Buying a business requires a lot of consideration and a range of different parts to be executed for it to be able to come to fruition, but it all starts with a dream. The dream could be to be your own boss, be in charge of your life, or expand and grow your existing business. We at Hasanov Capital have helped 100s of people achieve just that, and below, we outline the ten major steps it takes for you to do just that.
Step 1.
Get your team ready
You may be an expert so you are buying a business and could run it with your eyes closed, but to purchase a business, you will need the help of an Accountant (CPA), Business Lawyer, and a Financial Broker or Lender.
When analyzing whether a particular business is worth buying, you will need to know how much the company is making, its expenses, payroll, taxes, leases, etc. Unless you have an accounting or financial background, trying to understand and decipher all this paperwork will create a headache. And worse, probably cause you a costly mistake. For this reason, you need to have an expert accountant to help you analyze each thing. It includes the paperwork, the mountain of tax returns, financial statements, POS statements, payroll, debt, and tax liabilities.
Moreover,
Once you have decided of buying a business, you will need a Business Attorney to review and draft numerous legal documents. The lawyer will create an LOI (Letter of Intent), Bill of Sale, review and negotiate the lease or purchase of the building. The lawyer is not the place to try and save money. Your lawyer will protect you from potential liabilities, hold the seller accountable and make sure you are in control of the process.
Knowing what business to buy is important, but knowing if you can afford it is just as important. Research tells us that 82% of all businesses close because of cash flow problems; that statistic is even more important for those who are acquiring a business. First and foremost, you will need to know if you have the financing necessary to purchase the business. Secondly, you will need enough working capital to help you get the business through its initial months of acclamation. For this, you will need the help of a lender or a financial broker.
At Hasanov Capital, we help our clients get the best financing terms from a vast network of partner lenders and help guide them through the process from the initial negotiation period to funding at closing. Knowing the loan amount that you qualify for is crucial in your search for a business to buy. Make sure you reach out to your lender or broker early in the process, not to waste your time purchasing a business that then falls through for lack of funding.
Step 2
Find the right business to buy
Often, people looking to buy a business will enlist the help of a Business Broker to help find what they are looking for. You can also search businesses for sale on numerous websites such as BizBuySell, BusinessesForSale amongst others. While you may choose to search for yourself, you limit the number of potential business opportunities that you are exposed to while spending your valuable time doing so. Having a business broker, and you should have more than one, costs you nothing; brokers make their money from the business’s seller, usually 10%-15% of the sale price. You benefit from having access to all the existing listings of businesses for sale, and should you not find something of interest to you, they will take down your requirements and find something that is perfectly suited.
Step 3
Collect the necessary paperwork from the seller
You found the business that interests you, and everything about it, now what? While we hope and expect that sellers are honest in their representation of the business and all the financial information with it, unfortunately, that is not always the case. For this reason, and for the purposes of financing your purchase, you will need to collect numerous documents. Below, we outline the most important:
The last three years of Business Tax returns as well as complete, up-to-date financials and a balance sheet. This allows you to get an idea of the business’s revenue and profit margin as well as its assets and liabilities. The very important number here is the EBITDA (Earnings before Interest, Taxes, and Depreciation). This number will help you in valuing the business and making a proper offer.
Most businesses have Accounts Receivables and Payables reports. You will need to know any outstanding amount owed to the business by clients and any vendor liabilities the business has.
You will need to review the lease, or if you are buying a business property, get an appraisal of the property. If it’s a lease, have your business lawyer read and analyze all terms, including remaining time, the price per month and any increases through the years, property tax provisions, insurance, and much more. A great business can be destroyed with rent hikes, landlord disputes over taxes, and much more. If you are buying the property of the business, treat it as a separate purchase. The property needs to be assessed in value, condition, and potential. Your financing will greatly depend on the value of this part of the purchase.
Step 4
Get your financing in order
This is the step before making any offers or placing deposits for the purchase of a business. Too often, we see clients reach out to us to finance their purchases only to find out that the deal is not financeable. For Lenders to finance the purchase, there are numerous requirements to meet their criteria. At Hasanov Capital, we provide a vast network of partner lenders through whom we finance both straightforward and more difficult deals. You need to know how much you can afford.
Knowing your own financial strength. Whenever you buy a business, the lender will look at the company being purchased but also at the purchaser. You must know how much deposit you can afford towards the purchase. You must provide a list of assets, real estate, or collateral that you can provide. If you are a company purchasing another, your company’s financials must be provided as well.
