Owning a business is great, but very demanding. Building one from scratch? Very difficult. It’s not so hard to see why many entrepreneurs loves buying an existing business than build one from scratch.
This post outlines all the steps and activities involved in buying an existing business. Let’s get the ball rolling.
There are many businesses for sale out there. No doubt about that. However, not all can generate a good return on investment (ROI) within a short while.
You need to find a business that can generate good profit through practical means. Here’s how to identify a business that’s worth purchasing.
If you have difficulty finding a profitable business to buy, consider one of these options.
The value of a business is usually calculated through the revenue, total income, etc.
After finding a business that is worth buying, you should make calculations and find out how much the business is worth.
Almost all existing business owners will initially overvalue their business, either to earn more money or gain an advantage during negotiation.
Knowing how much a business is worth is very important. It should be done before you submit a proposal. That way, you can stand on your offer and appear very confident.
If you’re familiar with the industry and nature of business, you can value it yourself. If you’re not, you should consider hiring a professional.
Mind you, a professional can charge up to, or even more than USD 5,000, depending on the type and size of the business.
After finding a business to acquire and knowing how much it’s worth, you should start negotiating a price. This is usually done by making a written or verbal unbinding offer.
If the business owner likes your offer (or if it’s close enough to a good deal), he/she will start a negotiation.
Till the transaction is done, both of you will meet multiple times. You will most probably negotiate different purchase prices and terms before you arrive at a price that’s convenient for both of you.
Note: Purchase price and negotiation terms can be changed later if you discover something new during due diligence.
Due diligence is a legal binding process involving a potential buyer and a seller.
Since you’re about to purchase the business, due diligence allows you to review and estimate the assets and liabilities of the company.
There are many things involved in the negotiation process. You will decide whether to purchase the assets of the business (like vehicles, company buildings, etc). You can also decide to make it a stock sale.
In a stock sale, a prospective buyer is willing to let the business continue the way it is. All business operations will not be affected by the change of ownership.
However, keep in mind that you will take on all the outstanding legal liability. That’s why some sellers give discounts on the purchase price if the buyer agrees to a stock sale.
After negotiating a purchase price and terms of sale, the next thing to do is submit a letter of intent.
A letter of intent is a written outline of everything that you have negotiated and agreed to. This includes your intent to acquire the business as well as consenting to pay the negotiated price.
Although a letter of intent is a non-binding agreement, it is necessary. Aside from making progress on the purchase process, it’s also proof to the seller that you’re ready to do a deal.
Another thing a letter of intent will give you is an exclusive right to the business for 3 months. This means that you are the only person that can acquire that business during the 90 days.
If you meet the terms of your letter of intent, the existing business owner will have to sell the business to you.
After the letter of intent has been signed by you and the seller, you will be granted access to the core of the business.
At the start, you were only allowed to have an overview of the business assets and performance. After starting due diligence, you will be allowed to see and confirm any legal or financial info before proceeding with the business acquisition.
While due diligence is going on, you should also be working on how to get the money that you will use to purchase the company.
Most buyers buy businesses with debt and equity. Debt and equity mean that you will pay part of the purchase price and settle the remainder with a loan.
During the negotiation process, a potential buyer should ask the seller if seller financing is allowed.
Seller financing involves the previous business owner giving you the loan you need to buy the business. That way, you won’t have to obtain a business loan from a third party.
If the due diligence process goes well without anything being amiss, you should pay the agreed price and take claim ownership of the business.
Note that you should always hire a lawyer to negotiate this part on your behalf.
Once the purchase agreement has been signed, both of you will arrange a closing date. You’ll also arrange how the lender will deliver the loan and fund the purchase. Usually, the funds will be put in escrow.
An escrow means that a third party that is trusted by the buyer and seller will hold the money until all paperwork is ready. A bank, law firm, or any trusted entity can serve as an escrow.
Once both parties give the escrow approval, the funds will be delivered to the seller and the business legally belongs to the buyer.
Congratulations on becoming a business owner after knowing about buying an existing business. If it’s a stock sale, the transition will be as smooth as possible, and you won’t need to apply for any business licenses.
If it’s not a stock sale, you will need to apply for a few business licenses as soon as the acquisition is done. This will ensure that your business operations are not affected by the change in ownership.
Either way, go on with your business and do the needful. We wish you a fruitful business and bountiful profits. See you at the top!