What To Expect: A Chronology for Buying a Business

Buying a business is unlike any other purchase or transaction. The process can take months longer than starting a new business. Working with both a business broker and a business attorney can help a new business owner.

This FindLaw article helps small business owners understand what to expect during an existing business sale, how to find the right business, and the milestones you’ll reach when closing the sale.

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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 is the cash flow of the business?
• What locations are acceptable?
• What geographic area do I want the business to be in?
• What kind of income do I want the business to be making?
• What are my non-negotiable red flags in a business purchase?
• What is the value of the business you want to invest in?
• What are the zoning laws where you want to operate?

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. Create a Business Plan

You should draft a business plan when buying an existing business. Consider the existing business operations and how you plan to improve on them. The current owner will want to see your plan for the future of the business. Even though the owner is selling their business, they may still care about what happens to their legacy. Investors and financiers will want to see a business plan before offering you large sums of money.

5. Consider and Secure Financing Options

There are multiple financing options when buying a business.

• Debt financing through a traditional bank loan

• Equity financing, where the new owner sells a portion of their interest to an investor

• U.S. Small Business Administration loan, or SBA loan, for those business owners who may not qualify for traditional bank loans

• Seller financing, where the previous owner provides financing for the sale

The amount of funding you need at startup depends on the amount of cash you have to place a down payment on the purchase.

6. Conduct Due Diligence

The due diligence process is a thorough review of a business’s prior performance, forecasted earnings, assets, liabilities, personnel, and other pertinent details such as:

• Assets
• Balance sheets (accounts receivable and accounts payable)
• Cash flow statements
• Certificate of good standing from all states in which the business operates
• Current business loans
• Customer base
• Financial statements
• Forecasted earnings
• Intellectual property, like trademarks or copyrights on products or goods
• Lawsuits (settled, current, or pending)
• Liabilities (also known as debts)
• Personnel or existing employees and management
• Real estate zoning laws
• Tax returns

This is time-consuming and can involve fees for professional advisors, copies of documents, lien searches, and legal documents for closing. Regardless, it is an essential part of the business purchase process and should be completed in full.

Review a company’s financial documents for at least the last three years. Depending on the type of business and its length of operation, you may want to go back further to see a fuller history.

7. Letter of Intent and Making An Offer

Before you can complete the due diligence process and access the seller’s financial documents, you and the seller should draft and sign a letter of intent (LOI). A letter of intent is an agreement between both parties indicating their intent to complete a sale, contingent upon certain things.

Some contingencies include:

• Agreeable business valuation
• Financing availability
• Favorable due diligence (review of the internal documents)

The letter of intent will pause the seller’s ability to negotiate with another buyer while they are negotiating with you, the interested buyer.

8. Negotiate Terms of the Sales Agreement

This is the back-and-forth between the parties or their lawyers on the details of the sales agreement. It is common for lawyers to send multiple drafts during a negotiation process. Usually, the parties track changes in a document so the other person knows about the alterations.

When negotiating, set a reasonable time frame to discuss details or return drafts. This is important when a buyer prequalifies for a certain amount of funding. The approval only lasts a set amount of time, so negotiations must move quickly.

9. Create a Business Structure

You may not need to create a new business structure if either of these options applies to you:

• You wish to purchase an existing business as a sole proprietor
• You wish to buy the existing business under your existing kind of business

You do need to create a new legal entity, like a limited liability company (LLC) or a corporation, if:

• You wish to keep your personal assets and business assets separate
• You do not want to operate with the same partners or members of your current business

Some lenders may require a personal guaranty if you form a new legal entity as a startup or if the business venture is risky.

10. Close on the Business With a Sales Agreement

When you complete the due diligence process, discuss the sales agreement (purchase agreement) upfront with the seller. Once you have the details down, draft a purchase agreement.

Consult with a lawyer when negotiating the purchase agreement to ensure fair terms. The agreement includes:

• Agreed-upon purchase price
• Closing date
• Whether the seller will transfer any additional business assets

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:

• Bill of sale
• Closing statements
• Confidentiality agreements
• Note and security agreement

Schedule a closing date once the buyer and seller approve the closing documents. On the closing date, the buyer presents a cashier’s check for the agreed-upon amount.

How a Lawyer and Other Experts Can Help You Buy a Business