Buying A Business

Buying A Business: The Official Guide: Expert Advice From a Business Broker

Buying a business is a common goal of budding entrepreneurs around the country, but countless issues seem to pop up to complicate the process. Some problems are common and relatively easy to deal with, but others are more rare.

In other words, no one should expect buying a business to be a smooth, trouble-free experience. In some cases, it certainly will be, but in others multiple issues will arise at different points in the process. That’s why business brokers and other experts routinely recommend working with various advisors to make sure the desired end results are achieved.

The following information is intended to provide prospective business buyers with the basic information needed to complete the purchase of a business successfully. The information included is from a variety of experts with years of experience assisting business buyers. So, let’s get started.

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Buying A Business Is Risky But Rewarding

A relatively large percentage of entrepreneurs consider building a business from scratch. The idea is that they won’t have to make do with a less-than-ideal company that doesn’t include everything they envision. While there is some truth to that, there are compelling reasons to consider buying a business that has an existing track record.

- In most cases, the business will be operating, which means profits are generated from day one. With a new business, there can be a considerable lag time between investing that first dollar and seeing any return. With an existing business, there is also an existing client base, employees, equipment/inventory, and location/real estate/service area.

- Even when the current business isn’t exactly what the buyer is looking for, it’s generally easier to modify an existing business than it is to establish a new one. However, there are also pitfalls involved when purchasing an existing business.

Don’t Ignore the Risks When Buying a Business

Purchasing any business includes accepting and facing certain risks. Buying a business includes far greater risks than purchasing real estate, regardless of the type of real estate. Some investors feel safer investing in residential or commercial real estate rather than a business because they don’t anticipate having to deal with as many risks.
While it’s unlikely to happen, the value of an existing business can plummet quickly and irrevocably, resulting in significant losses. On the other hand, the value of a piece of land or building is unlikely to drop significantly. Even during periods like the recession of 2008, the value of real estate fell, but it recovered later.

Evaluating the Benefits and Risks When Buying a Business

When buying a small company, it’s always important to review the pros and cons involved. At first glance, there are a lot of small-to-medium-sized business opportunities that appear to be worthwhile investments. The current return on investment reported may be quite high, but that doesn’t always translate to long-term profitability. Each business opportunity must be carefully examined to determine if it will, indeed, be a quality, profitable investment.
When comparing the ROI from a business investment to other options, like owning stocks, the risks must be factored into the equation. While it’s possible to lose money when investing in stocks, that’s not what’s happened historically. While market downturns happen, the values tend to rise again if investors have the patience to stick out the downtimes. Up and down cycles are inherent when investing in stocks. But what’s important to you? Are you looking for a safe, passive investment or one that challenges you and offers higher returns?

Assess Your Willingness to Take Risks

Before making any type of investment, it’s important to understand how averse you are to risks. If you’re looking for a risk-free investment, purchasing a business may not be the best option. Owning a business will entail some level of risk, and it’s crucial to determine the level of risk involved in a specific type of investment.
Owning a business, especially a smaller operation, also requires at least some degree of active involvement. While it’s possible to hire someone to manage many of the day-to-day tasks involved in owning a business, attaining higher profits generally requires the owners to take part in the management.
If you’re looking for a completely passive investment, owning a small business probably isn’t an ideal choice. However, it’s up to the owner to determine just how much time will be spent monitoring and managing an investment.
The size of the business will also impact how actively engaged an owner must be. Many small businesses operate using few employees, which suggests the owner must be more actively involved. Larger businesses offer the opportunity to delegate more duties, which may suit some investors better. However, most business owners, regardless of the size of the business, find themselves spending more time managing their business than they initially envisioned.
So, just how much time and money are you willing to invest? Are you willing to invest in a business if it appears there will be a high ROI? The time to make those kinds of decisions is before you invest.

Getting Started Buying A Business

Once you’ve decided purchasing a business is a good idea, it’s important to understand buying a business without a support team is rarely wise. Because purchasing a business includes a variety of complicated steps, there are several professionals who should always be part of your team.

Working With a Business Broker

The first member of your team should be a business broker. Business brokers are familiar with the local business scene and generally have numerous contacts that prove invaluable when purchasing a business.
Most potential buyers have little experience when it comes to evaluating small-to-medium businesses. That means having an advisor who’s familiar with the local economic environment will make choosing the best deal structure easier.
Business brokers are also familiar with the actual buying process, including selecting suitable investments, helping buyers determine what types of problems might develop, negotiating a purchase, facilitating due diligence, finding banking, identifying quality legal representation, and walking buyers through the closing process.

