Not all businesses are started from scratch. Buying an existing business is a way to get into an established company and brand, with an existing operations structure, and ideally allow you to profit immediately. It can also be less risky than starting completely from the ground up. There are things to consider though, and you’ll want to carefully look into some things before finalizing the deal.
Figure Out What You’re Buying
You’re most likely buying from a seller that is set up as a corporation or an LLC. The question you need to answer is whether you're going to buy the business (the actual LLC or corporation) or you’re going to buy the assets of the business, and move them into your own separate company. There are tax implications to this, so it will be important to bring on an accountant or CPA to help carefully determine what’s in your best interest from that standpoint. There are also some potential legal issues involved - maybe the business has a significant amount of debt, is being sued or is at high risk of being sued. Maybe there are serious customer service and reputational issues. Even if that’s the case it’s not necessarily the answer that you should just buy the assets, but it is a decision that needs to be made early in the process, and one that probably needs some serious consideration.
Get A Letter of Intent In Place
This could be called a “term sheet” or a letter of intent (LOI), and it’s basically a short agreement between the buyer and the seller that spells out the main terms and conditions of the sale, and highlights the important topics for each side. This is typically done early in the process of buying a business, and is used as you move forward with formalizing the sale and the documents that will go along with it. It’s helpful to get a starting point on paper and the loose details of the proposed transaction. Terms that are usually included are the purchase price, which may be a formula for how it’s determined; the method of payment, e.g. lump sum, financed by the seller, financed by a bank, will there be a note or is it all cash, or some combination of those; the time frame for getting the deal done; any other important information such as will the seller be required to sign a non-compete, will the seller continue on for a set period of time to help with the transition, etc. Additionally, a buyer can use the LOI as a way to prevent the seller from exploring a sale to other interested parties for a set amount of time.
The deal terms that are listed in the LOI are non-binding because the parties want some flexibility as the process moves forward and additional information starts to come to light. The due diligence process may turn up issues that will impact the price or the timing or availability of certain assets for sale. For example, during due diligence the buyer may find a significant liability that would cause the purchase price to be reduced. While the deal terms themselves are not binding on the parties, there are a few sections that are usually binding, namely that it’s all kept confidential and that the business continues to operate in the ordinary course while the sale process unfolds.
Perform Your Due Diligence
This is an extremely important step in the process before you actually buy the business. You need to know what you’re getting into, and the way to go about that is to perform your due diligence on the company. You can think of this as doing your research, on every aspect of the business, to make sure there’s anything negative out there that you’ve missed. The process varies based on the deal and the business being purchased and can be fairly high level or extremely detailed. The goal is to make sure you get enough information to be comfortable with what you’re buying and that there are no surprises out there which will come back to haunt you down the road.
You’ll want to evaluate the financials of the business, it’s one of the most important parts of the due diligence process. Depending on your level of comfort and expertise with this type of information, it may be wise to bring in a subject matter expert to help go over everything. You want to pay close attention to the financial indicators such as sales, profits, expenses, cash flow and debts. This step can also reveal potential red flags that could impact the purchase price and the sale in general.
Dive into the businesses reputation, the power of its brand in the target market, threatened or actual lawsuits against the company and whether or not the business is living up to its obligations.
Make sure the company is in compliance with regulations and laws that pertain to the industry or locality, that it’s got all the licenses and permits needed. You’ll also want to make sure the company is in good standing with the appropriate state agency or authority and take a look at the operating agreement or bylaws.
Secure Financing
You’ll need to know how you’re going to pay for the business and where the money will come from. There are plenty of available options, but you don’t want to commit to having to purchase a company without being able to get the financing you need. It could be that you have the cash or assets on hand, or maybe it’s a bank loan, or the seller is willing to finance it for you, or some combination of all of that. Whatever the case may be, make sure you know how you’re going to pay for it and that you can get the money before you close on the deal.
Get A Feeling For The Operations
Make sure to understand what the operations of the business look like. How are things running, are there any issues that you should know about? Who are the key employees and are they going to be willing to stick around after you purchase the business (assuming you want them to). How do things run on a day to day basis, are there equipment issues, or staff issues or financial issues? Depending on what some of this looks like and what concerns may come up, you can address some potential problems and contingencies in the sale documents to give yourself an out.
Buying a business can be a great opportunity, just make sure you know (as much as possible) what you’re getting into and get your hands on as much information as possible.
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