Steps to Buying a Business

Many people find buying an established business difficult and daunting. The buyer will have a better chance of completing the transaction successfully if they are able to understand the steps and do the planning and preparation. A proven and well-tested process will reduce stress associated with the chartering of new territory and eliminate many of the unknowns and risks that can often lead to a business acquisition being canceled.

PERSONAL ASESSMENT

Introspection is the first step to buying a business. This should include a thorough and honest assessment of each candidate’s strengths, weaknesses, skills, and likes and dislikes. This will help narrow down the choices for the most logical and profitable business venture.

What skills, talents, and experiences do you have that will help you succeed in your role? Which types of businesses can benefit from these qualities behind the helm? These are some of the questions you should ask during your introspection phase:

Which type of business would you like to run? Do you prefer to be the owner/manager of the business or have a team of managers?
How many hours can you dedicate to your business? Owning a small business is not something you can do from 9 to 5. It is important to decide how much time you have available to manage your business. Are you looking for a B2B company that operates from 8-6pm M-F or more flexible options that are open late and on weekends?
Are you a salesperson who is able to meet clients and be the face of the company? Or are you more suited for a managerial position and managing the business behind the scenes with a sales team in place?
Do you need a business that allows you to travel for several days?
Are you more interested in the service or distribution industry?
Are you able to obtain the licenses and certifications required for your chosen business? Are you ready to get the credentials necessary for ownership, if required by the target business?
What are the things you enjoy most? What are the things you don’t like to do? It is best to look at businesses that are in the same industry as the buyer.

These are just a few questions that can help you narrow down the list of potential businesses where your skills, abilities, and passions will be most useful.

DEVELOPMENT CRITERIA

Once you have identified the type of business that will suit your needs, the next step is to write down and define your investment criteria. It is important to match the investment criteria with your resume and transferable skills if you plan on applying for bank financing. These are the investment criteria:

How much can you afford to purchase the business?
Which is the best geographic location for the business that you are looking to buy?
Which type of business do you want?
Manufacturing
Wholesale/Distribution
Service
Retail
Web-based
Which industry should the company be located?
What is the management structure? Owner managed or team-managed?
The size of the business. Referring to:
Revenues
Profits/Earnings
Employees
Numerous locations
Recurring revenue model vs. project based
LENDER PREQUALIFICATION

A prequalification is required if you are planning to use bank financing to purchase a business. This ‘prequalification’ will provide you with data about the size of the business that you can purchase. It will also show the seller and business broker that you are serious buyers. A bank prequalification is necessary if you want to buy a business. What’s the point of procrastinating when you can have this done at the beginning? There are no downsides and many benefits. Your business broker can recommend a financial institution offering business acquisition lending to suit the type of business that you are interested. This is where it is crucial to find the right lender.

BUSINESS RESEARCH (Individual, Retained)

How do you find and qualify businesses to purchase? Do you plan to do the search yourself or hire a professional broker or intermediary? There are thousands of businesses available at any one time. It is necessary to establish a process for searching and qualifying businesses. These businesses are not of the highest quality, caliber, or profit level, which makes them best in class. What can you do to make sure you stand out from the rest and get the right consideration when you approach a broker about a business for purchase? There are many buyers looking for business-for-sale listings who are not prepared and don’t care about seriousness. To establish contact with the right people and get the business to qualify as a legitimate candidate, it takes preparation, messaging, and a professional team. Many potential buyers succumb to the temptation of clicking on every business that interests them and then going online looking for business information. Many serious buyers are lost in the field. Here’s where the previous steps are helpful – having a personal biography, established investment criteria, and a lender preapproval.

QUALIFICATION

Prospective buyers will be able to review a variety of documents that a professionally represented business has available (e.g. Financials, Asset list, Business Summary, etc). To be considered as a serious candidate, buyers will need to sign an NDA.

The buyer must have done their own research on the industry or have some firsthand knowledge. Trade magazines are available for almost any industry sector. There is also a wealth of data on the World Wide Web.

A list of questions should be prepared by the buyer. It is intended to determine if the business meets all elements of the investment criteria. The business’s value should be understood by the buyer. The buyer should not evaluate the business if the price is too high for their financial capabilities. A serious buyer will need to understand that no business is perfect and each one will have its strengths and weaknesses. Buyers are looking for businesses that have a steady revenue stream, great staff, established policies & procedures, and growing profits. What are your most important attributes? It is helpful to rank the criteria when evaluating businesses. It is easier to find a business that meets all the criteria than it is to find one that does not. The buyer might be well-placed and have the experience to fix certain aspects of the business that are not working. This approach will allow the buyer to quickly and efficiently remove businesses that are not a good fit. It will also save time for all involved. For everyone’s benefit, a quick no is better than a slow one. The buyer must also recognize that the higher the business, the more they can expect to pay.

The buyer should prepare another set of questions, based on the details of the business. Once the information has been received, the buyer will know if their basic criteria have been met. The buyer should know the details of the business valuation, financials, and business operations. The seller (through the broker), should also be clear about how they will finance the transaction.

The business broker should arrange a teleconference to fill in any information gaps and allow buyers to ask specific questions. Sellers will then be able to answer them directly. If the interaction meets all requirements, a personal meeting is usually arranged. The buyer, seller and broker will discuss the details of a transaction that will meet their needs. At this stage, only serious contenders should participate. If the goal is to move forward, now is not the right time to waste anybody’s time by being a tire-kicker. Buyers need to be aware that the NDA does not allow for the disclosure of client names until the transaction is closed.

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