Business Buyer Personal Checklist
Use this checklist as a means of mental preparation for the steps and tasks usually associated with the purchase of a small business. It is intended as a tool to help you prepare for and understand the complexities you may face during the business buying process. It is highly recommended that as you read through each step, you take some time for self-reflection and self-application.
Self examination. To be successful in the world of small business ownership, you must have a variety of skills and the ability to multitask. At some time or another, you will have to be able to perform or teach every duty associated with running your chosen business. Do you work well with others? Are you a self-starter? Are you adaptable and do learn quickly? Can you or your family situation tolerate long work hours? If family members are going to be involved, would your relationship survive the strain? Can your family accept the financial risk of buying and running a business? You must be honest with yourself; this is not the time for an ego trip. You will need to truthfully answer yes to every one of these questions.
Creditability. Objectively look at yourself through the eyes of a business seller. Remember, they probably grew their business from a start-up and nursed it through some hard times; it has defined their lives for many years. It's their baby and their legacy. If the situation were reversed, would you sell this business to someone like you? If you're outside your element you will likely have to demonstrate just how you plan on continuing this business successfully, especially if you intend to have the owner providing financing.
Professional help. Most of us seek advice with any major decision we're about to make. The problem is we have a tendency to seek it from our family, friends, neighbors, and drinking buddies, most of whom have no expertise or experience to offer. Their well-intended advice is free and unfortunately, that's usually what its worth. It's not affirmation that you need, it's knowledgeable advice that can point out the potential problems and offer solutions for them. Unless you are highly experienced in the field of business sales you will need professional help at some point. Have your professional support team in place long before you actually need them.
Having a plan. To be successful in finding a suitable business to purchase and arranging for the needed capital will require advance planning. Waiting until you find 'the perfect' business before you act on raising capital is not a good idea. Part of the planning stage should be a through examination of your available investment capital through all available sources, savings, home equity, and borrowings. You need to know exactly how much capital you have to work with before entering the market. When your sources have been verified prepare a financial statement. You will most likely need it at some time during the process and it will serve as your guideline when researching businesses.
Pulling the trigger. Buying a business is not for the faint of heart. It takes courage and a strong belief in you and your abilities. Do you really have what it takes? I guess we'll never know this about ourselves until the time comes along. Recent stats say there are 20 buyers for every business for sale. This means that if you have found a viable business you can assume it will have at least one other interested buyer. If you hesitate to pull the trigger than the other buyer will and you will loose the deal and have nothing but wasted time to show for your efforts. The time to do your soul searching is now, long before the time action is required.
Adequate capital. Before you start your market search you need to determine the amount of your investment capital. You will need to budget for a down payment which traditionally ranges from 30 to 50% of the purchase price. Added to that is the cost of the inventory which is usually priced beyond the down payment and due at closing. Additionally, you must consider a budget for working capital and any advisor fees. If you are leaving an employment position you should also figure in living expenses until the business can provide a similar income. Once you crunch the numbers you will have a good idea of the price range you can safely afford to search in.
Risk tolerance and responsibility. Or to put it another way, what is your threshold for pain? We all have a minimum comfort level when it comes to dealing with risk and responsibility. It is something that should be examined before you spend much time in conducting a market search.
Patience. Searching out tens if not hundreds of possibilities to find “the perfect” business requires patience that few possess. It would be very unlikely that the first business you investigate is the perfect one for you. You must be ready to deal with disappointment and work with others time-frames. After many months of searching, the possibility of failed negotiations and a few due diligence processes, raising the required capital then closing the transaction can seem to take forever. Your search time could be lightened by involving a business broker to assist in the search, investigation and negotiation. This can be a great time saver.
Timing. The timing in buying a business is much like buying any other major item; they are subject to market value fluxuation such as real estate or the stock market. Because of this and other unknowns it not advised to use the sale comparables method as a strict guide in determining the value of your target business.
Defining your criteria. Beyond defining your purchase budget limitations it is advised to consider what industry or marketplace you can best use your acquired skills and talent. This is especially true if you are planning in asking a bank, friend, relative or the seller to extend financing assistance. You are asking a lot from any lender if what you are attempting is a dramatic change from your work history. If you find yourself in this quandary you will need to negotiate with the seller for an extended training period after the sale.
Locating businesses for sale. Over the past 10 years there has been a shift in the business opportunities marketplace. Once, newspapers held power as the single most effective marketplace for sellers to advertise their offerings that now has shifted to the worldwide web because the advertiser can present a great deal more information, for a fraction of the newspaper advertising dollar. A successful buyer should consult a Business Broker who will do most of the preliminary searching for him. They will have the inside track to businesses for sale that match your criteria and may also be privileged with information on businesses for sale that are not currently being advertised.
Prepare to meet the owner. Even though you represent the 'buy' side of the transaction you should still make an effort to sell yourself to the seller. You should prepare for your first meeting with the same diligence as you would prepare for an important job interview. Remember, you don’t want to take up too much of their time and you should have done your homework with researching their business, so have your questions ready and your notes in order prior to the meeting. It is also a good idea to prepare a thorough and concise financial statement, and a full resume' complete with references and be prepared to exchange this information with him. This could be especially important if you are considering asking him to finance. This acts as a measure of good faith and allows him some insight into who he is dealing with. The better prepared you are, the better impression you will make.
You're not his only buyer. As previously mentioned "there are 20 buyers for every available business". It's reasonable to assume that if you find this business attractive someone else has also. Be well prepared and ready to act swiftly by having 'your ducks in a row'. Don't expect the seller to hold tight while you fumble about trying to pull together your part of the bargain. Remember, time is of the essence and another buyer could have already begun their process and be their final stages.
Preliminary offer. There will be a point in your investigation that the seller will want you to demonstrate your level of interest before he continues to furnish you with sensitive proprietary company information, i.e., customer lists, payroll figures, etc. However, without this critical information you may not be ready to prepare an Offer to Purchase. In this case it is advised that you offer the seller a non-binding Letter of Intent. It allows you to reduce to writing your preliminary thinking of price, terms and conditions based upon the amount of information offered you to date. This letter traditionally ranges from 1 to 5 pages and should contain any 'deal breaking' conditions. It's best to have all of the 'sticky' points stated up front to save you, and the seller, time and energy should your and his thinking be too far apart. Should the parties be in agreement this letter should include a time-line detailing the beginning and ending dates and asking for permission for you to conduct the due diligence process where all remaining material items are disclosed. When applicable, it should also include the date when you are expected to go to a detailed Purchase Offer accompanied with a good faith deposit, assuming that you wish to proceed with the deal.
Final negotiation. This is the point you should consider engaging the services of an experienced professional to assist you in the preparation of this document. Once the Offer to Purchase is submitted to the seller fully expect to receive a counter-offer. This allows the seller to layout points which make the deal attractive to him. The Offer may rotate back and forth several times until a deal is hammered out. Don't get discouraged. Be careful that all last minute discussion items are mentioned within that agreement since it forms the basis of your buy-sell agreement and beyond since some matters will survive the closing date, such as promissory note servicing, transitional training, warranties, etc.
Closing the deal. If you have been diligent in the preparation of the Offer to Purchase and all other aspects of your research and due diligence, theoretically, the deal should close smoothly.
|
Free Information Center 