A Comprehensive Guide To Buying A Business
Buying a business is a complex process. To further complicate things there’s also a lot of misinformation out there.
So I’ve compiled A 16 Step Comprehensive Guide To Buying A Business.
A guide that outlines the process for buying a small business, through to a medium-sized business, in Canada.
Following each of these critical steps will help you to:
- Identify a fantastic business opportunity,
- buy a business for a great price,
- buy a business for the best possible Terms,
- buy a business in a way that gives you the greatest probability of business success.
STEP 1 – PERSONAL PREPARATION
You are about to embark on a great adventure and like any great adventure the key to success, is planning.
Sure, like most individuals or couples you are unlikely to know exactly what kind of business you want to buy. There are however a few essential planning steps everyone must take.
Action Item #1 – Check your credit score! (10 minutes)
You’re going to need financing in order to buy that business of your dreams. Your credit score is just one of several factors that will determine if a lender will lend you the money you need in order to buy that business. It’s therefore important you check it now.
Goto Equifax and order your credit report and score. Review for accuracy and immediately address any inaccurate / outdated information. You need to strive for a credit score that is higher than 700.
Action Item #2 – Take action item #1 one step further and document all your personal expenses. (One Hour)
One way to destroy a viable business, one way to destroy yourself financially, is to run out of money – money needed to cover the basics.
Grab a piece of paper and a pen or open up a new Excel (PC) or Numbers (Mac) file. Document ALL your monthly expenses from mortgage, insurance and automotive lease payments, through to grocery and gas estimates. You need to be clear on the minimum amount of money you need to make to cover all your personal bills and expenses.
Once you have found a business to buy, repeat this exercise to ensure you clearly understand how much money you need to make to cover all your personal and business related expenses – (don’t forget to include the loan you now have for buying the business!)
Additional Resource: Video
STEP 2 – TALK TO A FRIENDLY & EXPERIENCED BUSINESS BROKER
Business Brokers specialize in helping individuals and couples buy and sell small businesses.
Experienced Business Brokers are a wealth of valuable knowledge and “hands-on” experience that will save you lots of time, and lots of money. The great ones will be more than happy to share their knowledge and experience with you.
Identify an experienced Business Broker who you can trust as they will be the person to guide you through the entire business buying process as well as help you evaluate and valuate a business opportunity you are interested in potentially buying.
Furthermore they will be connected to other experts you will need in order to be successful. For example, experienced lender representatives as well as experienced lawyers.
Action Item #3 – Identify a suitable lender representative or two and meet them in person. (Couple of hours)
The experienced Business Broker you met will be able to give you the names of one or two experienced lender representatives who you can talk to. Lender representatives who the business broker has worked with on previous projects. You should meet them in person as soon as you can.
It’s important to start building a rapport with the lender. Furthermore, while you will not be able to get pre-approved for financing, an experienced lender representative will be able to tell you what they like to see as far as a deal structure is concerned. This information is important and it will help you from a planning perspective.
Additional Resource: Video
STEP 3 – SOURCE AN AWESOME BUSINESS OPPORTUNITY
I’ve found the following two websites to be great sources of quality business opportunities:
Businesses For Sale – http://www.businessesforsale.com
GlobalBx – http://www.globalbx.com
You might also want to look at individual Business Broker websites.
Additional Resource: Video
STEP 4 – THE IMPORTANCE OF A CONFIDENTIALITY AGREEMENT
When you first inquire about a business opportunity that is for sale, before receiving any specific details about the business that is for sale, the representative should (among other things), ask you to sign a Non Disclosure / Confidentiality Agreement (CA).
A CA is a legally binding document. It’s your promise to keep the information you receive to yourself and not share it with anyone else, (other than perhaps your lawyer, lender or accountant). You see it takes years of hard work (and some tears) to build a successful (and in turn valuable) business. It makes sense that its value must be protected at all costs doesn’t it? Absolutely – hence the need for such things as a Confidentiality Agreement.
