While each business acquisition transaction varies in its complexity and size, knowledge of the process will help keep you on the path to a successful close.
Owner’s decision to sell
Intermediaries understand that there are two elements necessary for a successful business sale:
- The business offering must make economic sense to both a buyer and a seller.
- Often, it’s the occurrence of a cataclysmic event like fatigue, declining health, divorce or the desire to retire, that pushes the owner’s decision to sell.
Determining Your Buying Parameters
Before a search for a viable business can begin, buyers should have a good idea of their needs and buying requirements.
- Geographic preference
- Financial ramifications
- Financing is an issue in most small business transfers
- Type of industry, annual sales volume, number of employees, and longevity of business
Identify Potential Businesses
There is always an overabundance of buyers for good business offerings, the key is to determine the right fit. Buyers should be ready to sign a confidentiality agreement and provide verification of their financial ability to complete a transaction.
Determine the Value of the Business
The ultimate value of a business will be the final price negotiated between buyer and the seller. A seller may a request a business valuation from a CPA or a qualified valuation company.
Arranged Buyer and Seller Meetings
The meetings with a seller are of paramount importance to the deal. The decision of both parties will depend upon financial information provided to each, the quick response to questions answered and how each party presents himself or his business.
Offer to Purchase / Letter of Intent
After meeting with the owner and completing the analysis on the financial statements, buyers will:
- pass on a business
- ask for more information
- prepare a formal contract
The two most common legal vehicles are a Letter of Intent or an Offer to Purchase and either document is accompanied by an escrow check, as a good faith gesture.
Negotiations – Structuring the Deal
The seller has three primary decisions once a legal offer has been submitted:
(b) a decline
The purchase price, payment terms, length of training, consulting agreements, and allocation of purchase price are just a few items that can be leveraged to make a deal more favorable.
Due diligence is a time to learn more about the business to determine compatibility. The buyer performs due diligence to ensure that the books, records and operation of the business have been portrayed accurately. Due diligence can last between 7 to 45 days with the average length being around 21 days.
This is the best part of the whole process, the time you are handed the keys to the business. Prior to closing, the offer to purchase or definitive agreement is submitted to an escrow company or closing attorney so that legal and governmental due diligence can be performed. The closing agent’s responsibilities vary from agent to agent, but at a minimum should include:
- lien and title search
- real estate and personal tax prorations
- preparation of closing documents
- disbursement of funds to the seller
To learn more about buying a business download this book by Alex Vantarakis, “Entrance– A Business Owner’s Guide To Buying A Company”