Buying a Business - Beehive Business Brokers

The Buying Process

1. Preparation - Determining What's Important

The first step in buying a business and becoming an entrepreneur is identifying the most appropriate type of business. This usually involves closely examining your needs, interests, and experience. Buying a business in an area you know little and have no experience running about is almost always a mistake. What is motivating you to buy a business and work for yourself?
Questions to ask yourself as you begin your quest:
• What are your financial needs, both short-term and long-term?
• Do you need an immediate paycheck, or can you afford to go lean while growing the business?

• What time and effort are you prepared to put into the business?
• You will be leaving the 9-5, 40-hour-a-week job world and working for yourself. Very few businesses run themselves. Are you prepared for the long hours and physical demands that may be required?

• What financial resources do you have access to?
• You should plan on 20% down to get a loan in addition to working capital to get started.
• What skillsets and experience do you have that will help you be successful?
• You should consider industries that are familiar to you and match your skills, interests, and capabilities.
• What is your preferred business size, location, number of employees, etc?
• Consider your goals and factors like location, travel, hobbies, lifestyle implications, and passions. You will spend a lot of time and effort on your new venture, so you better enjoy it.

2. Finding The Right business

Once you have determined the factors that are important in your quest to buy a business, the next step is to start searching and doing your homework.

• Ask around the industry you currently work in if it seems like a good fit. Ask business associates, friends, and family for leads. If there’s a business you frequent and admire, ask the owner if they are interested in selling.

• Search the internet, especially business-for-sale websites like BizBuySell.com and BusinessForSale.com. These sites offer thousands of businesses for sale of all kinds and prices. They are easy to search by location, type, and size of business.

• Use classified ads such as Craigslist.com and KSL.com.

• Reach out to BUSINESS BROKERS in your area. Get to know them. Find one that is a good fit. They have access to many businesses for sale and are a great resource for advice and feedback, usually for free. They can also be helpful in assisting you through the entire process.

3. Initial Due Diligence

Once you find a few businesses that interest you and meet your criteria, the next steps are:

1. Talk to the Broker or Seller, Sign an NDA if required, and get a CBR or business summary.

2. If it still looks interesting, obtain and review the financial records. To begin with, you should request:

• Certified financial records (cash flow statements, balance sheets, accounts payable and receivable)

• A list of assets with valuations, including inventory, intellectual property, etc.

3. Arrange to meet the seller and tour the business. This is often done off-site or after hours to maintain confidentiality.

• Learn why the business is for sale. This can be telling and helpful when crafting an offer.

• Ask about challenges, employee turnover, lawsuits, history.

4. Conduct your own in-depth investigation of the business

• This includes researching reviews, competition, competitiveness, cleanliness, etc.

4. Determine The Value of The Business

Determining the value of a business is definitely not an exact science and involves many factors.

Here are some considerations that can affect the value of a business:
1. Small businesses (one where the owner will be actively working in the business) are usually valued based on the sellers’ discretionary earnings (SDE). This is a measure of what income and benefits the owner can expect to receive from the business.
2. A good BUSINESS BROKER should have this information available and be able to explain how it was derived. This should be examined for at least the most recent three years in order to see trends.
3. A business’s value is typically determined by taking a multiple of the SDE value. This multiple varies depending on the industry, business type, and business size (SDE).
4. It is also affected by other factors such as:
• the cost of money (interest rate, which affects the buyers’ debt service coverage ratio (DSCR).
• The type and amount of owner financing that is offered by the seller.
5. Other less tangible factors such as brand recognition, intellectual property (uniqueness), market competition, customer concentration, growth potential, risk, the presence of management, etc.

5. Submit an Initial Offer (LOI)

1. If the business looks like a solid investment that meets your criteria, you should go ahead and make an offer sooner rather than later. This is done by submitting an LOI to the seller.

2. A letter of Intent (LOI) is a short, non-binding agreement that allows a buyer and seller to agree on the transaction’s basic price, structure, timing, contingencies, and terms.

3. Although non-binding, it aligns the expectations of both the buyer and the seller so they feel comfortable moving forward, arranging financing options, and negotiating a formal, binding Purchase Agreement.

4. Most lenders require a signed LOI in order to accept and process a loan application.

6. Start the Funding Search

Now that you and the seller have agreed upon a basic deal outline (a signed LOI), it is time to start shopping for the financing needed to complete the deal.

1. The most common form of financing for small business purchases is an SBA loan. This is a US government-backed loan that many banks and lenders prefer, as the SBA guarantees a large portion of the loan. You will be required to use some of your own funds. In addition, the seller may agree to finance part of the deal (which is common and sometimes required by lenders). Lenders may also look at collateral you may have to back the loan. The purchase price balance will likely be an SBA loan.

