Ready to buy your own business? Here are three steps you will need to take on your road to business ownership.
Step 1: Arranging Financing
One of the most important steps in the process of purchasing a business is financing. How are you going to pay for your new venture?
There are several resources available which you could tap in order to put together the financing needed for your journey into entrepreneurship. These options consist of gathering funds from family members/friends, financial institutions or seller financing.
No matter what the source of funds, all lenders are going to have conditions which you will have to satisfy if you want to be approved for the funds. They are going to require you to have adequate cash readily available for the 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 an Offer
You found a business 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 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.
The evaluation of the business will begin with examining the previous three years of financial records. You need to reveal 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.
The evaluation will need to be modified to take into account any details uncovered while in the due diligence phase. Developing a complete picture of the value of the business will allow you to determine whether or not to move forward as well as the highest price that you are prepared to spend.
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. The purchase contract might be quite a few pages long due to the fact it itemizes each and every component of the sale. This step commonly requires using the services of your business broker, a CPA along with an attorney to guide you in the process.
Do you have more questions about the steps required to buy a business? Would you like to know more abou the due diligence process? Ask us here!
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