator to make sure everything is checked thoroughly.
Value the business
Many factors determine value but these are the big ones to look at:
Finance your purchase
�You must make a down payment, which is typically about 10% - 40% of the selling price.�
You must make a down payment, which is typically about 10% - 40% of the selling price, and be sure that adequate working capital sources are available.
If you do not have the funds needed for the down payment readily available, you must look for financing from an outside source such as loans from family or friends, a bank, a business angel, or venture capitalist.
The vast majority of businesses, particularly smaller businesses, are purchased with a significant portion of the purchase price financed by the owner.
Price is just one aspect of the transaction to be agreed. The terms are just as important, particularly the period of time over which any debt is to be repaid and the allocation for tax purposes of the purchase price.
Sellers naturally have the upper hand in negotiations since they best know the business. You should minimise the seller's advantage by learning as much as possible about the company. Both parties must understand each other's motivation for wanting to buy or sell, and each other's plans after transition takes place.
Make an offer
�An appraisal of the business can be used to establish a pricing floor.�
You should determine a range of value for the business. An appraisal of the business as is can be used to establish a pricing floor. A pricing ceiling can be established by using an appraisal that capitalises projected future cash flows under new management.
You should have access to all records needed to prepare an offer. An offer may take the form of a purchase and sale agreement, or a letter of intent. The first is usually binding the second is usually non-binding. The purchase and sale agreement is a complex document and it is a good idea to get professional help in its drafting.
Close the deal
After you and the seller have entered into a binding contract, there are usually several conditions to be met before the sale can close. They often address issues like assignment of the lease, verification of financial statements, transfer of licenses, or obtaining financing.
A date is set for meeting the conditions of sale and if a condition is not met within the specified time frame, the agreement is invalidated. Business settlements, or closings, are usually done either by an attorney or an escrow agent.