Basics of Buying or Selling a Business

 

Here you will find some basic information for anyone thinking about buying or selling a business.  As with any transaction, knowledge is key.  The more information both buyer and seller have about the process of acquiring or selling a business, the easier the transaction will be.

A Buyer Profile 

The average individual interested in buying a business is looking to replace a lost job or seeking a way to get out of an uncomfortable job situation.  Most often he is male; however more and more women are going into business for themselves as well.  Almost 50 percent of all potential buyers will have less than $100,000 to invest in the purchase of a business.  Fewer than 30 percent will have $250,000 to invest.  In many cases the funds, or part of them, will come from personal savings followed by financial assistance from family members.  He or she will never have owned a business before and will most likely buy a business that was not previously considered until it was introduced, perhaps by a business broker.

The primary reason for going into business is to get out one’s present situation, be it unemployment, job disagreement, or dissatisfaction.  Potential buyers want to be in charge of their own destiny, and they don't want to work for anyone.  Money is important, but it's not at the top of the list; in fact, it is probably fourth or fifth on their priority list.  In order to pursue the dream of owning one's own business, the buyer must be able to make that "leap of faith" necessary to take the plunge.  Once that has been made, the buyer should review the following tips.

Importance of Information to the Potential Buyer

Understand that if you are looking at small businesses, you will have to dig for much of the relevant information.  Small business owners are not known for their record-keeping.  You want to make sure you don't overlook a "gem" of a business because you don't or won't take the time required to find the information you need to make an informed decision.  Try to get an understanding of the real earning power of the business.  Once you have found a business that interests you, learn as much as you can about that particular industry.

Negotiating the Deal

Understand, going into the deal, that your friendly banker will tell you his bank is interested in making small business loans; however, his "story" may change when it comes time to put his words into action.  It’s important to recognize that the seller finances the vast majority of small business transactions.  If your credit is good, supply a copy of your credit report with the offer. The seller may be impressed enough to accept a lower-than-desired down payment.

Since you can't expect the seller to cut both the down payment and the full price, decide which is more important to you.  If you are attempting to buy the business with as little cash as possible, don't try to substantially lower the full price.  On the other hand, if cash is not a problem (this is very seldom the case), you can attempt to reduce the full price significantly.  Make sure you can afford the debt structure - don't obligate yourself to making payments to the seller that will not allow you to build the business and still provide a living for you and your family.

Furthermore, don't try to push the seller to the wall.  You want to have a good relationship with him or her.  The seller will be teaching you the business and acting as a consultant, at least for a while.  Negotiate on areas that are important to you, but don't waste time negotiating over details that aren’t really  key.  Many sales fall apart because either the buyer or the seller becomes stubborn, usually over some minor detail, and refuses to bend.

Due Diligence

The responsibility of investigating the business belongs to the buyer.  Don't depend on anyone else to do the work for you.  You are the one who will be working in the business and must ultimately take responsibility for the decision to buy it.  There is not much point in undertaking due diligence until and unless you and the seller have reached at least a tentative agreement on price and terms.  Also, there usually isn't reason to bring in your outside advisors (accountants, attorneys, bankers, etc.), if you are using them, until you reach the due diligence stage.  This is another part of the "leap of faith" necessary to achieve business ownership.  Responsible outside professionals normally won't tell you that you should or should not buy a particular business, nor should you expect them to.  You will want to get your own answers - an important step for anyone serious about entering the world of independent business ownership.