What to Expect: A Chronology for Buying a Business
Buying a business is unlike any other purchase or transaction. The process can take months and requires many boxes to be checked before the process is complete. Working with both a business broker and business attorney can help with this process. The following is a framework for scouting and purchasing a business, from the beginning steps of determining what type of business you want to buy, to closing.
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1. Determine Realistic Criteria for Buying a Business
One of the first steps in determining how and when to buy a business is to establish a list of wants and needs. Know (or have an idea) of the market you want to buy in, what business elements are important to you, and have an idea of what you might need help with. Make a list of questions to review, which should include:
- What type of business do I want to own?
- What locations are acceptable and what radius do I want the business to be in?
- What type of income do I want the business to be making?
Consider the risks and potential rewards before entering into any contracts or transactions. Even as you begin this process, remember that buying any small business takes time, consideration, and serious dedication. If you're still in the beginning stages of buying, it's best to talk to a lawyer before making any decisions.
2. Search for a Business and Talk With a Broker
One of the best ways to seek out businesses for sale is through networking. Future entrepreneurs can also work with brokers and search listings and advertisements to find the right business.
If a buyer uses a broker, the broker will review several businesses that meet the buyer's criteria and financial qualifications. Buyers should always expect to sign a confidentiality agreement before seeing prospectuses or profiles summarizing business and financial information.
If a buyer decides not to use a broker, they will have discussions directly with the current owner of the business. Buyers may or may not pay a broker's fee, but it is more typical for a seller to pay a broker's fees in the sale.
3. Meet Business Owners and Tour the Businesses
Once a shortlist of businesses has been developed, the buyer or the buyer's business broker can begin scheduling appointments (whether it's in-person or virtual) with business owners to see the facilities and operations.
The potential buyer and seller will discuss a variety of issues about the business, including the initial business valuation and terms of the sale. It is highly advised to also do a deep dive into the finances of the business. To do so properly, reach out to a financial advisor, such as a certified public accountant (CPA), or an attorney to assist you. Depending on how serious the inquiries are, you may wish to be accompanied by an attorney who can help facilitate discussions. As a potential buyer, it is also necessary to speak with a loan officer early on to discuss options.
4. Do Due Diligence and Make an Offer
The due diligence process is a thorough review of a business's prior performance, forecasted earnings, assets, liabilities, personnel, and other pertinent details.
This can be a very time-consuming and expensive process for all parties involved. It involves fees for professional advisors, copies of documents, lien searches, closing documentation, and more. However, it is an extremely important part of the business purchase process as this information is crucial for understanding where the business currently stands and if it will be a smart purchase.
Review the financial documents of a company for at least the last three years. Depending on the type of business and length of time the business has been operating, you may wish to go further back to see a fuller history.
Letter of Intent
Before you are able to complete the due diligence process and actually have access to the seller's financial documents, a letter of intent (LOI) should be drafted and signed by you and the seller. A letter of intent is an agreement between both parties indicating their intent to go into business with one another contingent upon certain things, such as a review of the internal documents and an agreement on the seller's price of the business following the review.
The letter of intent will put a pause on the seller's ability to negotiate with another buyer while they are negotiating with you, the interested buyer.
A Note on Working With Experts
As a buyer, it is advised to have a team of experts on your side to help you sort through all of the documentation you will be provided. A business broker or an attorney can assist in coordinating documentation requests and meetings between the parties' advisors, the business's landlord, lenders, etc. They are also valuable during the offer and closing processes.
As stated earlier, as a buyer, you should also work with a loan officer to ensure that you have the finances you need to make a proper offer, and subsequently close, on the business.
5. Closing on a Business
When due diligence is completed and the buyer is satisfied with all aspects of the business, the buyer and seller will discuss and draft a purchase agreement.
It is extremely important that you consult a lawyer when negotiating the purchase agreement to ensure you are getting fair terms. The purchase agreement will lay out such things as the agreed-upon purchase price and if the seller will transfer any additional assets (such as any property owned by the business) to the buyer.
Once this agreement is negotiated and agreed upon, the buyer will authorize an escrow officer and place the agreed-upon purchase price funds in escrow. This makes it possible to conduct lien searches and prepare closing documents such as a bill of sale, note and security agreement, closing statements, noncompetition agreements, leases, and approvals from various parties. Once the closing documents have been approved by the buyer and seller, they can schedule a closing date. On the closing date, the buyer will present a cashier's check for the full amount due.
How a Lawyer Can Help You Buy a Business
Having a knowledgeable legal advocate on your side can save you time and money, and help eliminate unnecessary costs when purchasing a business.
Speak to a lawyer about everything from seeking out a business for sale and locating a suitable spot for your new venture, to the terms of a potential lease. Contact a business law attorney today for a consultation.
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