A Guide to Buying a Small Business

Determining How Much You Can Afford to Invest!

Before acquiring any business you must to determine how much of an investment your looking to make. When making this consideration it is important to consider not

only the the monetary value, but the amount of time and effort your willing to commit to your new business as well. Typically, the minimum down payment needed by a buyer is between 20% and 30% of the purchase price of the business. For example, if the business purchase price is $200,000 then in order to finance the business the buyer’s down payment needs to be $40,000 to $60,000. Obviously, you are always able to put down more, or purchase the business without obtaining lender financing.

In addition to that initial purchase price, possible expenses a purchaser needs to consider are the costs of inventory, supplies, escrow fees, license and permit fees, franchise transfer fee (if applicable), and other associated costs of acquiring the business.

And then you have to set criteria of desired business. Which includes location of business, type of business, price range of business, desired income of business.

Finding a Business to Invest In!

After you decide how much you are looking to invest and the type of business your looking to become involved with, You will need to begin to look for a business you can acquire that meet those criteria.

There are a number of ways to find businesses for sale. You can search business through one of the multitude of online business listing services, search local newspapers and trade publications, or go through local business brokers and sales agents. One often overlooked avenue is professional connections. Lawyers, Accountants, and other professionals often learn of business’s looking to sell even before anyone else does, so building a good report with these types of professionals can help you find the deals that not everyone knows about.

Understanding the Business and Making an Offer!

You have found a business that you want to purchase, now what? You will need to evaluate the business. While their are many methods of evaluating a business’s value most of them rely on determining the potential income stream and equity that business has the ability to offer. To learn more about how businesses are valued, click here.

You should sit down with the current owners and look at how the business is currently operating. Try to identify what the business is doing right and potential areas which could me improved, streamlined, or eliminated. Learn the businesses core values and philosophy and see if that is the right fit not just for your budget, but your personal business philosophy. While you can change the way systems operate when you take over, it is very difficult to change a businesses culture, so you want to make sure it is something you can grow with.

Only after you have done those steps can you make decision whether to pursue purchasing business or not. If the business seems like the right fit for your business philosophy and budget it is time to create Purchase and Sale Agreement. This document will have all of the details about when, how, and how much the business will sell for. It may also include things like agreements of former owners to stay on for a transition period, or other things you come up with.

When you are crafting an offer, make sure the document includes the following items: Your offering price, Initial deposit amount, financing terms, closing date. In addition to these fundamentals it may be advantageous to add things to the offer such as loan approval contingencies, lease information and lease transfer approval from landlord, requirements that the buyer be able to obtain all necessary licenses and permits, required franchise information (If your dealing with the a franchise), the buyer’s Satisfaction of books and records, how closing costs are to be allocated, a buyer training session with seller (Or stay on provision), guarantees on the business equipment and fixtures, information on inventories and supplies amount, non-compete agreements, and any other important details that pertain to your deal. This offer is now your starting point.

Negotiating with the Seller!

Now that you have crafted your offer it is time to present your offer to the seller. When you present the offer know you will likely be countered. Know your sticking points and where your willing to make concessions. No is the time to negotiate the price, terms, and conditions. It may take several rounds of going back and fourth to get the right deal but eventually, with any luck, you will settle on a final price and terms of the deal.

Once you have arrived at your finalized terms you will need to dot the I’s and Cross your T’s. Obtain needed licences, secure any financing if needed, make sure leases or other steps are taken. You want to make sure everything is in order for the most important step in squiring a business.

Closing the Deal!

All of the terms have been worked out, financing has been secured, and everything is ready. Now is the time when you sign over the business, pay the seller, and handle any needed legal steps. Congratulations, your now the owner of your new small business.