Have you ever wondered how to buy a business?
If you want to be an entrepreneur, you don’t need to start from scratch.
Taking over an existing business is usually less risky and more profitable (here’s why).
If you’ve decided to go this route, here’s an overview of what to expect and how to ensure you cover the most important bases.
1. Get Clear on What & Why
Before moving forward with a major purchase, you want to be completely clear about what you want — and why.
Beyond the most obvious points to do with price, profit and ROI, you’ll want to consider:
- Economic resilience of industry and/or product
- Impact of innovation
- What size of business you can realistically manage
- How it fits with your current and future lifestyle
You also want to be clear about why the seller is moving forward; if it seems “too good to be true,” or you have some other reason why you feel they are not being transparent, you’ll want to take note of this and practice due diligence.
2. Build a Support Team
You’ll also want to start building a support team to help you with the initial acquisition, some of whom will likely stick with you in the long term.
This team should include at least one accountant and a business attorney, and may also include:
- A financial advisor
- A banker
- A business valuation expert
- A business broker
Your team can help you with research, determine the economic risk involved, understand why the seller is moving forward, determine the price, forecast the return on investment, and finalize all documents.
3. Establish a Fair Price Point
To understand how a business is valued and priced, you’ll want to get a clear understanding of the potential return on investment (ROI).
Your team can help you to understand factors such as:
- Economic factors
- Seller motivation
- Capitalized earnings
Your ROI should be enough so that it pays for itself, and will be different depending on the the size, scale, and scope of your business.
The seller (or other industry players) may try to offer you ROI numbers based on certain industry standards, but getting clear on these numbers in the context of the actual business is a crucial part of understanding how to buy a business.
4. Choose a Deal Structure & Secure Financing
Learning how to buy a business isn’t just about whether or not you can get a loan.
It really has to do with how you manage your financing in the long-term, whether or not you can keep up with interest payments and understanding taxation structures.
A deal structure may be:
- A merger
- A stock purchase (equity purchase)
- An asset purchase
Financing options may include:
- Paying the seller off over time with interest (seller financing)
- Venture capital
- Business loans
There are sometimes unique financing opportunities that are related to your industry or region.
Make sure you’re clear about your financing options as early as possible and consult with your team for new ideas.
5. Create a Letter of Intent (LOI) & Closing Checklist
The buyer and seller may want to establish a non-binding agreement in the form of a Letter of Intent (LOI) as they move towards closing a deal.
The LOI can include structuring, purchase price, due diligence, expectations, closing date, and other specific details that should be communicated upfront.
Next, a closing list will ensure that everything that needs to be completed gets done on time.
It’s a good idea to keep this updated and shared between parties so that all are able to see updates and changes.
6. Complete Due Diligence
If you’re moving closer to making a purchase on a new business, you might be excited and want to move quickly.
But the steps for how to buy a business aren’t always cut and dry, and sources of liability could be less than obvious
Your accountant will want to do a thorough review of the business’s financial records and investigate anything that seems unusual or unclear.
Beyond the numbers, you’ll want to investigate other things like employee turnover or shareholder behavior.
At this time you can validate the purchase price in relation to risk and walk away if you make unseemly discoveries
7. Draft a Purchase Agreement
Once terms are established and funding secured you’ll want to draft an agreement with the help of an attorney. Make sure your attorney explains the agreement in detail.
This will be a legal agreement based on terms established mutually by buyer and seller, much of which will likely be outlined in the LOI.
Once finalized and signed, the purchase agreement is the official completion point of the sale.
8. Get Consent and Approvals
You’ll need to obtain explicit permission from anyone else who has an agreement or partnership with the existing business. .
This includes other owners and shareholders, but also entities that are tied to the business via other agreements.
Areas to consider include:
- Consent of Members (LLC)
- Consent of Shareholders (corporation)
- Third-party contracts
- Lines of credit
Get your lawyer to help you revise and draw up new contracts as they pertain to the above parties.
9. Make the Final Transition
Wondering how to buy a business is actually emotional as it is about the numbers. Before signing anything, make sure all parties feel good about the transaction, and that your support team is on board as well.
Part of your research process should also involve interacting with clients, employees, customers and vendors — anyone connected with the business.
Get to know them and make sure you are transparent about what you have planned so that they can feel comfortable and happy about the transition as well.
10. Close That Deal!
Once everything is finalized and you’ve worked through your closing checklist, you can move forward with finalizing the deal.
Have your payments and stock certificates prepared, along with all legal documents.
And don’t forget to plan a celebration for when it’s done!
If you are buying or selling a business, our attorneys can help to make sure you cover all necessary steps and are legally protected.
Call us at 303-780-7333 for a free 30-minute consultation, or schedule an appointment today.
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