10 Things to Know before Buying a Business
Before buying a business there are several things you as the buyer should do and know. Understanding the below points can help you make the best decision when purchasing a business. Peak Business Valuation, business appraiser Utah, is here to help you buy a business with confidence. Reach out by scheduling a free consultation!
Be sure to take a look at Buying a Business as well as The Basics of Buying a Business for additional information.
Find a Business to Buy
There are many resources to find the right business to buy. Some of these resources include online websites such as BizBuySell.com, BusinessBroker.net, BizQuest.com, among others. Networking, business brokers, franchise consultants, and industry publications can also be helpful in finding available businesses to buy.
Speak with the Business Owner
Once you find a business you have an interest in buying, it is always preferable to speak with the business owner before making an initial offer. However, some business owners prefer you to work solely with their broker. If that is the case, speaking with the broker can be valuable too.
Below are some of the key questions to ask the business owner/business broker. For more in-depth explanations see Questions to Ask the Seller of a Business.
- Why is the owner selling the business?
- What assets and liabilities is the seller including in the transaction?
- How did the seller arrive at the asking price?
- What outcomes is the seller looking for?
- Is the owner willing to stay on for a transition period?
- What has the seller’s role in the business been?
- Who are the business’s key customers, suppliers, and employees?
- Will the owner consider seller-financing? If so, how much?
- Is the owner willing to sign a non-compete agreement?
- What are the biggest challenges the business faces?
The goal is to get to know the business owner and the business. Address as many of your questions as possible. Understand their rationale for the asking price and valuation. Understand what terms and conditions the seller is requesting. As a buyer, you don’t want to go into a transaction blindly. You also don’t want to waste time putting numerous offers on the table. Speaking directly with the business owner can give you the best sense of how the business is operating and what role you will play as the new owner.
Write a Letter of Intent
The next step in buying a business is drafting a letter of intent. The letter of intent shows the buyer you are serious about buying the business. A letter of intent includes the purchase price, payment structure, terms and conditions, the seller’s future involvement, and a variety of other items. It is the stepping stone for further negotiation with the seller. The letter of intent is a summary of the proposed price, terms, and conditions of the transaction. If accepted, you can then start the due diligence process.
Due Diligence Process
Obtain Key Information
Once you agree to the initial offer, there are several documents, agreements, and statements you will want to obtain. With the help of a business valuation expert, you can then analyze these statements. Dong proper due diligence can help you avoid many of the headaches and troubles down the road.
Some of these documents and statements include organizational documents, contracts and leases, financial statements, and inventory and equipment. Reviewing financial statements is of vital importance. The financials will tell you a story of how the business is operating, current revenue and profit levels, and the growth projection of the business. Be sure to review all these documents and ask as many questions as necessary to gain a solid comprehensive understanding of the business.
Get a Business Valuation
A business valuation is an important piece of the due diligence process. A business appraiser asks important questions about the seller’s financials that can impact the value of the business. The business appraiser will then determine a range of values for the business.
Peak Business Valuation, business appraiser Utah, can help you understand the fair market value of the business. We also spend time working with buyers to understand the strengths, weaknesses, and risks of the business. If you are looking to buy a business, schedule your free consultation today!
Negotiate the Purchase Price
Negotiation is the next step in buying a business. To negotiate a fair purchase price and terms and conditions, both the buyer and seller will need to determine what the business is worth. Obtaining a business valuation can give you critical insight into the value of the business and what drives the value. A business valuation can provide insight into the strengths and weaknesses of the business and how it compares to competitors.
Once you determine a fair purchase price you can then negotiate the other terms and conditions. Some of these may include timing, financing, what assets and liabilities are included, non-compete agreements, etc…The goal is to feel confident that the offer and terms will help you succeed as the future business owner. It is best to avoid deal-breakers, and rather be a dealmaker. Keeping an open mind is also important as you work to find good solutions. Be creative and reasonable with the terms you are asking for.
Make a Final Offer
The last step in buying a business is making a final offer or purchase agreement. This is a comprehensive document that details the negotiated terms and conditions. It may include terms of payment, conditions, non-compete, financing, transition period, training, leases, contracts, and warranties, among other things. Once both the buyer and seller sign and agree to the purchase agreement the document becomes binding.
Buying a business is a large decision with far-reaching consequences. Knowing the above points can help you confidently buy a business that is a good fit for you. Keep in mind, in most transactions the buyer assumes the most amount of the risk. As such, you want to be as informed as possible. It is also okay to ask for anything you need and want. As the buyer, it is your money, your future, and ultimately your risk. You want to feel confident in the purchase offer and the terms and conditions. Doing proper due diligence and including professionals such as your lawyer, accountant, and a business valuation expert can be most useful.
Peak Business Valuation, business appraiser Utah, wants you to feel confident buying a business. We are happy to answer any questions you may have. Reach out by scheduling your free consultation below!
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