Choose a Banker

Your broker will recommend choosing a banker to assist with financing the purchase of a business. The vast majority of investors purchasing an existing business will require some type of financing to complete the purchase.
For loans under $5,000,000, the primary funder would be the SBA. Banks like SBA loans because their exposure is limited to 25% of the loan. The SBA guarantees 75% of the loan amount, and that’s a big plus for banks. Of course, it also means acquiring a loan tends to be easier for borrowers as the SBA requirements are standardized, which means the deal terms are bit more straight-forward than for mid-market deals.
There are also downsides to using an SBA loan. The fees vary based on the amount of the loan, but expect to pay a guarantee fee ranging from 2.25 percent for smaller loans to 3.75 percent for loans over $700,000. Those fees are not negotiable, but most investors feel obtaining the necessary funding makes paying the fees worthwhile.
In addition, the SBA also requires personal guarantees when providing funding, and sellers are only allowed to remain in a staff or advisory position for one year or less. Those limitations can make some situations less tenable for buyers, but they must be adhered to.
For mid-market or larger deals, buyers may also use private equity firms to finance the equity part of a purchase, if they are an experienced corporate executive, looking to strike out on their own. The actual debt financing may come from a variety of sources, and those lenders will base their funding on cash flows and the actual assets of the company.
When exploring funding opportunities, it’s always a good idea to discuss all the options with your broker, accountant, and legal advisors prior to signing any agreements. There are pros and cons to all funding choices, which means each must be evaluated carefully to ensure the best option is selected.

Select an M&A Attorney Early in the Buying Process

Business brokers strongly recommend retaining a specialized mergers and acquisitions attorney early in the process, rather than a general “business” practitioner. The attorney selected should be well-versed in all aspects of business sales and be able to explain various nuances of the transaction buyers need to understand.
Experienced M&A attorneys will cost more per hour than a general business attorney, but the extra expense is easily justified, as a true specialist will cut to the chase and ensure the transaction is completed faster. In many cases, the total costs, though higher per hour, will be less, overall, than a less experienced, general business attorney. Business brokers will have worked with numerous M&A attorneys and be able to supply recommendations to select from in your search.
Remember that working with a team of professionals will always make purchasing a business easier. Each team member will bring different types of expertise to the table and significantly increase the odds your transaction will flow smoothly.

Conduct Adequate Market Research

Every M&A expert will point out the importance of conducting adequate market research. That goes way beyond simply reading ads for businesses currently on the market. The success of any business will depend on a number of factors. Online and print ads will hit a few high points, but the underlying details will determine which businesses are worth further pursuit.
First, it’s crucial to learn about a business’s target market. Remember that all markets tend to evolve, which means a business that had a hot following last year may see that demographic shrinking rapidly today. Look for companies serving a growing market rather than organizations mired in industries that are likely to shrink, though it does depend on how fast they’re expected to shrink.
Remember a few years ago when video stores were all the rage? Where are they now? They’re gone. The world moved on, and there is no longer any interest in renting VHS tapes or DVDs. The pandemic is pushing many older businesses out while encouraging expansion in others. Look for businesses in growth areas.
One example right now is bicycles. The market for bicycles surged during the pandemic, with countless people buying them for fitness or commuting. At this point, the indicators suggest the industry will continue to grow even though the pandemic appears to be winding down.
Cutting-edge technology companies have seen significant growth, and there are numerous rags-to-riches stories about people who started small and saw their startup companies grow dramatically. However, the technologies we’re seeing today are changing quickly, which means those business opportunities may be riskier than a business that’s a little less likely to see significant changes occur quickly. It’s important to see a return on your investment before having to shift gears and move on to a new product or service.
However, if you’re determined to enter the tech world, and the product or service is expected to provide a significant ROI, it still makes sense to explore that opportunity. The issue may become how to finance the acquisition. Most M&A experts agree that venture capitalists will be the primary source for funding in the tech sector. Private equity firms tend to be a little more conservative, but both are possible sources for funding under the right circumstances.
Again, don’t move forward with an acquisition without having your business broker, legal team, and accounting professionals review the documentation you’re provided. The object is to protect your investment and, at the same time, consider a business that’s going to provide a significant ROI over the long term.

