First Steps: Buying a Business with Your Business Broker
For what ever reason, you've decided it's time to buy a business. Engaging a Business Broker has immeasurable benefits - so many its an post for another day.
After I meet with a Buyer for the first time, I discuss next steps. Here a few of my thoughts that can help every new buyer ground themselves in what can be a challenging process.
A few helpful thoughts on the buying process:
Confirm your cash on hand. This is the amount you are willing to invest for your business purchase. Closing costs can run from a couple to many thousands of dollars, even more for an SBA loan. Prepare to pay 50% of the closing attorney's fees. The buyer's responsibility may be $1,250-$3000 or more depending on the complexity of the transaction. SBA Lenders may be flexible on financing closing costs and additional equity to leave adequate cash in the bank for a few months cash flow. If you do not buy through the SBA process, a cash purchase of a $500K business may cost up to 10% of the cost after closing for cash in bank (cash flow) and transition costs for the first few months: licenses, deposits on utilities, repairs and replacements, initial advertising, inventory, supplies, turnover expenses, payroll, etc. While it isn't common and isn't contractually permitted, some sellers allow inventory and supplies deplete just before a sale. Be prepared.
Credit. Pull your credit report from www.freecreditreport.com. Clean up any negative items. Surprises when applying for a loan create delays and could result in a declination.
Target only listings within your budget with a preferred geography and industry(ies). Choose THREE industries that interest you. Any more than that, you'll be wasting a lot of time. Decision making gets fuzzy and complicated, It is difficult to compare like businesses. Identify your ideal geography and search in that area. E-commerce businesses deserve a national search. Be realistic on a business's value and make decisions based on proven historical financial performance, not what it "could be". You'll have plenty of time to make it your own later.
Be patient in your search. Buyers often look for a year or more when identifying the right fit at the right price. However, in this competitive market, once you find a business that is financially sound and interests you, be willing to "pounce". Your broker (1st & Main Partners) will help submit your NDA (non-disclosure agreement) and request financials and other details for the business. Be prepared to make an offer quickly. Good businesses do not remain actively listed for more than a few weeks.
Escrow Deposit: Upon execution (signing) of the Purchase Contract, the Buyer places a pre-agreed upon deposit in escrow with the agreed upon closing attorney. This money remains the buyers' until the end of the due diligence period (more on due diligence below). You can exit the deal without consequence and receive a refund on your escrowed deposit during the due diligence period. Once the due diligence window closes without a written request to exit, the deposit "goes hard" meaning that regardless of the outcome of the sale, the Seller keeps the deposit. In some cases, a refusal by the Lender to finance the deal is the only exception that allows the Buyer to retain their deposit. Take the due diligence period seriously and proceed without delays, commit the time needed to make an educated and confident buying decision.
Due Diligence: All contracts have a 30+ day inspection period (just like a home purchase). During that time, you'll work with your broker to review more detailed financials and spend time in the business (often after hours), and frequently speak with the Seller. Your broker will coordinate scheduled meetings and actions directly with the Seller or the Seller's broker. This is your in-depth decision making period. This period is what allows you to make an offer promptly upon a successful review of the initial financials and memo.
Be realistic. Some businesses don't measure up to the listing details, the seller's opinion, or the advertised financial performance. Be prepared to uncover staffing issues, delayed repairs, outdated software and hardware and/or POS systems. Some concerns are easy to remedy, others are red flags.
The Seller's Discretionary Earnings (SDE) IS EVERYTHING. Stay focused on the return on your investment. What is your time worth? The Owner Benefit of a business is the reward for your effort. It builds wealth, saves up for a rainy day or economic downturn, and permits/allows for growth. Remember, an SBA loan requires the owner operate the business full-time. Absentee owners should be onsite frequently to review performance, staffing, and the financials (hugely important). Inspect what you expect.
Your Broker is your Partner but not the decision-maker: Manage expectations early, identify communications preferences, and lean on your broker as your sounding board and source of information. Most business brokers are transactional (neutral to both sides of the deal) and focus on the transference of information. A good broker demonstrates their integrity and honesty; They assist the buyer "see" the reality of the deal and prepare you for next steps and manage the process. Great brokers are good story tellers - they should share what they have witnessed and learned to your benefit. Expect that of your broker-partner.
Prepare a Personal Financial Statement "PFS" now. Your PFS stays on file with your broker and will not be distributed without the approval for every event it is requested or required. PFS Template > CLICK BELOW.
All that being said, here are a few websites to use to search for your ideal business:
Many businesses are cross listed. If it appears to be a duplicate, it probably is. Where you can, sign up for email lists for new listings with your specific filters. When you find a listing(s) that you like, send your broker the link(s) to the listing(s) itself OR the LISTING NUMBER on the page itself and the website name.
Your Broker will ask you to sign an NDA (non-disclosure agreement) for their listings or send your NDA to the listing agent prior to obtaining additional and confidential information. While it may appear to be overkill, a unique NDA is required for every listing for which you'd like to receive financials and business information. FYI, many brokers do not write a memo for the smaller businesses. The initial Buyer-Seller meeting becomes invaluable.
1st & Main looks forward to assisting you as you reach your ownership goals!
Should you like to learn more about Buyer Engagement levels (focused, individual searches by retainer), contact firstname.lastname@example.org.