How to buy a business

It’s one of life's toughest decisions: are you ready to be your own boss? The emotional and financial rewards of being self-employed can be great for those that are truly ready and willing to work hard to succeed.

First, pause and take stock of your life. You have to answer all the questions on the emotional checklist an enthusiastic “yes” before taking the plunge. Are you ready to work harder than you’re ever worked before? Are you passionate about the industry you’re about enter? Can you hear “no” often, and keep going with the same strength of spirit? How well do you overcome daily adversity? What is your risk tolerance? Remember, not every business succeeds, but those that do reap the rewards of being the boss!

Once you’re emotionally ready, run down the practical questions checklist to maximize your chances of success. Do you have the talent and knack for the business you’re considering? Do you have sufficient experience? Do you have sufficient financial cushion and investment capital? Do you have a good working knowledge of business fundamentals, or professionals you can rely on?

Lastly, take a moment and consider the classic debate between buying an existing business vs. starting one from scratch. (Spoiler alert: we’re enthusiastic fans of buying the right opportunity.) Buying the right business often means immediate cash flow, available financing, a great location, or a bargain purchase price.

Once you’ve walked the emotional checklist with your family and ticked off the practical requirements, you’re ready to find the right business. Business ownership isn’t for everybody, but for those up to the challenge, it is truly rewarding. Nobody said it will be easy!

Finding the right business to buy is often the longest part of the process. It is a “needle in a haystack” search; it's not as simple as scrolling through one master list of every local business for sale. Professional business brokers typically represent Sellers and have a collection of businesses for sale in their local market. Most have mediocre-at-best websites, so you often must inquire directly. Additionally, there are several larger marketplace websites with thousands of existing businesses for sale; those are excellent places to find potential acquisitions.

You can speed up your search if your expectations are properly set in advance.

• Remember that business brokers market their businesses anonymously, and will insist you sign a Non-Disclosure Agreement before sharing any specific details.

• Every Seller’s greatest concern is ensuring their prospective sale remain confidential; be a good citizen and follow BottomLine’s Buyer’s Code of Conduct to avoid unintentionally damaging their business.

• Know what makes a particular business right for you! Don’t waste time looking at businesses that don’t match your requirements.

• There are several core “Buyer Dos” and “Buyer Don’ts” that should guide your actions during the search process. Follow these common sense tips to ensure a smooth search.

• Also remember that (the good) business brokers have many businesses for sale and speak with numerous Buyers every week. Part of their job is to make sure that interested Buyers are genuinely qualified to purchase the business! Make yourself stand out and be memorable, qualified, and easy to work with.

Be patient; this part of the process takes time. Some Buyers find the right business immediately, while others look seriously at a dozen or more. You’ll know when you've found the right one!

You finally found a business that caught your eye. What appealed to you? It’s different for everybody: a perfect location, it’s your dream business, a bargain priced asset sale, perhaps it has great cash flow, and other times it’s merely a great acquisition! In any case, it’s time to learn more.

Start with the broker; they’re your best source of information, as it’s their job to know everything worth knowing about the business. There are a number of questions to be answered before making an offer. The broker should be able answer them, as well as provide financial statements, the current lease, an asset list, and any other relevant documents. Remember that the material available varies. Asset Sales where the concept is not expected to continue often don’t have financials. Businesses with real estate included won’t have a lease, but instead include information on the property.

Remember, the business broker will be asking you questions at the same time! It is the broker’s job to determine if you are a qualified buyer, i.e. if you would be a good fit to purchase the business. The questions will cover the spectrum: experience (licensing, past work history, past entrepreneurial experience), financial (investable cash, credit scores, net worth), and “soft” questions (your backstory, why you want to own the business, etc.).

As you’re moving through this process, you’ll feel your mind shift as you learn more. If the business is a good fit, your original interest will grow and you’ll begin to see the potential. You’ll start to strategize what you’d do once you’re in charge. If the opportunity isn’t the right fit, no problem, move on to the next one! 

Remember that you’ll rarely get ALL your questions answered prior to making an offer, you’ll think of them faster than they can be answered. Start a list and save them for due diligence. 

You’ve found the right business and hatched a plan to turbocharge it. Now it’s time to begin the process of buying it.

An experienced broker who has done this many times before will guide you through the process. Together you’ll prepare a purchase agreement, the document which details the terms and conditions of your offer to buy the business. You’ll start with one of the standard forms used to handle these types of transactions, then customize it to suit the particulars of your purchase. Many of the terms will be straightforward, and are terms and contingencies commonly found in most properly prepared purchase agreements. Other terms have to be written from scratch, and are unique to your deal. Once you’re satisfied with the offer you and your agent have crafted, you’ll submit it to the Seller for their review. 

Expect some back-and-forth negotiations, as offers are seldom accepted “as is”, even if they are excellent. Price is one of the most common negotiating points, and terms frequently need to be clarified or revised. Your broker will facilitate the negotiations and handle the mechanics of the process, until a mutually acceptable offer is reached. 

A few details you may need to know:

• There are two types of purchases: an Asset Purchase vs. a Stock Purchase. Asset Purchases are far more common; Stock Purchases are advantageous in fewer situations. There are pros and cons to each approach; your broker can help you decide between the two.
• Some Buyers prefer to lead with a Letter of Intent (an “LOI”) rather than a purchase agreement. It’s a perfectly valid approach typically seen in larger, more complex deals. Just like everything else, there are pros and cons to this approach, your Agent can help you determine when to use an LOI over a purchase agreement.