If you are asked to sign a CA you should see it as a really good sign because it is an indicator that the owner and owners representative “care” about who is inquiring and receiving the confidential business information.
As a potential buyer of a business you should seek assurances that everyone who is privy to this confidential business information has signed a CA. After all if you do end up buying the business, you will be in a terrible situation from day one if you find out a competitor, or other party looking to setup a competing business, had access to all that confidential business information!
STEP 5 – THE INITIAL INFORMATION PACKAGE – WHAT IT MUST INCLUDE
Once you have completed a CA you should receive an initial information package on the business opportunity. Among other things, it is very important you get:
- At least 3 years Accountant Prepared, Year End Financial Statements.
- If the year end was more than 3 months ago, a complete Interim Statement.
- A complete, and up to date, copy of the real estate lease agreement.
- A detailed breakdown of the expenses as reflected in the financial statements – specifically you want to know what expenses pertain to the business owner(s).
- Details pertaining to equipment and any inventory included in the sale.
Additional Resource: Video
STEP 6 – BUSINESS SHOWING & OWNER MEETING
You’ve read through the initial information package and you’ve done some initial online research of your own. It looks to be a great business opportunity and you’re excited. Now is the time to meet the owner and have a tour of the business.
Keep in mind most meetings take place in an evening, after the staff have gone home.
Expert TIP – The first meeting with the owner is simply a get to know each other meeting – that’s it. Dress appropriately. Start the meeting by explaining why you are interested in their business and allow the business owner the time to show off their business to you.
Additional Resource: Video
STEP 7 – FOLLOWUP Q&A
There’s a lot of information to take in when having a tour of a business with a business owner. Make notes as soon after the meeting as possible and start comparing what you were told at this meeting with the information you were provided in the initial information package.
You are going to have followup questions post meeting. Possibly even questions designed to verify your understanding of certain things. Prioritize these questions and seek an answer that is to your satisfaction. In some cases a face to face followup meeting, off site, is required.
STEP 8 – REVIEW, EVALUATE AND VALUATE THE BUSINESS
With the help from your chosen experienced Business Broker, review and evaluate every element of the business. Review the competition, research historical sales data of similar business opportunities and valuate the subject business.
Determine what elements of the business are contributing to the value of the business.
Determine what elements of the business are negatively effecting the value of the business.
Additional Resource: Pratt’s Stats – Acquired Private Company Transactions Comparables. A good resource for finding comparable business sales. Information you might be able to reference when determining the value of a business you are interested in purchasing.
STEP 9 – NEGOTIATE A CONDITIONAL OFFER WITH THE BUSINESS OWNER
With guidance from your Business Broker, all you want to do here is talk openly and honestly to the business owner about your thoughts and plans for a business purchase and what the transition from one owner to another might look like.
Expert TIP – It is important to understand that if the business owner is prepared, they will know what their business is worth. If they are actively marketing the business for sale they will likely also know what other potential buyers are prepared to pay for the business. Therefore I’d highly recommend you make your best offer straight away!
The quickest way to completely destroy the fragile relationship you have with the business owner as well as destroy any chances of you owning the business is to come across like you want to nickel and dime the business owner and / or you are clearly presenting a “low ball” offer.
Focus the discussion on the “meat and potatoes” of the deal, things like:
- Target Possession Date
- Purchase Price (and how it is broken down : Deposit, Cash At Closing etc.)
- What’s included in the purchase
- Training and Transition details
If there is some aspect of the deal the business owner does not like, allow them the opportunity to give you their thoughts. The key to coming to an agreement with someone is to have a two way discussion.
Be clear that your offer is “Conditional” – conditional to such things as:
- You completing a thorough Due Diligence on the business
- You obtaining Financing
- Your review of the landlord and the landlords review & approval of you
- Your lawyers review of the final sale purchase agreement, etc. etc.
