Most people panic at the very idea of buying an existing business, assuming that it is difficult to do, but actually it really isn’t that hard. Buying a business should actually be a straightforward process, which can be broken down into seven unique steps.
The seven steps of buying a business, are;
- Determine the value
- Negotiate the price
- Sort out finance
- Heads of agreement
- Due diligence
- Final agreement
- Completion
If you follow these seven steps in the correct order, getting professional advice at each stage, then you can assure yourself that you are far more likely to end up with the upper hand in the negotiations, and a strong business purchase at the end.
Let’s go through these steps, one by one.
Determine the value
You need to start this part of the process by working out what you are actually buying. Is it business goodwill? What about equipment? Does it come with customer records and all data backups? Are you taking on existing liabilities, etc?
An asset purchase is when you buy just the assets and not the actual business, whereas buying the business means taking the liabilities and any legal responsibilities too.
It all depends really on what the business has; it is goodwill from professional services, or is there large warehouse storage, full of expensive stock and equipment?
Negotiate the price
It is often hard to know exactly what you will pay, until the later stages of due diligence, however after the first stage, you should have a fair expectation. It could even be $50,000 plus cost at stock or it could be X percentage of profits, etc.
Whatever you do, make sure any offers states subject to due diligence, which allows you to back out, should there be something scary in the minutia.
No matter what formula you apply, at the end of the day, you can only offer what you feel is a fair price. If the seller doesn’t agree, it is fine to walk away.
Sort out finance
Unless you are lucky enough to have the entire purchase amount under your bed in cash, there is a good chance you will need to finance the purchase.
Your investor, bank or financier will want to see a business plan, cash flow forecasts and existing profit and loss statements for the business.
Traditional bank finance can often turn out to be the cheapest too, so don’t immediately ignore your bank. Be aware though that banks are extremely risk-averse, however don’t despair. You can find plenty of other avenues to fund a purchase, however more than likely at higher costs.
Heads of agreement
Once you and the current business owner have agreed on some overall general sale terms, these are normally put into a simple document, stating that you intend to purchase the business, should it meet all the due diligence and latter steps in the process.
Once this has been agreed and signed, it is now the stage where both parties will now engage and brief their lawyers, accountants and any other advisers.
Due diligence
This is a fancy way of saying explore the minute details of the business, looking at legals, stock levels, any liabilities and assets, etc.
They will also investigate any long customer contracts, as well as supplier contracts such as leases on premises or equipment, IT management contracts, website hosting, etc.
This part of the process is quite time consuming for your lawyers and accountants, hence why we do all the steps before this, to weed out the bad buys initially.
The end result of this phase will be you having all the information you need to satisfy yourself you understand exactly what you are buying, and that there are no unpleasant surprises hidden in fine print or behind a closed door
Final agreement
Your lawyers will normally draft the sale agreement, which will set out all the legal details of the sale and will likely run into the dozens of pages in length. It is very important that you completely understand this document though, so make sure to spend the time and have them walk you through it, cover to cover.
Where there will be other owners or investors, it is very prudent to have a shareholder or partnership agreement also created by your lawyers, no matter how close your friendship or relationship may seem.
Completion
Once all of the above has been done, and you are happy with the due diligence and advice from your various consultants, then the money can change hands and the business ownership will pass to you.
Sit back, drink a few celebration drinks with family and friends and congratulations! You are now a business owner.
In Summary
Buying a business may seem rather daunting; however going through the process using these seven simple steps will ensure you end up with the right outcome. Now enjoy being a business owner!