Buying A Business

1. KNOW THYSELF - Analyze your skills to own/operate a business.
2. PLAN YOUR WORK AND WORK YOUR PLAN- Determine your goals and objectives; Then establish a team of professionals and begin your networking/marketing process.
3. FIND A REPUTABLE BUSINESS INTERMEDIAR - To help you find the right business.
4. CONFIDENTIALITY - Critical to maintain the goodwill and to keep the key employees in a business.
5. INVESTIGATE PROSPECTIVE BUSINESS OPPORTUNITIES - Review financial information, market conditions and competition.
6. BUYER/SELLER MEETING -Gain a better understanding of the business. Develop a rapport with the seller.
7. DETERMINE THE VALUE OF THE BUSINESS - Make sure the business will provide a reasonable return on your time and your investment.
8. MAKE AN OFFER- The intermediary will typically prepare a Purchase Agreement which is submitted to the seller after you have consulted with your attorney and accountant.
9. COMPLETE THE TRANSACTION - Perform your due diligence and complete the steps necessary too a successful transaction.
10. THE TRANSITION PROCESS- After the closing, you will meet the employees, customers and suppliers and begin to learn the business from the seller.

1) KNOW THYSELF - First you should determine whether you have the skills and financial capability to successfully own and operate your own business. There area variety of resources available including books such as What Color is Your Parachute, Who Moved my Cheese and The E-Myth to understand the necessary skills. Financial capability is harder to determine but a conservative rule of thumb is that you should have an amount available in liquid assets (those which can be readily turned into cash) for a down payment which is at least equal to the income you expect to earn from the business you acquire. For example, if you need to earn $100,000 per year, you should have $100,000 to put down on the purchase of a business.

2) PLAN YOUR WORK AND WORK YOUR PLAN - You would never construct a building without first having a set of blueprints, or plans. The same is true of buying a business. You should prepare a Personal Profile which outlines the criteria you have established for the business you wish to acquire (you can download the Buyer Profile in this section of our website to use for this purpose). Your profile should include the following information: your educational and professional background, your strengths and weaknesses, outside interests, the types of businesses you would like to acquire and why (some buyers also like to list the businesses they would not like and why), your geographical preferences, your desired timeframe to complete the process (allow at least six months), your personal financial statement, the amount of money you are willing to invest and the income you wish to make from the business you acquire. Be reasonable in all aspects of your plan. Unlike Bo Derek, there are no perfect 10's in the business world. It is unlikely that you will find a business that meets all of your requirements. Be flexible - it is a skill you will need not only in buying a business, but also in operating it.

You should establish a team of professionals to assist you in your acquisition search. Your current advisors may not be versed in the intricacies of buying a business. Find an attorney, accountant and lender who are knowledgeable in the acquisition process. Business Acquisitions, Ltd. can provide you with a list of professionals who are knowledgeable in this area. Now, it is time to begin your search. Several marketing ideas to consider are 1) networking with your existing business contacts, 2) sending your profile to the professional community (transactional attorneys, accountants, bankers, trade associations and professional groups like the chamber of commerce, 3) mailing inquiries to business owners in the industries of interest to you, 4) searching the internet and local newspapers for businesses currently on the market, and 5) contacting Business Intermediaries who handle the size and type of business you are looking for.

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3) FIND A REPUTABLE BUSINESS INTERMEDIARY - Unlike finding a home, there is no multi-list for business opportunities. It is important for you to interview many different business intermediaries and choose several you are comfortable working with. Bring a list of questions as well as your Personal Profile to the initial meeting. Find out how long their firm has been in business, how long the individual has been a business intermediary, what their background is, if they have handled the sale of a business similar to your criteria, how many opportunities they sell each year, how many opportunities they currently have on the market and if they will provide a list of references. Once you are comfortable with the firm and the individual intermediary, share your Profile with them and explain your acquisition criteria. Help the intermediary get to know you and to understand your motivations for buying a business so he or she can best meet your needs.

4) CONFIDENTIALITY - Before sharing detailed information about a specific business, a seller or an intermediary will ask you to sign a Confidentiality Agreement and provide a profile (both of which can be downloaded from this section of our website). Almost every seller requires confidentiality as they do not want their employees, customers or suppliers to know they are selling their business until after a transaction has been completed. Buyers should be just as concerned about maintaining confidentiality to ensure a smooth transition during and after the acquisition. It is important to remember that buyers need trained, knowledgable and motivated employees just as much as those employees need a secure working environment and job satisfaction. A breach of confidentiality can have a major negative impact on a business.