Determining the Value of a Business for Sale

One issue facing business buyers is determining whether the asking price for a business is fair. Like anything else, the true value of a business is what someone is willing to pay for it. However, when a seller determines an asking price, they’ll use established approaches to estimate the value of the business.

Asset-Based Approach

The first approach is to list the value of all tangible assets to arrive at the company’s book value. Assets are, essentially, everything the seller includes in the sale. They include machinery, goods and materials for manufacturing, office equipment, trucks and automobiles, and anything else that’s physical in nature. However, it’s important to understand how the seller set the value of those assets. Was it from a market-based source?
Of course, intangible assets are also important. Intangible assets will include goodwill, proprietary technology, copyrights, patents, and similar items. The type of business will determine the balance between tangible and intangible assets. For example, a service business may not have a lot of tangible assets, as the value of its goodwill may be a much higher proportion of the deal price.
That balance between tangible and intangible assets may create issues when you’re seeking financing. Banks always prefer to lend money based on physical assets they can attach should a borrower fail to make their loan payments. However, the U.S. is trending more towards a service-based economy with every passing year. This is where a business broker’s banking contacts can prove invaluable, as they will know which banks will finance a bigger “airball”, consisting of goodwill and intangible assets and based on cash flow, rather than physical assets.

Precedent Transaction Approach

The second approach used to determine value is precedent transactions, which is also referred to the market approach. This is the approach that’s commonly used when establishing a value for residential properties, but it’s also routinely used as a standard for determining the value of businesses. However, it’s always important to make sure you’re comparing apples to apples.
Even when another company appears to be a close match to the one you’re considering, there are factors that must be considered. First, the comparable business must be in the same or a very closely related industry. For example, it makes no sense to compare a hardware store to a convenience store. There are a few exceptions to the rule, but they tend to complicate the evaluation process. Your business broker can explain how valuations are arrived at when there are no direct comparables.
Other companies used as precedent transactions must be roughly the same size. An independent, $100,000 revenue, local dry cleaner can’t be compared to a $50 million revenue, fifty-location regional dry cleaning chain. Experts in business valuations will compare businesses in similar industries with similar levels of revenue and cash flows. Values are assigned based on pretax earnings or by using gross revenue figures, though the latter is much less important than earnings. Once that initial value is determined, there are multipliers used to account for trailing or future growth potential.
When two businesses are roughly the same size and in similar industries, the type of products or services offered must also be considered. The brands available in a specific store, for instance, will impact who visits the store. Some shoppers prefer high-quality products and are willing to pay premium prices for those products. Others want value-priced goods and are willing to compromise on quality to get a lower price.
Location is a factor, if the business is tied to a location, such as a retail store. Prime locations generate more revenue and cash flow and will demand a higher price. That holds true for virtually any type of business, but the definition of “prime location” may change depending on the industry. Manufacturers want to be located close to primary highways, rail transportation, or airports. Retail businesses demand higher prices when they are located in or near areas where their target market lives or passes during their daily activities. However, location is much more important in real estate than in business, so don’t overlook businesses that are outside of metro areas. These types of businesses may take a little longer to sell and may offer better value, especially if relative cash flows are the same. There also may be less competition?
If the business is tied to a location, take the time to discuss any location issues with a business broker prior to making an offer, as it’s not easy to move an established business. Your offer may hinge on making changes to offset the location issue, but making any changes generally entails an additional investment, and that can reduce your ROI. Plus, if the buyer is using SBA financing, the bank and SBA will want the business to have a permanent home for the life of the loan, which is ten years. There are some caveats and nuances to this, though, so be sure to go over this with your business broker.

Income Approach

Different income-based methodologies are used to determine the value of a business. The two most common are discounted cash flow and the capitalization of earnings methodologies.

Discounted Cash Flow Methodology

As a buyer, your focus should be on what the business is likely to earn in the future. However, some or most of that future growth will come through your own efforts. You will want to pay for the business “as is”, factoring in past and current growth rates, to be fair to the seller. You’re betting the business will grow, but it’s difficult to estimate what those future earnings will be. There are a lot of unknown or unpredictable variables that impact what happens in the future. Volatile economic conditions, changing market conditions, and dramatic changes in technology are all factors to weigh when considering buying a business.
Your team members are invaluable here, as they can provide advice based on their experience to help you better visualize what the future may have in store. Your business broker or business valuation expert will likely use some form of a discounted cash flow methodology to estimate what earnings should be expected in the future. DCF’s, as they are known, allow users to plug in different assumptions for different years. These might be different discount rates, volatile future earnings, or terminal value assumptions. This is a difficult model to get right and is best left for professionals who understand the inputs well, as small changes can have large effects on valuation. Plus, your attorney can help you understand legal factors that could interfere with the estimate, and your business broker will answer questions related to industry conditions that might alter future earnings.

