Four steps on where to begin and how to execute.
Step 1 – Team LAB
Find a lawyer, accountant and broker (LAB). Find professionals with proven track records in asset transaction services. Your local chamber of commerce or Small Business Administration can be a good starting point if you do not already have current contacts. During initial meetings with the LAB, be clear and honest about what you want to buy, your credentials, and an approximate price range.
Step 2 – The Right Fit
Many of the best businesses for sale, ironically, are not listed as for sale. Spread the word through your network and community that you are interested in buying a business. If you have a certain business in mind, do not hesitate to express your interest to the owner. Do not mention specifics on a deal until you have first established a relationship with your LAB.
Your broker will prepare a short list of possible fits for you. Behind the scene, they will have prescreened much of what is on the market and will approach you with financially viable prospects that align with your interests. Most importantly, they will filter offerings in growing markets with growing customer bases. Remember, buying a business is like making an investment and good brokers know which opportunities should yield the highest return on your investment.
Websites such as bizbuysell.com and businessbroker.net have nationwide listings. These sites can give you a good perspective on the total market and you can address interesting prospects with your broker. Websites such as bbb.org and yelp.com can give you insight as to how the public perceives the business. An existing bad reputation could be hard to overcome and might warrant seeking another alternative.
Step 3 – Due Diligence
This is where your accountant becomes immensely important. To proceed with the transaction your accountant will audit all financial statements from the last 3-5 years, or as closely possible. As a product of this work you can be confident in what you are paying for. If the business is inventory heavy such as a wholesaler, you will also want your accountant to conduct an inventory count.
Another key take away should be the cash budget. With this information you can determine cash needs for at least 12 months so that you always have plenty of cash on hand to meet obligations. You might be tempted to pledge as much cash as you can on the initial investment, but a cash budget could show you that reserving some cash for later would be wise.
Your attorney will want to review all current contracts, leases, patents and other legal documents to which the current ownership has entered.
Step 4 – The Deal
At this point you and your broker have found a good fit, the audited financials appear acceptable, your attorney approves of existing contracts, and your broker negotiated a price that you are willing to pay. Now comes time to determine how much to pledge as a down payment and how much to finance either through the seller or through a bank.
From your review of the cash budget you should know about how much of your cash to reserve, and expect to put at least 30-60 percent down. You might find that after reserving cash and making the down payment that the business is too expensive. Either try and renegotiate or consider other short term lending for future cash needs. Still, if the initial cash outlay for the down payment and your reserves is simply too high, do not proceed with the deal. Keep looking for a better-suited opportunity. Cash budgeting is a common pitfall to a newly-acquired businesses. Having access to plenty of cash for the first few operating years is critical to survival.
Always consider the seller as the lender. Many times they are willing to structure a deal that benefits both of you, which can lead to favorable terms. For example, they get the benefit of the interest, and default could potentially return the business to their ownership. By working with your LAB, you can determine the feasibility of a seller-financed transaction. If the seller wants payment in full at sale, then you will most likely have to turn to a bank.