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5) INVESTIGATE PROSPECTIVE BUSINESS OPPORTUNITES - Once you have identified a possible acquisition, you should ask to receive a Confidential Business Review (or CBR, much like a prospectus) which should include a description of the business, a list of the major assets, information about the real estate lease and at least three years of historical financial information including tax returns. If the business meets your key criteria, analyze all the information provided and prepare a list of questions about the business. When studying the financial statements of a privately held business, it is important to remember that the goal of every business owner is to minimize their income for tax purposes. A buyer should look to uncover the true earning power of a business by adjusting, or adding back, expenses which would the buyer would not incur after the acquisition such as personal vehicle expenses, personal travel, life/health insurances, salaries to non-working owners or family members, etc. You will hear many different terms for this analysis, such as Seller's Discretionary Cash Flow (SDCF), Adjusted Net Income, or Recast Earnings to name a few but the intent is the same - to determine the 'true' income of the business.

6) BUYER/SELLER MEETING - You should approach the first meeting with the seller much like a job interview. Do you homework - research the company and its industry, look up their website, determine their strengths, weaknesses, opportunities and challenges and check out their competition. Be understanding if the seller prefers to have this first meeting after hours or away from their place of business. Prepare an outline with a list of questions or topics you want to cover during the meeting. Be relaxed and start the meeting by giving the seller a brief description of you work experience which will then lead into a discussion of the business and how it might fit your needs. Most of all it is important to determine if you and the seller have compatible business philosophies. If you are not comfortable with a seller, move on - life is too short to buy a business from someone you do not trust.

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7) DETERMINE THE VALUE OF THE BUSINESS - There are three basic ways to value a business. First is Replacement Cost which includes not only the cost to replace the assets (inventory, furniture, fixtures and equipment, leasehold improvements, franchise fees, patents, trade marks, goodwill, etc.) but also the cost in working capital to build a similar business from scratch in order to reach the current level of profitability. The second method is the Income Approach which values the business based a return on investment analysis or the ability of a business to generate earnings. Third is the Market Approach. Certain types of businesses are in higher demand than others and may command a premium in the marketplace. In realestate, public records allow you to find sales data on similar properties, or COMPS. Unfortunately this type of information is not as readily available for business opportunities due to the confidential nature of most transactions. The acid test for a buyer should be: 1) can I afford the down payment and working capital necessary to acquire the business? 2) does the business provide a reasonable income after servicing any debt I incur to make the acquisition? and 3) does it provide a reasonable return on my investment?

8) MAKE AN OFFER - Once you have decided the business fits your personal, professional and financial needs it is time to consult with your team of advisors. The Business Intermediary can generally provide you with a purchase agreement to review with your legal and financial advisors. Any offer should clearly state the price and terms, and include standard warranties and representations from both parties, a non-compete agreement, and a familiarization period. Your accountant can help you allocate the purchase price to maximize your tax benefits, however, it is important to anticipate the seller's tax needs as well if you hope to have your offer accepted. Your banker can provide you with a loan profile to determine your debt service. Working through an intermediary to handle the negotiations allows you and the seller to maintain a positive working relationship which is critical for a smooth transition process after the purchase is completed.

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9) COMPLETING THE TRANSACTION - This is the most critical step in the entire process. A strong team of advisors and a knowledgeable Business Intermediary are paramount to ensure a successful outcome, but you must take a proactive approach to ensure that all the necessary steps are completed in a timely manner. Once the buyer and seller signed a purchaser agreement, it takes about thirty days to complete the transaction and there are many steps that must be completed before a closing can take place. These steps include forming a business entity for the acquisition, performing due diligence to verify the accuracy of the information provided by the seller, assuming the real estate lease (or possibly buying the real estate), obtaining financing, transferring any special licenses and taking an accurate inventory immediately prior to closing. A professional intermediary will provide all parties with a timeline and checklist to ensure that every detail is completed in a timely manner to avoid any delays in the process.

10) THE TRANSITION PROCESS - Once the euphoria of the closing wears off, the real work begins. Before closing, you should have completed all the necessary steps to establish your business entity and its associated licenses and tax I.D. numbers so that you can focus your energy on learning your new business. Don't waste valuable training time doing things you should have completed before the closing. The seller's time is best spent introducing you to the employees, customers and suppliers and teaching you the operation of the business. You and the seller should mutually prepare an outline of the items you need to learn during the transition period. Don't be afraid to ask questions. Make good use of every second you have with the seller - they have built a successful business and it is your job to learn how and why. Last, but not least, 'if it ain't broke, don't fix it'. Don't start making immediate changes to a successful business - you are likely to lose key employees or customers. Take time to learn the business then gradually implement changes you feel will make it better.

Owning your own business can be one of the most rewarding experiences of your life if you take the time to prepare a plan before you start the buying process. The professionals at Business Acquisitions, Ltd. are available to help you throughout the entire process and to answer any questionsyou may have.

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