Receive term sheets from several lenders for your purchase. Once all of the information is submitted, your lender or financial broker will be able to provide you with terms of potential financing – i.e., size of the deposit. Whether you need to put down 10%, 15%, or more for your purchase, you will also know the interest rate and the term length of the loan. Closing cost, and all associated fees, must be disclosed to you to properly assess the full price of the purchase. This will give you confidence in making an offer you know you can complete.
Step 5
Negotiate like a pro
Once you have reviewed all the financial paperwork, researched the business you are looking to purchase, and know where you stand with financing, you are ready to make offers and negotiate prices with the seller. There are a lot of things to consider at this stage, and we will mention some of the more critical ones below.
The asking price does not have to be the final price. Understand that the sellers will often ask for more than what he/she thinks his/her business is worth. Price is always open to negotiation, and you should not be afraid to make an offer below the asking. At this point, you have done your research and must have formulated a fair price. Your first offer should be a price you are most comfortable at buying the business. At this point. the negotiations will start, and hopefully, the final accepted price will be closer to what you feel comfortable with than the seller.
Price is only one of the many aspects to negotiate a purchase. When buying a new building, it is advisable both for your success and financing to ask at least one of the partners in the selling business to stay on board for a period of time after closing. This allows time for you to get acclimated, get to know the clients, employees, and the business’s suppliers. It provides peace of mind, both for you and the lender. This is very common in the world of business acquisitions.
Moreover
One common misconception of financing is the confusion between seller financing and the financing you seek from the lender. A lot of business purchases are accompanied by seller financing. This is where the seller defers a part of his payment in installments. Or a sum payment after a certain time period. This helps purchasers with the initial outlay of cash. It also reassures buyers of the seller’s intentions and honesty about the business.
Separate from seller financing, an escrow amount should be laid aside with the buyer’s lawyer to hold until certain metrics. An example of this would be an escrow fund to verify that the previous owners paid the state sales taxes. The state will shut you down, even if the previous owners owe the balance. A verification letter must be provided after the sale is completed from the state that all sales taxes were paid in full. This is just one example to show the importance of what an escrow balance might be used for.
Step 6
Draft an LOI with your attorney
After researching the business and agreeing on a price, a Letter of Intent is drafted by your lawyer. This is where your lawyer outlines your offer for buying a business, along with all other things that you negotiated with the seller. It will include the final agreed price, the deposit amount, escrow balances, any and all negotiated points off the purchase. A draft LOI is then sent to the seller’s lawyer for review and signature by the seller.
Step 7
Complete your due diligence
You have now agreed with the seller to purchase their business; what is next? Here comes perhaps the hardest part of this process. This is the time for you to verify the information that was provided to you by the seller. Ask for bank statements to verify revenue and deposits. Speak to employees and learn about what each does and their plans during the transition. You will need to know, which employees are staying put with you at the helm, and who will need to be replaced. You need to verify as much information and learn as much as possible about the business before you become the owner of this entity.
Step 8
Make adjustments based on your findings
The due diligence process is long and tedious but very important. Your findings during this process will have an effect on the purchase price, and terms negotiated. If all is perfect, the price previously agreed upon will be honored. If there are discrepancies, you might either renegotiate or walk away from the deal with your deposit returned.
Step 9
Finalize the agreement with the seller, your lawyer, and the lender
You are almost there, the finish line is in sight. Now you can feel the pride of owning a business and the freedom of choice and dreams that it provides. But first, the final touches to be applied to this process. Your lawyer will be in constant contact with the seller’s lawyer drafting a purchasing agreement, bill of sale, and all the rest of the legal jargon necessary for the closing. Simultaneously, the lender will start the underwriting process and provide you with all of the loan documents before closing.
Step 10
Buy the business and pick up the keys
All of your work and the time spent is accumulated at this moment. At the closing, you are with your lawyer, the seller, and his lawyer, and multiple checks in your hands. It is an exciting time as well as an anxious one until the pen is set to paper. At closing, you have the right to once again review all documents to be signed. Also, you can speak or ask any last-minute questions from the seller. If all is right, then both you and the seller will sign copies of the agreement and purchase. And then provide checks to the seller, lawyers, and if escrow amounts have been established, a check for the escrow. Congratulations, here are the keys to your new business and much success in your endeavor.
