Buying a business can be rewarding — but the process can be complex. While there are many advantages to buying an existing business, a business acquisition requires careful planning, research, and investigation. Several steps exist that every entrepreneur should take when acquiring a business to help ensure the acquisition is a financially successful endeavor.
Find a Business to Purchase
After you have determined the industry you’re interested in, your goals, and how much you will invest, you should find a potential business to buy. Also consider whether you are looking for a franchise or a stand-alone business. Many ways exist to find a business to buy, including using online resources, utilizing your network, and consulting with professionals who may have clients looking to sell their companies. You might also consider working with a business broker or directly contacting specific businesses.
1. Research the Business
Once you have identified a target business, you will need to research that business to decide whether it is a good fit. Understand everything about the business and assess its long-term viability. Learn about the products or services the business sells, find out about the customer base, and obtain basic information about the company’s financials to determine if that business will meet your goals and expectations. Also try to find out why the owner is selling to identify any challenges or red flags you might face.
2. Conduct a Due Diligence Investigation
A due diligence investigation should be performed after you have conducted preliminary research about the business. Due diligence is a thorough inquiry into all parts of the company’s finances, operations, and intangible assets. The diligence process is your opportunity to look closely at how the business is structured and makes a profit.
During this phase of purchasing a business, request to review:
- h4:The company’s articles of incorporation and bylaws
- H4: A summary of investors
- H4: Detailed financial statements
- H4: The company’s marketing plan
- H4: Tax returns
- H4: Cash flow statements
- H4: Budgeting information
- H4: Customer lists
- H4: Supplier contracts
- H4: Employment contracts
- H4: Stock purchase agreements
- H4: Loan agreements
- H4: Legal documents
- H4: Permits and licenses
- H4: Patents, trademarks, and copyright owned by the business
- H4: Inventory management procedures
The above list are only a few documents that must be reviewed during the due diligence process. Depending on the complexity of the business, this stage can last from a few weeks to several months. Assess any legal issues during this period, such as pending lawsuits — as well as regulatory and compliance information.
3. Determine the Value of the Business
As part of the due diligence and selection process, you will need to value the business you’re interested in purchasing before making an offer. A business can be valued in several ways. The asset valuation approach calculates the current value of all assets of the company to determine the purchase price. The liquidation value approach looks at the value of the business’s assets as if it had to sell them within a short period of time. Other ways the value of a business can be calculated can include the income capitalization, multiple of earnings, and rule of thumb approaches.
4. Obtain Financing
If you will be relying on financing to purchase the business, you typically have several options. Financing can include bank loans, SBA loans, and crowdfunding. You might also seek business partners or investors who can help fund the endeavor. Sometimes, the current owner of the business may work with you to finance part of the sale — and let you make payments in installments.
5. Make a Formal Offer
After you’ve conducted your due diligence investigation, determined the value of the business, and obtained financing, the Letter of Intent is delivered to the seller. The Letter of Intent is not a binding document. Rather, the Letter of Intent outlines the terms of the proposed sale, the purchase price, payment terms, and other relevant details. Be prepared to negotiate with the seller.
Finalize the Purchase Agreement
The last step in buying a business is finalizing the purchase agreement. The Purchase Agreement is the binding contract that includes the purchase price, terms agreed upon, and closing date. Ownership of the business can then be transferred — along with any permits, assets, contracts, and licenses — and you will take over business operations.
Contact an Experienced New York Business Attorney
If you are interested in purchasing a business, it’s essential to have a knowledgeable attorney by your side who can guide you through the process. Offering adept counsel and trusted legal services, Brinen & Associates advises entrepreneurs regarding a wide variety of business matters. Call (212) 330-8151 or send us a message to learn more about how we can assist you.