The idea of having your own business always seems appealing, but people have many questions when it comes down to it. Where to start? Building a business from scratch is difficult, so some entrepreneurs, or people with a lot of startup capital, prefer to buy a ready-made company. There are other reasons entrepreneurs may decide to buy an existing business, but regardless of the senses, the buying process will follow the same pattern. In this article, we’ll talk about the algorithm for buying an existing small business.
First, find a company to buy
It’s important not just to find a business that’s for sale but a business that’s worth buying. Of course, there are many offers, but not many offer terms that will be right for you. The main thing to look for is the potential profitability of the business, and a transparent offer, with no skeletons in the closet.
Look for offers that offer:
- Positive cash flow or a potentially profitable strategic plan
- Business from an industry you’re most familiar with or suited to
- A wide range of clients
- A long-term growth plan
- Something you enjoy doing
There are plenty of places to find a business. You can use a broker, your connections, local media or attorneys, and certain websites.
Evaluate the business
Valuing a business is very important because sellers often provide an unfair price. You can hire professionals to do the appraisal or do it yourself. The first option can cost a penny. The price for such services starts at $ 500. You need to decide what is best for you, and if you still want to do it yourself, you need to familiarize yourself with the evaluation process of the business you want to buy.
Negotiate a Price
After appraising the business, you’ll offer a purchase price, and if the seller comes close to that price, they will negotiate with you. This process is very time-consuming as you will negotiate terms and conditions of purchase and different prices before you can agree on anything. You can change the terms if you find facts in the due diligence that affect your decision. In this process, you must also decide whether you want to buy the assets or sell the stock. If you sell the store, you take full legal responsibility, and this is the option that sellers prefer the most. They are even willing to discount the price of the business in such a case.
Send a letter of intent
A letter of intent says everything the same thing you previously agreed upon, including the purchase price. It has no official motive to help move the deal forward. However, it does guarantee that within 90 days, you will be the only potential buyer of the business.
Do your due diligence
After the LOI is mutually approved, more information about the business is revealed to you. The seller submits his company’s confidential data for review, and you, in turn, should make sure to review all of the most important documents, which include:
- Organizational data (business licenses, etc.)
- Tax returns for the last three years of business
- Profit and loss statements for the current year
- Customer income for the last three years
- Debt information
- Customer Lists
- Existing contracts
- Real estate documents
- Data on employees and executives
- Marketing and promotional materials
- Legal information
Close the deal
This is where you have to draw up the final purchase agreement and negotiate all the terms with the seller. You can’t do without a lawyer to act as an intermediary between you in this endeavor. They can also see the quality of the contract drawn up. After closing the deal, you must apply for all business licenses.