Capitalization of Earnings Methodology

• Another income approach is the capitalization of earnings (CoE) methodology. While the language is confusing, capitalized earnings are commonly defined as the net present value of the expected future earnings of the company. This approach is used most often when a company has a very stable income that’s unlikely to change much. An extreme example would be a manufacturer with a long-term contract to supply parts for many other companies where that contract specifies any cost changes are added to the price the client company pays. In other words, the supplying company is pretty much guaranteed a stable income regardless of changes in material or labor costs.
It’s important to note that the capitalized earning approach is generally reserved for very stable businesses, so, in that sense, it’s more akin to a rent-producing piece of commercial real estate. Most serious practitioners would use a DCF model to model out various changes in business conditions, rather than a capitalization of earnings method. However, if you want fast and easy, CoE would be the way to go.
Also, it’s common for business buyers to use a combination of the approaches when evaluating the value of a company they’re considering. Your business broker can explain which approaches provide the best guidance when deciding if a specific business opportunity should be considered.

We also have more about business valuation here, including some rules of thumb, to make it a bit easier.

Signing a Letter of Intent

The next major step, after researching the industry and specific company, and establishing a value in purchasing a business is to present a Letter of Intent (LOI). Potential buyers will generally review a Confidential Information Memorandum (CIM) and proceed with their applicable, initial due diligence prior to signing a letter of intent.

- In some situations, your M&A advisors may recommend using an Indication of Interest (IOI) strategy when competitive conditions are present. That step tends to weed out some competitors who are less capable of completing the transaction. In other words, the seller can focus on the most serious buyers, which saves everyone time.

- During this stage of the buying process, you’ll work closely with your M&A broker and attorney to determine what must be included in the terms of an offer. If you’re expecting the seller to remain as an advisor, now is the time to discuss that and determine what would be involved. If the seller won’t be getting all cash at closing, all payment terms must be outlined so there are no misunderstandings.
- In some instances, the contract terms will include retaining current employees. That can be a sticking point, so spelling out all the details now will be crucial. The seller may insist that key employees be retained for longer than you may want, so clarify all expectations.

Arranging Funding

- If you haven’t already confirmed your source of funding, now is the time to do so. Even in cases when you were pre-approved for a loan, the actual terms of a purchase may require some changes to your plans. Whenever possible, have any changes in your pre-approval made to prevent issues from coming up at the last minute.
- As noted earlier, SBA loans are commonly used for transactions under $5,000,000, with the SBA backing up to 75 percent of the loan amount. That simplifies the purchase of smaller businesses, as the banks are relatively eager to work with borrowers when the bank’s exposure is limited.
- However, not all SBA lenders are Preferred Lenders. The SBA allows Preferred Lenders to approve loans in-house rather than waiting for a decision from the SBA. If you elect to work with a lender who isn’t in that preferred category, waiting for a decision from the SBA can add weeks to the approval process. If you’re unsure of your lender’s status, it pays to ask if they are a preferred lender.
- When evaluating a borrower, the SBA lender will determine if the borrow has the requisite skills to operate the business successfully. Ideally, the borrower will have experience in operating a similar business, but that isn’t always going to happen. In general, borrowers must demonstrate in some way that they have the skills required to run the business.
- Remember that SBA loans include non-negotiable fees you’ll be responsible for paying, and the deal must be structured to meet SBA standards. That doesn’t allow the creativity some borrowers, and sellers, would prefer to see. Arguably the biggest drawback to an SBA loan is that the borrower must provide a personal guarantee from the buyer. That means some of your assets outside the business will be at risk if you cannot repay the loan.
- If you’re purchasing a business for over that $5,000,000 SBA cap, there are other types of funding available, but they may require a larger down payment or other concessions. However, you’ll also have more flexibility than is possible under SBA regulations. For example, if you wish the seller to remain as part of the management team for more than one year, that’s possible when non-SBA financing is used. In these lower-middle-market or mid-market size deals, there may be a senior lender, a mezzanine lender, unitranche lenders, or even asset-backed lenders, as well.