2. Most banks and lending institutions are approved SBA lenders. However, they are not all equal. They each have their own niches and geographic areas in which they prefer to lend and can set their own rates.

3. Also, some are designated as “preferred” SBA lenders, meaning they make the lending decisions internally rather than needing approval from the SBA. Using a preferred lender will usually significantly streamline the loan approval process.

4. An experienced BROKER will be able to refer you to their proven, preferred SBA lender list.

5. It is highly recommended that a buyer apply to more than one lender simultaneously to increase the likelihood of getting the best deal in the shortest timeframe.

6. The sellers’ BROKER can be invaluable in working with your lender(s) to supply them with the necessary business documentation and help expedite the loan approval process. This is especially true of preferred SBA lenders that have an established relationship with the BROKER.

7. Negotiate a Purchase Agreement

1. As a LOI is non-binding, it is highly recommended that a buyer and seller enter into a binding Purchase Agreement as soon as possible after signing an LOI.
• Buyers are often hesitant to do this for fear of signing something binding (and committing earnest money) prior to finalizing their due diligence or securing financing.
• This is a big mistake, as this is the only way to contractually obligate the seller to the deal, thereby assuring the buyer of being in 1st position.
• It is common for a seller to receive multiple LOIs relatively soon after a good business is available, and without a binding Purchase Agreement, it is the seller’s prerogative to select the best offer.
2. Signing a Purchase Agreement sooner rather than later is safe if it is structured properly. A good Purchase Agreement will:
• Bind both parties to the deal and allow them to confidently move forward.
• Include ironclad provisions that protect you from any liabilities that are identified during the due diligence and loan approval process.
• Be contingent upon obtaining acceptable financing.
• Be contingent on the business appraising for the asking price.
• Include consideration (i.e., earnest money). This is absolutely necessary for the agreement to be binding. It is tied to the contingencies in order to protect the buyer during the due diligence process.
• Spell out the terms and conditions of the entire business transfer process.
• Include a detailed non-compete agreement for the seller to sign.
• It may also include an NDA for the seller to sign if there are trade secrets associated with the business.
• Include a detailed list of the tangible and intangible assets and their allocation breakdown toward the purchase price.
• The Purchase Agreement is generally drafted by the seller (or the seller’s attorney or BROKER) after agreeing on the terms with the seller. This is logical since the buyer is putting up the cash and carrying the greatest risk of loss.

3. Final Due Diligence as you work to Secure Financing
• Initial due diligence, done earlier in the process, is intended to provide a sufficient overview of the business to make an initial decision and offer (LOI).
4. Final due diligence involves a much deeper analysis of the details. This is done once a Purchase Agreement has been signed. The insights gained during this phase should help you decide whether or not to move forward with the deal.
• This includes a detailed (and sometimes professional) review of the financial documents (also done by the lender), property documents (leases), business loans and debt, up-to-date cash flow statements, balance sheets, income statements, intellectual property details, business licenses, and permits, etc.
• A lender is very helpful in this regard as they will perform their own in-depth, expert financial analysis of the deal.
• A lender will likely order their own independent appraisal (valuation) of the business, which will also be very helpful in helping you arrive at a decision to move forward.

8. Do Your Final Due Diligence as you work to Secure Financing

• Initial due diligence, done earlier in the process, is intended to provide a sufficient overview of the business to make an initial decision and offer (LOI).

• Final due diligence involves a much deeper analysis of the details.

• This is done once a Purchase Agreement has been signed.

• The insights gained during this phase should help you decide whether or not to move forward with the deal.

• This includes a detailed (and sometimes professional) review of the financial documents (also done by the lender), property documents (leases), business loans and debt, up-to-date cash flow statements, balance sheets, income statements, intellectual property details, business licenses, and permits, etc.

• A lender is very helpful in this regard as they will perform their own in-depth, expert financial analysis of the deal.

• A lender will likely order their own independent appraisal (valuation) of the business, which will also be very helpful in helping you arrive at a decision to move forward.

9. Closing The Deal and Making The Transition

• The deal is considered closed when the closing documents are signed and consideration (money) is exchanged. This can be done in person or remotely and is often orchestrated by the lenders (who will have a lot of documents to sign). They will also be present for larger deals that involve attorneys.

• The transition to the new owner is exciting and overwhelming. Everyone is excited (hopefully) and nervous – employees, customers, vendors, the previous owner, and you, the buyer.

• A smooth transition almost always involves the seller being available for a gradually decreasing amount of time over several weeks or months.

• It should involve company meetings to assure employees they are valuable and their jobs are secure, introductions to and meetings with customers and suppliers, and a lot of new owner coaching by the seller.

• As this process proceeds, it is important to avoid any radical changes as all the players get used to the new ownership.

Contact Us Today to Discuss Your Business Buying Aspirations

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