Ready to buy your own business?
Step 1: Arranging Capital
You could probably guess that step one is figuring out how you are going to pay for your new venture.
If you don’t have enough cash on hand to fully fund the purchase of a business there are several resources available which you could tap. These options consist of acquiring funds from the Small Business Administration (SBA), traditional financial institutions like banks or seller financing.
No matter what the source of funds, any lender is going to have conditions which you will have to satisfy if you want to be approved for said funds. They are going to require you to have adequate cash readily available for a down payment in addition to having sufficient working capital to sustain the business.
You will need to be aware of and account for costs like closing fees. It is possible to either pay for the closing fees up front or plan to have them incorporated within the amount that you will be financing.
Having financing or at least a down payment in place before you begin your business search will simplify the process of finding the right business for you.
Step 2: Making Offers
You found a business that meets with your goals and have finished going over the initial financial records. You think this might be the business for you. It is time to make an offer, but how do you determine what that offer should be?
First, consult with your business broker. There are considerations that influence price such as the amount comparable businesses have actually sold for, the value of inventory and contracts, the amount of cash flow the business currently generates – the list goes on. By consulting with your business broker you can consider all aspects and decide whether the asking price is fair and how much you are willing to offer.
Step 3: Due Diligence
After an offer is accepted, the offer you submitted essentially becomes the purchase contract and you will move to the next stage – due diligence. This is a crucial step when purchasing a business. It is due diligence which enables you to figure out whether or not this business is for you. It also helps to determine what price you will be prepared to pay for it.
Due diligence will begin with examining previous years of financial records. You will be able to learn about any unresolved legal actions, relationships with vendors and clients, intellectual property rights including copyrights or patents, as well as any future liabilities.
Once you have all the necessary information you can make an informed decision about whether or not to proceed. This is the nature and necessity of due diligence. Your findings during due diligence may also modify the amount you are willing to pay for the business.
As soon as you have arrived at what you feel is a complete picture of the business and have also arrived at a price that takes into account what you found during due diligence – you and the seller will negotiate to amend the purchase contract and proceed to the closing table. This step typically requires using the expertise and negotiating skills of your business broker, and possibly a CPA and/or attorney to guide you through the process.
While buying a business might initially seem like a monumental task, when broken down into basic steps it is absolutely possible for any driven future entrepreneur.
Do you have more questions about the steps required to buy a business? Would you like to know more about the due diligence process? Ask us! Please feel free to leave any questions or comments, we would be happy to help.
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