Due Diligence

This step can be quite easy or require a great deal of time. The size and type of the business will be primary factors in determining how difficult this step is, but how much information the seller provides (and its accuracy) will also be critical.

Most M&A advisors will recommend requesting more information when the business price is higher or any time there are complexities involved. However, most small businesses won’t require a lot of information or take a lot of time to review. If you’re unsure how much to proceed, listen to your advisors. Don’t be afraid to ask questions if clarifications are needed, but don’t become obsessed with the process. Make sure you give the Seller an appropriately-sized due diligence list and review it for non-applicable items. Nothing irks a Seller more than a ten-page, single-space due diligence list that the Buyer or his attorney pulled off the internet. That size due diligence list is more for Google buying IBM, not for your local, $5 million distribution business. If you don’t have an appropriately-sized list, ask the Seller’s business broker for the IBBA’s (International Business Brokers’ Association) list. They have small business and mid-market due diligence lists. Review this list for non-applicable items and add items that are necessary for the business under review.
If you’re purchasing a larger business, it will be vitally important to get input from advisors who are fully qualified to analyze the information provided. Your advisors will know what information to request and who should evaluate that information. Listen to them. Often, private equity firms will have specialized due diligence providers who provide specific parts of due diligence review, such as environmental studies.

Protect Yourself: Get Legal Advice

During the purchase process, there are always legal issues that come up, which suggests having an M&A attorney is a basic requirement if you intend to avoid problems. However, it’s also important to understand that you can’t always have everything you want when structuring a transaction. That means your M&A attorney must be pragmatic as well as detail oriented. Remember that it’s you who must make any final decisions.
Your M&A attorney is there to provide advice and point out problems, but they shouldn’t determine when a transaction is in your best interest. That’s not to say you should ever ignore legal advice. Your attorney will know when a transaction drifts to the point where the risks are too onerous. If there’s a problem, but it isn’t overly serious, now is the time to discuss the pros and cons of moving forward with the remainder of your team. The business broker and your accountant can also weigh in and help you determine if a risk is tolerable or a specific aspect of a contract may be acceptable even if you don’t like it.
Remember, your attorney is there to protect you when things go wrong. However, you should be aware when your attorney is becoming a “deal killer” and when they are trying to protect you from the “comet hitting the earth”. As they are being paid by the hour, it’s not always in their best interests to resolve problems quickly, so don’t be afraid to ask a second attorney for their opinion on a deal point before abandoning a deal over esoteric language. Despite sounding knowledgeable, your attorney could be the one that’s wrong.

Due Diligence

- Most M&A advisors will recommend requesting more information when the business price is higher or any time there are complexities involved. However, most small businesses won’t require a lot of information or take a lot of time to review. If you’re unsure how much to proceed, listen to your advisors. Don’t be afraid to ask questions if clarifications are needed, but don’t become obsessed with the process. Make sure you give the Seller an appropriately-sized due diligence list and review it for non-applicable items. Nothing irks a Seller more than a ten-page, single-space due diligence list that the Buyer or his attorney pulled off the internet. That size due diligence list is more for Google buying IBM, not for your local, $5 million distribution business. If you don’t have an appropriately-sized list, ask the Seller’s business broker for the IBBA’s (International Business Brokers’ Association) list. They have small business and mid-market due diligence lists. Review this list for non-applicable items and add items that are necessary for the business under review.
- If you’re purchasing a larger business, it will be vitally important to get input from advisors who are fully qualified to analyze the information provided. Your advisors will know what information to request and who should evaluate that information. Listen to them. Often, private equity firms will have specialized due diligence providers who provide specific parts of due diligence review, such as environmental studies.

Protect Yourself: Get Legal Advice

• During the purchase process, there are always legal issues that come up, which suggests having an M&A attorney is a basic requirement if you intend to avoid problems. However, it’s also important to understand that you can’t always have everything you want when structuring a transaction. That means your M&A attorney must be pragmatic as well as detail oriented. Remember that it’s you who must make any final decisions.
Your M&A attorney is there to provide advice and point out problems, but they shouldn’t determine when a transaction is in your best interest. That’s not to say you should ever ignore legal advice. Your attorney will know when a transaction drifts to the point where the risks are too onerous. If there’s a problem, but it isn’t overly serious, now is the time to discuss the pros and cons of moving forward with the remainder of your team. The business broker and your accountant can also weigh in and help you determine if a risk is tolerable or a specific aspect of a contract may be acceptable even if you don’t like it.
Remember, your attorney is there to protect you when things go wrong. However, you should be aware when your attorney is becoming a “deal killer” and when they are trying to protect you from the “comet hitting the earth”. As they are being paid by the hour, it’s not always in their best interests to resolve problems quickly, so don’t be afraid to ask a second attorney for their opinion on a deal point before abandoning a deal over esoteric language. Despite sounding knowledgeable, your attorney could be the one that’s wrong.

