Knowledge is Power in Buying and Selling a Business

As Calvin Coolidge once stated, “The business of America is business.” In that respect, it’s no wonder that America is buying and selling businesses at an astounding rate. In fact, one of the latest surveys released from a 1996 Gallop poll showed that an amazing 3.5 million new businesses were started in the U.S. last year. Obviously, becoming your own boss has never been more popular. Not surprisingly, the Wall Street Journal reported that saving to start a new business is second only to a remodeled kitchen on American’s wish-list for big ticket items.

Of course, starting a new business can be extremely frustrating if not handled properly and the risk is high. Reportedly, 80% of all new businesses fail in the first three years due to factors such as poor location, low product quality, under-capitalization, and lack of management skills, However, there are things you can do to increase your chances of success. For example, purchase an established business! A mature business offers the advantage of providing you with a proven location, existing customer base, and product. The key is to look for a business that is established but has potential for growth. That way the business will be affordable while providing the opportunity to significantly increase your profits. Also, keep in mind that most business owners will be willing to train you in the daily operations of the business, there by helping to further reduce the risk.

So, how do you begin to pursue the American dream? The answer is to make sure you have a solid understanding of the process involved in the purchase of a business and to follow it. To get a better understanding of this process, let’s run through a few of the more important aspects of a typical transaction.

First, you must be totally committed to purchasing a business at a price and terms consistent with the marketplace. Once this commitment has been made, it is then time to consider using the services of a good, knowledgeable business broker. Remember that purchasing a business is even more complicated than the purchase of a home, and most of us would not attempt to buy a home without the assistance of a qualified real estate professional. If you elect to use a broker, choose one with a proven track record and one with whom you feel comfortable. To protect the business owner who is selling, you will be required to sign a non disclosure agreement promising to maintain confidentiality for all the information provided to you on the businesses discussed.

The broker will begin showing you businesses in the categories in which you are interested and will also begin to familiarize you with the important factors associated with each business: its history, previous sales, terms of purchase, etc.. The business broker will then arrange a meeting between you and the sellers. Usually a number of meetings will take place with various businesses before you decide on the one that best meets your needs.

The next step will be to write a purchase offer and present the offer to the seller. At this point, the business broker will share information on your background and pertinent financial history with the seller. This information will include your experience and specifics of how you arrived at the offering price, terms, and conditions. Your broker will then explain the purchase terms and conditions to the seller, who will either accept the offer or submit a counter offer. When both parties have agreed to the terms and an escrow deposit has been received, you will then be allowed to do your due diligence of the business to determine if everything is in order. At this point, all of the information should be substantiated that was presented to you on the listing schedule. If there has been any misinformation, the deal may be cancelled and you would receive your escrow deposit back or you may elect to renegotiate your offer.

If all questions are resolved and the financial records are in order, all contingencies will be removed from the agreement which then becomes a binding contract. The broker, seller, and yourself will work with the landlord to arrange an assignment of the current lease or to create a new lease with new terms. Once this occurs, you will provide all necessary paperwork to the transferring agent who will run a lien search. If the lien search finds everything is in order, the broker will make arrangements to assign any notes or equipment leases to you. Finally, arrangements are made for you and the seller to set a closing date. When this is completed, documents are signed and the deal is closed.

Thus, with knowledge, a little luck, and a good business broker, the process of purchasing a business can be surprisingly simple. Utilizing a good business broker can help you drastically reduce the time it normally takes to complete a transaction.

If you as a potential buyer follow these steps in purchasing a business and utilize all the information available to you, you will stand a much better chance of fulfilling your dream of owning a business. More importantly, if you want to continue to succeed after purchasing a business, the day you sign escrow papers and become the owner, your mind set must change from buyer to seller. Whether you plan on selling the business in one year, ten years, or never, strategies to maximize the value of the business are good management practice and should begin well before you ever decide to sell.

First and foremost, begin to position the business for sale from the day it is purchased. To build long-term value, in addition to ensuring short-term profits, it is essential to keep track of financial records, permits, licenses, equipment, and inventory. This is important throughout the life of the business, but is especially critical when you are trying to sell. If the business you purchase a franchise, care should be taken to learn the franchiser’s requirements for resale. These requirements are usually listed in the franchise contract.

Second, when the decision has been made to sell the business, determine the fair market value of the business. Business owners have the option of going to their attorney, accounting firm, appraisal firm, real estate broker, or business broker to have a business valuation performed. A business broker typically has the most complete and current information on actual business sales and pricing formulas.

Furthermore, continue to manage your business for optimal performance. A common mistake made by sellers is to pay less attention to the daily operations of the business once they have decided to sell. To maintain maximum value, continue to run your business with complete dedication and keep up your inventory, maintenance, advertising, and customer service levels. And again, as with buying a business, you must maintain confidentiality. Your business’ value could suffer if employees, customers, or suppliers know your business is for sale and you risk them no longer treating you “as usual.”

Finally, negotiate effectively. Don’t let inflexibility prematurely end a deal with a qualified buyer. At this stage, you benefit tremendously from the professional help of a business broker who is trained to develop creative (and responsible) terms that both help close the deal and ensure all interests are met.

As is very evident, with access to good information and the help of a qualified professional, buying or selling a business can be a much less stressful experience and become one of the most fulfilling as well as profitable events in your life.

Article reprinted with permission from the July issue of Business Opportunity Journal.

[From Connection Magazine, September 1997]

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