updated - August 14, 2020 Friday EDT
Buying a business is not like buying a piece of real estate or a piece of critical equipment. Finding a good business for sale can be a real challenge, as can thoroughly checking it out and closing the deal. The process can take months, and can virtually monopolize a buyer's time. Below is the framework that most business purchases follow.
The first step in fulfilling the dream of purchasing a business is translating an entrepreneur's desires into concrete criteria to find the perfect target. What particular type of business will do? What kind of income should the business be making? What locations are acceptable? The prospective buyer also needs to determine what he or she can afford, depending on whether the business will be financed by the owner, out of the entrepreneur's own assets, or by an outside lender. At this stage the buyer should also think hard about what risks he or she is in a position to take, and whether he or she can afford to expend the time and energy it will take to purchase the business and run it.
Entrepreneurs can look for businesses for sale by checking the ads in newspapers and trade publications, seeking out opportunities through their networks, and enlisting the services of a business broker. If a buyer uses a broker, the broker will review several businesses that meet the buyer's criteria and financial qualifications. Buyers should expect to sign a confidentiality agreement before seeing prospectuses or profiles summarizing business and financial information. A buyer not using a business broker will need to research the companies he or she has identified through various publications, any filings they have made, and discussions with the owners.
Business brokers charge a fee which is usually set as a percent of the purchase price. Buyers sometimes pay a broker's fee, but it is more usual for sellers to do so.
Once a short slate of candidate businesses has been developed, the buyer or the buyer's business broker can begin scheduling appointments with business owners to see the facilities and operations. Most business owners will require that all meetings be held outside of business hours so as not to prematurely disclose the potential sale to customers and employees. The buyer and seller will discuss a variety of issues about the business, including the basis upon which the business was valued and the terms of a potential sale. This information is confidential and should not be disclosed to anyone other than the buyer's advisors and spouse. Depending on how serious the inquiries are, the buyer may wish to be accompanied by an attorney, to facilitate the discussion of key matters and to help complete an earnest money agreement and begin the due diligence process.
Due diligence is a thorough review of the business's prior and forecasted performance, assets, liabilities, personnel, and other details. It can be very time consuming for both the buyer and the seller, and quite expensive because of fees for professional advisors, acquiring copies of documents, conducting lien searches, and creating closing documentation. It is not in the best interests of either party to go through the due diligence process unless the buyer is serious and willing to make an acceptable offer to purchase the business. Therefore, before the process begins, an earnest money agreement must be made.
The earnest money agreement provides the terms and conditions under which the buyer and seller are willing to transfer the business. The amount of earnest money required with the agreement depends on the price of the transaction. In general, it must be high enough to demonstrate a buyer's serious intentions and to motivate the seller to take the business off the market for at least fifteen to thirty days while due diligence is completed. A typical earnest money amount for small to mid-sized businesses is $5,000 to $10,000.
If a business broker is involved, these professionals will coordinate document requests and meetings between the parties' advisors, the business's landlord, lenders, and others.
When due diligence is completed and the buyer is satisfied with all aspects of the business, the buyer will authorize an escrow officer to conduct lien searches and prepare final 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.
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