- Figure out what type of business you want to buy. Narrow down your passions, interest, skills and experience. You’ll be happier if you buy a business that dovetails with what you already like and have some experience in.
- Understand why a business is for sale? What is the general perception of the industry and the particular business and what is the outlook for the future? Does, or can, the business control enough market share to stay profitable? Assess the company’s reputation and the strengths of its business relationships. Get to know the key employees and ensure that they will stay on board at least long enough for you to learn what they already know.
- Whatever method you use to determine the fair market price of the business, your assessment of the business’s value should take into account such issues as the business’s financial health, its earnings history and its growth potential, as well as its intangible assets such as brand name and market position. The most common means of judging any business is its return on investment (ROI), or the amount of money the buyer will realize from the business in profit after debt service and taxes.
- Many people think banks lend money for small business purchases when in fact, they rarely do. Therefore, it is important to negotiate financing through the seller, it is common, often, it is the only way to finance a purchase, and it truly serves to validate what the seller has represented when they share in the risk.
- Negotiate a "letter of intent." Also called a "term sheet," a letter of intent (or LOI) is a short, two- or three-page agreement between the buyer and seller of a business that spells out all the important terms and conditions of the sale. For example, it will include the purchase price, how and when the purchase price will be paid, the assets that will be sold to the buyer (and those the seller will keep for his own use), the terms of the seller's non-compete agreement, and so forth.
- Make sure you're buying the assets, not the business. If the seller is a corporation or LLC, under no circumstances should you buy stock in his business. Instead, offer to buy the assets of the business, and form a separate company to act as the purchaser. Why? Two reasons. First, you get a better tax treatment, since your "tax basis" in the assets will be the amount you paid for them, rather than the amount your seller paid for them long, long ago. Second, if he owes money to people or is being sued by someone, you won't assume any of those liabilities if you buy the assets.
- Find an attorney who specializes in business sales and ideally in deal sizes comparable to what you are purchasing.
- Find an accountant to conduct the financial due diligence and provide advice regarding other financial matters.
- Find a mentor who has experience buying businesses and will only look out for your best interests.
Every year, more than 500,000 businesses change hands, and that number is expected to skyrocket in the next several years as millions of baby boomers begin retiring and selling their businesses.
Purchasing an existing business can be very rewarding, profitable and much less risky than a new startup. Creating a filter of an ideal business acquisition based upon your strengths, passion and skillsets and assembling a qualified acquisition team to assist you will help ensure your acquisition is a success!