Ways to Structure a Deal

When it comes to buying a business, deal structure is an important topic. There’s no “right answer”. The structure of the deal will depend on size, the assets or debts included, and working capital considerations. Entire books have been written on this subject, so it’s best to speak with your business broker, attorney, and accountant to determine the best structure. Remember, the best structure for you might not be the best one for the Seller, so think a bit about the other side before charging ahead.

Included Assets and Debts

Depending on the size of the deal, assets and/or debts may or may not be included. For most readers, you will want all assets that produce cash flow to be included in the deal. If it’s a family heirloom of the Seller’s and doesn’t help produce cash flow, let the Seller take that with them. On the other hand, you will want no outstanding debt to be included.

Does This Include Everything?

Most deals are conducted on a “cash-free, debt-free” basis. Most banks will want all outstanding debt to be paid off concurrently with closing the deal. However, for the largest, Wall St.-style deals, this could include assets and debts. Be sure to check with your advisors as to what is appropriate for your deal size.
Including too little or too much are where deals are won or lost. Make sure you fully understand this concept and what is typical for a deal your size.

Asset vs. Stock Deals

CPAs almost always want their clients to do “stock” deals. However, most deals at the small and lower-middle market are “asset” deals. Middle market deals can be either. For buyers, asset deals are usually preferred over stock deals, since this presents a clear legal dividing line. This way, there are no contingent liabilities that are transferred to the Buyer.
However, if there are numerous, hard-to-assign contracts involved, your deal could wind up as a stock sale. While this is a little more complicated legally, this is sometimes the only viable option. Your attorney should write up the appropriate indemnifications and, for tax purposes, it can be treated as an asset sale, so that the assets can be “written up” and depreciated for tax purposes.

Banking: The Details

SBA Bank Financing

If your loan is valued at under $5 million, you will almost certainly have an SBA-backed loan. These loans are guaranteed by the SBA. The bank just needs to follow the SBA’s loan standards of procedures. By following the SBA’s SOP’s, the bank gets a 75% guarantee from the SBA. As you can imagine, banks like this guarantee, especially for risky, small business acquisition loans.
SBA financing lets buyers take out loans for low, equity down payments, sometimes as low as 10%, though usually it’s 15% (or higher). However, for these low down payments, you must follow specific rules. There are tight deal structures allowed, such as no earn-outs and sellers must sell 100% of the equity in their businesses (i.e. no partial sales). Sellers must not receive too much in consulting fees or it will jeopardize the loan and must make a full transition from the business in under a year.

Middle-Market Banking

If the loan is over $5 million, you’ll need something other than an SBA loan. You’ll need a commercial bank or mid-market lender. Eligible acquisition targets need at least $2 million of EBITDA, or higher. You can expect an equity check of 25% – 50% of the deal price. You may have a senior lender and a mezzanine lender. These two levels can also be combined in a “unitranche” lender. At mid-market levels and higher, the banking becomes much more complicated, along with deal structures.
Deal structures at the mid-market level may include preference shares, an earn-out, a partial sale of equity, indemnification insurance, options, and other convoluted, but sometimes necessary deal structures. Make sure you consult your business broker, attorney, and accountant. These steps are critical.

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Psychology as a Buyer

It’s important to understand the mindset you should have when you’re buying a business as a small or medium-sized buyer.

