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Buyer's Guide
It is important to have a general understanding of the process of buying a business before you get started. Knowing this information will inform you if it will be a rewarding experience leading to purchasing a business or lots of frustration and an inability to buy a business. The brief explanation below covers the major components of buying a business.
Step 1: Evaluating your resources.
Performing a reality check is critical. You need to understand your personal goals, objectives and financial requirements. You also need to be realistic about your expectations and financial resources. In doing so, keep in mind the following:
- Very small businesses, those with income of $40,000 to $90,000 in seller’s discretionary earnings (SDE) should generally sell for 1.0 – 1.5x multiple of SDE.
- Small businesses, those with income from $100,000 to $300,000 in SDE, generally sell for 1.5-3x multiples plus inventory
- Lower middle market companies (over $300,000 in EBITDA) generally sell for 3-5x multiples of EBITDA, including inventory and a rational or realistic manager salary.
- Larger companies (over $1,000,000 in EBITDA) will sell for a higher multiplier.
- Lenders of SBA backed loans may require as little as 10% cash injection, provided that you have working capital and can get the seller to finance part of the business. In some cases the bank will provide working capital as part of the lending structure.
- Note, are you seeking a stable business with continuing customers or a business requiring you to find new customers for each sale.
Step 2: Commitment.
Business ownership requires time, energy and commitment, it is not for the “faint of heart.” Successful entrepreneurs do not have time to second guess themselves, they need to make decisions with available information and may not have time to wait to find out more information. It is important to not interpret this as making rash decisions, rather it is necessary to have the patience and commitment to collect data through research, to arrive at potential outcomes by examining the facts, and make a calculated decision. Once the data is collected, facts analyzed, then a decision is made to move forward. These same exact principles apply to buying a business. You the buyer, need to do your research, collect the facts, understand your expectations and know the resources you can bring to the table. If business ownership is the right step for you, then you need to commit to the work and patience involved in purchasing a business. It takes time to identify the right opportunity and the process requires a step by step approach, that cannot be rushed, nor delayed to insure you make the right acquisition.
Step 3: Meet with a Rainmaker Business Alliance professional business broker.
The initial meeting is about you getting to know the business broker and the business broker getting to know you and your goals. Do ask about their education, work experience and background. Ideally you want a business broker with (corporate) business and small business experience who can help you shape not only a strategy to take over a company but to operate it as well. Be prepared as they will also ask you specific questions. Be ready to provide accurate information about your background, your financial capabilities, skills, goals and expectations. This information will help the broker to zero in on the types of businesses for sale best suited to your experience and requirements.
All business owners will want the sale of their business to remain confidential, so you will also be asked to sign a Confidentiality Agreement (Non-Disclosure Agreement (NDA), Buyer Profile and Agency Disclosure. The Confidentiality Agreement basically states that you will not disclose the identity or share details about any business you are shown to third-parties (without prior written consent).
Step 4: Searching for Your Business.
Your business broker will be your confidant and colleague and help you find a suitable businesses for sale. Your Rainmaker Business Alliance professional business broker spends a lot of time gathering specific information about the financials, processes, management and structure of each business for sale. We develop detailed profiles, which can be shared and reviewed with you. We will also work with any other business broker in and out of the state to negotiate the proper deal for you.
Step 5: Visiting the Business for Sale and Speaking with the Seller in Person.
Having signed the NDA and reviewed businesses on paper, and had your preliminary questions answered it is now time to meet the business seller to get more information. Your business broker will arrange a confidential business meeting with the seller. This is your opportunity to get a feel for the business and ask any additional questions you might have. Your broker will allow you and the seller to interact directly, and will be there only to assist to insure the meeting is productive for both sides. Note, there are no stupid questions, and often times you may think of addition questions after thinking about and analyzing what you learned on this initial meeting. Please let your business broker know this questions and they will communicate those to the Seller and get the answers. Our job is to get you the information you need to make an informed decision on the purchase of the business.
Step 6: The LOI (Letter of Intent).
If you liked the business and want to move forward and want to learn more about the business by doing due diligence, the next step is for your business broker to help you draft an LOI (Letter of Intent). Do not be concerned about the words “Letter of Intent”. This does not lock you into buying the business. The purpose of an Letter of Intent is to define the terms upon which you are willing to buy. These often include specific contingencies that will be included in a Contingent Purchase Agreement. These will include obtaining a satisfactory lease (for you and your financing bank), further satisfactory review of financials, and the ability to obtain financing (SBA or private lenders). The accepted Letter of Intent specifies agreement between the parties on the terms and projected timing of signing a contingent Purchase Agreement accompanied by an earnest money deposit held in our trust account.
Step 7: Due Diligence Process (Books and Records Examinations).
The Contingencies to the Purchase Agreement trigger the due diligence process. During this process you have the opportunity to inspect the owner’s books & records. This is an opportunity to verify prior representations and confirm their accuracy. As an example, do the P&L’s (Profit and Loss Statements) or AR (Accounts Receivables) match the information previously disclosed on the Tax Returns. Your Rainmaker Business Alliance professional business broker will coordinate communications during this process and will provide ongoing updates. Your business broker will also be “symphony conductor” coordinating the efforts of legal and accounting professionals with lenders and closing attorneys to insure that the process moves forward in a timely manner.
Step 8: Financing/Lending.
Should financing be necessary, we can assist you with connecting to lending resources. This is a detail your business broker will ask early on. Some business buyers are able to use their 401k resources to purchase a business outright. Others use their 401k as a deposit and rely on bank financing for the remainder. Some will have savings and rely on lenders for the rest. However your finances are arranged, the business broker can give you suggestions and introduce you to the best lending resources available.
Step 9: Purchase/Sale and Closing.
Once every contingency has been met, then the final preparations to transfer the business begin. At the time the closing documents are drafted, and every effort is made to transfer the business as seamlessly as possible. We work with each party to ensure communication on transition issues. A training and transition period (defined by the Purchase Agreement) begins on the day of closing, and is structured to ensure your familiarization with the business operations, employees, clients and vendors; all with the Seller at your side. Note, while we do our utmost to ensure a seamless transition, it is rare when a business transaction closes on the day everyone expected, so be ready that you may encounter some delays, whether caused by the bank, SBA, attorneys, seller or in some cases yourself. After all, buying a business is a complex procedure. We are here to make it as seamless and easy as possible, but it is not always possible to anticipate every issue or item that can arise and slow down or delay the process. But by being ready, having all documents prepared, understanding what needs to be done, you will succeed and we will be by your side to help you get this done. Having a business broker with experience and knowledge and familiarity with the process will make it go more smoothly. The Business Intermediaries at Rainmaker Business Alliance are dedicated to seeing the details through, and ready to help you realize your dream of business ownership.