Why do people buy businesses?
- They buy businesses because they want to be “their own boss”
- They buy businesses because they need a career change
- They buy businesses because they need a “job”
- They buy businesses because they are tired of working for someone else
- They buy businesses because they are bored with early retirement
- They buy businesses for strategic reasons – the business fits well/compliments with another business they own or it allows instant growth
- They buy businesses for financial reasons – it is a good investment
- They buy businesses because the business fits with a “hobby” interest they have
- They buy businesses because they are looking for something for a spouse or other relative to do
Now we know why people buying businesses, so the question is whether to buy an existing business or to start it yourself. It is usually much safer and more profitable to buy an existing business than starting a new venture. According to the Small Business Administration, over 50% of startup businesses fail due to unproven concepts, lack of working capital, and poor management.
Advantages to Buying an Existing Business
Being able to review a company’s existing track record as reflected in P&Ls, tax returns, and other financial records is a good indicator of future profit. The need for additional working capital is reduced due to the immediate cash flow being generated by the acquired company. Also, obtaining skilled employees who are familiar with the business. You also gain established customers who already trust the company. Sources of capital to purchase existing businesses are more readily available than startup ventures. Banks and other financial institutions prefer to loan money for existing operations that have a proven track record.
So you have decided so buy an existing business, but where do you go now?
Seek an experienced business broker who can assist you in finding a business and coordinate the sequence of events that need to take place. The vast majority of all business buyers are first-time buyers, unprepared to meet the complexities of acquisition transactions. Utilize an accountant who can help you with the due diligence process and advise you on tax and record keeping issues. Obtain legal advice for business organizational requirements and legal documentation for your acquisition.
Find out if the business broker is a member of the Texas Association of Business Brokers (TABB) and/or the International Business Brokers Association (IBBA). The brokers in these organizations are required to adhere to practice standards and a code of ethics.
If you are like most people, you’ll buy a business only once in your lifetime. So, ask yourself the following questions before you visit a broker:
- Why do you want to buy a business?
- What is your educational background?
- What special skills and interests do you have?
- What is the maximum amount of your personal funds you can invest as a down payment
- Is there a specific type of business you are interested in owning?
- Where would you like to be located?
- What is the minimum income you require to meet your living expenses?
By answering these questions, you will save valuable time with your broker.
Once a broker is able to see your answers, they can better assist you with the buying process. They can review several businesses that meet your needs and go over them with you. You will be asked to sign a confidentiality agreement and then you can see financial information on the businesses.
You can then narrow down the list to those businesses that are of interest to you. Your broker can then schedule a time for you to meet with the business owner, so you can see the facilities and operations. The business broker will attend these meetings with you to introduce you to the owner and help the flow of information. During these meetings, it is best not to discuss the price and terms of sale with the business owner. The business broker should be able to explain the basis on which the business was valued and the terms of sale required by the owner. Whether you’re prepared to invest $50,000 or $50 million, your first question about any business opportunity should be, “Why is this business for sale?” Please remember to keep all proprietary information you obtain about the business confidential. In most cases, the employees, customers, suppliers, landlords and lenders are not aware that the businesses are for sale. Premature disclosure could have a negative impact on the business being sold.
Once you have reviewed all necessary information, you are ready to select a business and begin your due diligence process. The business owner does not want to go through a detailed due diligence process without knowing the buyer is serious and willing to make an acceptable offer to purchase the business. Therefore, before copies of tax returns and other business documents can be obtained and before any contact can be made with landlords, bankers, suppliers, employees, or customer, an Earnest Money Agreement must be presented and accepted by the business owner. The business broker will assist in the negotiations between you and the business owner to secure an Earnest Money Agreement that is acceptable to all parties.
If institutional financing is required, the business broker can usually recommend various lending sources depending upon the type of financing needed.
When you have completed your due diligence and are satisfied with all aspects of the business, you will authorize an escrow attorney to conduct lien searches and prepare the bill of sale and other closing documents for all parties to review. After the principals have approved the closing documents, a closing date will be scheduled. A cashier’s check will be required at closing for the amount due. The business broker will coordinate with the principals and their advisors, landlord, lender, and others to insure that all the necessary paperwork is completed by the closing date.
NOW YOU CAN ENJOY “THE AMERICAN DREAM” OF OWNING YOUR OWN BUSINESS AND BECOMING AN ENTREPRENEUR………