There is a reason the business you’re examining isn’t bigger than it is. None of these businesses are going to be perfect. They’re are going to have some sort of “warts” on them. You will need to decide if these warts are something you can live with, or not. These aren’t the kind of businesses that MBA’s read about in case studies. They’re all flawed in some way. This might simply be because the owner got it to a certain point and then didn’t want to expand. Cut these businesses and owners a little slack. As the saying goes, “You can diligence yourself out of any deal.”
As a buyer, you will want to know a lot of information about the business. However, there are pieces of confidential information that the Seller will want to keep private until later in the process, such as customer lists. This is normal.
Also, in most small deals, it’s too risky to interview everyone in the business before you buy the business. If there are going to be meetings with employees, these will with those that are deemed “key”, and this won’t happen until much later in the process. Key employees tend to be those who make a large amount of money or control a large portion of revenue. It’s too risky for the Seller to march a bunch of potential buyers in front of their employees or the employees might get nervous and quit.
Every business is different. If you’re coming from the corporate world, you may be in for a surprise with how unorganized small business seems to be. This is natural. As businesses get bigger, they need to become more organized. In most small businesses, the owners wear many “hats”. If you think you’ll find a small business where you can simply create and implement strategy, think again. Be prepared to turn off the lights at night and make your own coffee.
Don’t change much in year one. The deals I’ve seen blow up, post-closing, are ones where the Buyer tried to change things too quickly and upset the employees who then quit. Observe first and change later.

Closing the Deal and Take Care of Needed Training

This stage is the culmination of all your hard work. Once you’ve taken all the preparatory steps, it’s time to sign the paperwork and assume ownership of the business. Are you ready?

Remember to take care of all those pesky details like setting up bank accounts, utilities, insurance, and related details. Now is the time to become familiar with current vendors and determine if those vendors should be retained or new ones contracted.
It’s also the time to work with the sellers to ensure a smooth transition. M&A brokers routinely point out that many new business owners encounter problems right away when taking over a business because the seller kept too much information in their head rather than on paper.
That’s why it’s often important that the seller stays on to train the new owner or management team in the day-to-day operations of the company. While you may want to make changes later, it’s generally better to avoid making those decisions right away.
While industry best practices should never be ignored, that doesn’t mean improvements shouldn’t be made. But, most experts will recommend starting small. That can be especially important when the existing employees are retained.
Once the new owner or management team has a chance to become acclimated to the operation, it will be easier to determine what types of alterations are needed and how to implement those improvements.

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Buying a Local Business

• If you’re buying a business at the local level, plan on being both the owner and manager. Very few local businesses can be run as an absentee operation. That’s why M&A advisors suggest buyers be suspicious of small, local businesses advertised as absentee operations. It’s simply not practical.
Smaller businesses generally have few employees and require the owner to make numerous day-to-day operational decisions. The owner may be the bookkeeper, sales manager, and janitor as well as having ownership responsibilities.

Buying a Larger Business

If you’re considering buying a business that is larger in size, you have far more options. You could, in fact, be an absentee owner who relies on staff members to take care of most management functions. At the same time, you might want to be closely involved in making upper-level decisions. There are many options that are not available with small businesses. Again, it’s important to express your wishes to your advisors during the search process.

Considering an Online Business or Ecommerce Website?

Today’s markets barely resemble those commonly seen twenty, or even ten, years ago. That’s especially true since the onset of the pandemic. There are numerous online business options that didn’t even exist a few years ago, and many businesses that once thrived in brick-and-mortar versions that now rely on online sales.
The point is that you’ve got more choices now than ever, and a merger and acquisitions advisor can help you decide what types of online businesses will allow you to attain your overall objectives. It’s still important to follow established guidelines when purchasing an online business, but there are real opportunities available.

Common Mistakes to Avoid When Buying a Business

There are numerous mistakes business buyers make, and many of them prove to be costly. Here are just a few of the common issues M&A brokers see when buyers don’t follow the advice their advisors provide.

Signing documents improperly. In many instances, buyers simply sign all documents in their own name. That can be a serious mistake. Your M&A legal experts should help you properly structure the business and recommend the correct way to sign legal documents related to the business.
Failing to complete proper due diligence. The importance of completing your due diligence can never be emphasized enough. As noted earlier, there may not be a lot of due diligence required when buying a small company, but there is never a time when it’s not needed. Listen to your advisors and conduct the level of due diligence your team recommends. At the same time, realize that no business is perfect, or else they would likely be much larger businesses. You can always find something wrong and diligence yourself out of a deal. Keep the big picture in mind.
Assuming Nothing Will Change. The vast majority of businesses will need to evolve as conditions change. That’s truer now than ever, as technology is pushing more businesses to improve productivity and change their operating styles. Plan on changing, and keeping abreast of market conditions so you’re a leader rather than a late adapter when changes are required.
Failing to delegate. Far too many new business owners try to take on more than they can handle. Stand back and see where employees can take over and handle specific duties. Let your employees grow, and learn to listen to their concerns and suggestions.

Of course, it’s virtually impossible to list all the mistakes a business owner can make. The important thing is to recognize when errors are made and take steps to ensure they are not repeated in the future.