STEP 10 – INCLUDE A MEANINGFUL DEPOSIT
If you say you are serious about wanting to buy that business – then prove it! Once a Conditional Offer is agreed upon, pay a meaningful deposit to the business owners lawyer straight away.
Don’t worry, if you find something is amiss with the business, and / or you are (even with best efforts) unable to remove a condition, you should be entitled to a complete refund of your deposit.
STEP 11 – ENGAGED YOUR CHOSEN LENDER
As soon as a written Conditional Offer has been accepted by both you and the business owner, you need to get a copy of this document to your chosen lender as soon as possible. Include the initial information package you received once you signed the CA so that the lender has everything they need in order to understand the opportunity as well as determine if they will offer you financing.
Additional Resource: Video
STEP 12 – ENGAGE YOUR CHOSEN LAWYER
Expert TIP – When it comes to buying a business the only lawyer you should hire is a lawyer who is experienced in dealing in small business transactions!
Again, an experienced Business Broker will be able to recommend to you an experienced lawyer or two who they have worked with on other projects.
Meet your chosen lawyer in person and present to them the same information as you sent your lender. Include the name and contact information of the sellers lawyer.
STEP 13 – THE DUE DILIGENCE PHASE
Due Diligence is the process of analyzing and verifying the information you have received, as well as tap down into the details of other information. It’s a process that must follow a pre-determined path – the exact details of which are beyond the scope of this article.
However if you enrol in my course, “The 8 Elements Approach To Buying A Business”, there is a whole section dedicated to guiding you through the Due Diligence process – a Due Diligence process that can be applied to any size and type of business.
Expert TIP – The quickest way to turn your dream of owning a great business into a complete nightmare, is to skip this step!
STEP 14 – REMOVING CONDITIONS
Typically, the longest lead time of any condition will be fore filling the financing condition. A close second can be the lawyers review of the sale purchase agreement. Keep on top of your lender and lawyer, get regular updates from them and then in turn update the business owner so that they know what’s going on. This can be a stressful time for both you and the business owner so regular communication between one another is essential.
When challenges arise, discuss and brainstorm solutions with one another as well as with your other experienced advisors.
STEP 15 – FINALIZE THE AGREEMENT
Finalizing an agreement involves an incredible amount of work by all involved. You will find a healthy dollop of patients is also required!
That being said, as a buyer you should feel a great deal of comfort knowing you have help and guidance from an experienced Business Broker, a lender (who will also complete a lot of Due Diligence on the business you are looking to buy) as well as from an experienced lawyer.
Expert TIP – As you and the business owner finalize your agreement with one another, be sure to slowly start learning the business operations. Specifically start getting updates from the business owner on such things as business inquiries and opportunities, as well as inventory and or equipment purchases.
Once the agreement is finalized, as confirmed by the lawyers, there is one more VERY important step you need to complete…
STEP 16 – THE NIGHT BEFORE YOUR BIG DAY YOU MUST COMPLETE A FINAL INSPECTION
Completing a Final Inspection on any business is as important as completing a thorough Due Diligence on a business opportunity.
A Final Inspection occurs the night before you legally take possession of the business.
- It is a physical inspection of the entire business, AND
- It is a physical inspection of each asset included in the purchase.
Any issues should be reported to each lawyer – immediately.
The Final Inspection should end with you receiving all the keys to the business, passwords as well as any highly confidential information promised.
CONGRATULATIONS – You’re now the owner of a fantastic business opportunity!
Enjoy your new adventure!
NOW ITS YOUR TURN
As I’m sure you can appreciate, while there is a lot of great advice in this guide, it is just a fraction of what you need to know when it comes to buying a business.
If you are serious about wanting to buy a fantastic business opportunity in Canada, I hope you will consider enrolling in my online course – “The 8 Elements Approach To Buying A Business”. Canada’s definitive guide to buying a business.
If you enjoyed reading this article and found it helpful and informative, please do take a moment to Comment & Share! Doing so really will help me get my message out to other people just like you, who are searching for such expert advice.