After an offer has been accepted, due diligence begins. Due diligence is the deep dive into a business’s books and records that should answer all the questions buzzing around every Buyer’s head, and will confirm whether this opportunity is truly worth buying. 

• You’ll conduct a Documentation Review confirming the business is “as represented”. You'll verify the revenue, expenses, and earnings in the business’s books and records: financial statements, POS reports, bank statements, payroll reports, tax returns, utility bills, lease, etc.
• If a lot of equipment or real estate is being purchased, an Inspection can determine whether the equipment is in usable and good working condition, and whether there are any issues with the property. Any problems discovered can be addressed prior to close of escrow. 
• Buyers taking a loan to fund the purchase also typically prequalify for a loan during due diligence. That way, any early financing issues can be resolved before entering escrow. 

Due Diligence is a lot of work: you’re reviewing a lot of documentation in a very short period of time. You may involve outside advisors for more complex deals, typically accountants but occasionally attorneys, inspectors, or contractors.

A couple of tips:

• Most Buyers are laser-focused on “ensuring the Seller is telling the truth” about the business, and that’s critical. However, while reviewing documentation and interacting with the Seller, get to know the Seller’s strengths and weaknesses. What did they do well, or do poorly? If they were staying, what would they try next? What did they attempt and fail, that perhaps you have additional skills or resources? Keep your eyes peeled for opportunity. Good working relationships with Sellers begin during due diligence; treat them properly, and that will carry into escrow, training, and transition. 
• Remember that while you’re doing diligence on the business, the Seller is typically doing diligence on you! You’ll generally have to produce proof of funds and document your financial position. Sometimes you’ll have to produce concept documentation, proof of experience, or a business plan, because we know in advance those will be relevant to a bank or landlord. 

Once Due Diligence is concluded, the Buyer formally removes the Due Diligence contingency and escrow can be opened.

Escrow serves a valuable role; no business purchase should be without one. The escrow company facilitates completing the transaction, ensuring all the terms and conditions of the purchase agreement have been met before allowing the sale to complete. 

Escrow is definitely crunch time for Buyers, who juggle their current workload in addition to preparing to buy the business. During this 45-day period, Buyers are typically: 

• Financing the purchase. This may include borrowing funds from a lender, earmarking personal or company funds for deposit into escrow, or both.
• Handling the details of starting a new company: the entity, licensing, state accounts, bank accounts, etc. 
• Preparing to implement their growth strategy. 
• Training on the niche or industry of the target business.
• Negotiating a lease assignment with the landlord. (where required) 
• Obtaining franchisor approval. (where required) 

Escrow is working on your behalf on several fronts. They document any outstanding Seller’s debt, ensuring that the business’s assets will be transferred to you free and clear. Escrow safely holds your opening deposit and all purchase funds until the closing date. They maintain all contingencies until you explicitly remove them. Escrow will only allow the deal to close when: 

• All the deal-specific terms and conditions have been completed by both Buyer & Seller.
• All clearances and releases have been filed by taxing agencies. 
• 100% of the Buyer’s funding has been finalized and submitted.
• For deals with liquor licenses, once final approval has been received from the ABC. 

Once the i's are dotted and the t’s are crossed, escrow is ready to close! 

You’re officially in charge: now it’s all up to you! You’ve entered training and transition, that fixed window of time to benefit from your Seller’s experience. The training time varies among businesses and was agreed upon in the Offer. 

Training 

Learn as much as possible about the business and industry. The subjects you’ll cover depend not only on the operational requirements of the business but on the talent match between the Buyer and Seller. Buyers should focus on acquiring those skills and knowledge they didn’t bring with them, where they can learn the most from the Seller. Focus on the core areas of the business’s value: operations, a formula, a process, sales strategies, technical knowledge, etc. 

Transition

As you’re training, you’re also transitioning operations and key relationships from the Seller to you. Again, this varies among industries, company size, and the role the Seller played in the business. Most people remember to transition day-to-day details such as alarm codes, keys, utilities, passwords and accounts, bank accounts, etc. But don’t forget to focus on transitioning the Seller’s important relationships:

• Employees: Get to know your employees; they have a great deal of knowledge on operations and procedures, and are typically the face of the company to your customers. Share your plans to improve the business and the company’s bright future ahead.
• Suppliers and Partners: Try to leverage any existing relationships with existing vendors to maintain any special discounts, volume pricing, or product availability.
• Clients: Spend time getting to know key accounts, and share your vision for continuing (or seriously improving) the business’s goods and services.
• Industry Relationships: If your Seller introduces you to key industry relationships worth having, spend time cultivating them. They were probably instrumental to their success. 

Final Thoughts

• Unless you’re planning a complete overhaul of the business, think twice before making major changes for a few months. Settle in and observe; you may learn something that will alter your plans. 
• If you left an employer, do so on good terms. Give plenty of notice and wrapup any loose details. Remember, your reputation follows you. 
• Finally, build a good working relationship with your Seller. You never know when you’ll need their advice 3, 6, or 9 months down the road! 

You’re done, the business is yours! You’ve finished one journey, only to begin another more challenging (and hopefully deeply rewarding) one. You’re now running the show, although perhaps not quite 100% comfortably. Don’t worry; that comes with time and experience. 

It’s time to start executing your master plan. Maybe it’s a complete rebrand, or perhaps you’re adding new products or services. Perhaps you’re absorbing a business into a larger company. Some Buyers invest full throttle in marketing and advertising ... a web and social media blitz.

Whatever your approach, you’re in charge now, and your business can go as far as your ambition, skill, and effort will take you. Remember, good luck is the result of good planning and hard work. So get to it!