To avoid mistakes, learn from the past owners. They’ll generally tell you what they tried, what didn’t work, and what areas may need improvement. In many cases, it’s also a good idea to work with a business consultant who’s familiar with your industry and current trends.

Still Have Questions?

It’s normal to have a lot of questions when buying a business. While the information included here is intended to answer typical questions, your business broker is fully prepared to answer other questions. In the rare event they don’t have the answer you need, they’ll know where to find it. Here are just a few of the questions other business buyers have asked:

How do I purchase an existing business? There isn’t a one-size-fits-all answer to that question. The business broker’s response will depend on the specific business opportunity you’re exploring.
Is it a good idea to buy an existing business? Not for everyone, but the answer is a solid yes for people looking to work for themselves on a business that they can enjoy for years to come.
How do I find a business for sale? While it’s possible to stumble on a good business for sale, the best way to find a good business opportunity is to work with an M&A broker.
How much does it cost to buy an existing business? That will depend entirely on the type of business, growth rates, and cash flows. Your business broker will help you establish your objectives and work with you to find an affordable opportunity.
How do I purchase an existing business? There are numerous ways to purchase an existing business. Some sellers may be willing to finance the sale, the SBA helps countless business buyers every year, and other forms of financing are available for certain types of businesses.
Are brokerage fees negotiable? In some cases, business brokers are willing to negotiate their fees, and clients are encouraged to ask business brokers about their fee structures before signing any agreements.
How are brokerage fees calculated? As a rule, brokers set their fees based on pre-determined criteria. The size of the business, the complexity of the transaction, and the amount of time required will certainly impact a typical broker’s fees. Don’t be afraid to ask a specific broker how their fees are set.
Should I hire a business broker to buy a business? This one is easy. It always pays to work with an business broker when buying a business. Brokers provide the information needed to successfully complete a transaction and help buyers avoid common pitfalls.
How do I find a business broker for my business? Whether you’re buying a business or selling one, finding the best broker will always be important. Look for an M&A advisor that’s established and has experience dealing with transactions similar to the one you’re considering.

The best way to start a search for that perfect business opportunity is to contact a business broker for more information now.

For many budding entrepreneurs, the idea of buying a business can be mind-boggling. It’s a long process and there’s a lot to know, even beyond knowing the business or industry. If you are buying a business, talk with a business broker or mergers and acquisitions advisor, so you can start getting the help you need. Even if this is simply the seller’s broker, they will help you through the process. Call CGK Business Sales today or confidentially email us below to start the conversation.

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GregKnox

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Greg Knox, CFA has spent his 20+ year career in investment banking, private equity, a hedge fund, and institutional trading, at institutions as Deutsche Bank, T. Rowe Price, and Wachovia. After his MBA at Cornell...(click Greg's picture to read more)

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Eric Lewis has over 17 years of experience in the financial industry. He has worked for a breadth of companies ranging from investment banks to proprietary trading firms. Following his MBA at the University of Chicago, Eric... (click Eric's picture to read more)

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Jason Clendaniel has been in “business” since he was seven years old. Whether mowing lawns, or delivering papers, Jason learned business from the ground up. After graduating from the United States Naval Academy... (click Jason's picture to read more)

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Matthew Mistica has 13+ years of experience in finance and entrepreneurship. Matthew spent 7 years in Corporate Finance working for Chevron and Shell Oil. After his MBA at the University of Houston, Matt became... (click Matthew's picture to read more)

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Wes McDonough has over 18 years of experience in M&A, corporate finance, and entrepreneurship. Previous to CGK, Wes held numerous positions, including accounting, payroll, billing, project management, and IT/Application Support at ... (click Wes' picture to read more)

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David Smoot has 20 successful years working for Fortune 500 companies in sales and finance and owning his own small businesses. His leadership roles included sales, finance, managing multi-million dollar product launches, training new ... (click David's picture to read more)

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Mr. Thomas “Jay” Lennon is an Air Force veteran, combat aviator, and distinguished leader with 26 years’ experience leading multi-million dollar projects, finance, and organizational transitions, inside and outside of the.... (click Jay's picture to read more)

LanceHupfield

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Lance Hupfeld has over 25 years of experience in sales and business development management. With a broad array of valuable experience, Lance has deep knowledge in healthcare consulting... (click Lance's picture to read more)

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MERGERS & ACQUISITIONS | BUSINESS VALUATIONS