10 Tips for Buying a Business
Are you looking to buy a business? If so, stick around because in this video we're going to talk about 10 tips for buying a business.
1. Where to Look?
There are a number of websites where you can search businesses for sale online. Two of the most common websites are www.bizbuysell.com and www.bizben.com. Here you can create a free account and set up search alerts much like if you were looking for a home on Zillow or Redfin. Once you set up your search the sites will notify you when new listings meet your search criteria.
2. Asset vs Stock Sale
Typically, there are two ways to buy a business: asset sales and stock sales. An asset sale is where the buyer sets up a new business entity and simply purchases the assets from the seller, whereas, a stock sale is the purchase of the owner’s shares in the corporation. Generally, when you buy a business you will do an asset sale. This is often the safer route because it helps create a clean breaking off point and can protect you from liabilities that may arise from the seller’s prior business activities.
3. Structuring the Deal
Find out why the seller is selling and ways to structure the deal that have advantages for both parties. Understanding the seller’s motivations is essential to successfully buy a business. Do they want all their cash up front and plan to move somewhere? Do they want their money over time and still need a steady source of income to support their lifestyle? Perhaps they want to stay on with the business and take a salary or consulting fee arrangement. Each of these scenarios will dictate a different structure of the deal. For example, checkout Earn-out clauses if the seller wants a sales price that is more than a buyer is willing to pay.
4. Taxes & Add-Backs
Typically, sellers will provide their business tax returns to support the profitability of the business. Then, oftentimes they will provide you with a list of add-backs to show the true profitability of the business excluding expenses that they believe are not critical to the business operations. For example, common add-backs would be things like depreciation, amortization, and interest because depreciation/amortization is a non-cash expense and you will not have the same interest expense as you take over the business. Other add-backs may need to be negotiated because you may also incur similar expenses to operate the business.
5. Bank Financing
If you need financing to purchase the business, you could consider going to your bank for a small business loan. It’s often easier to get a bank loan for buying a business compared to starting because there is historical business cash flow. You will need to come in with 10% down for most business acquisition small business loans and they can be termed out over 10 years under SBA loan programs to help lower your monthly payment.
6. Seller Financing
Seller financing is an alternative to bank financing. This is where the seller essentially serves as the bank. In this case, the seller of the business takes a note from the buyer and agrees to terms much like a bank (interest rate, term, etc.). This can be a good sign for a buyer if a seller is willing to carry some paper because it shows that they believe the business will be able to pay them back.
7. Multiples & Valuations
There are numerous ways to value a business. Some industries have clear multiplies of earnings to help determine valuations and some don’t. In most cases, these are just rules of thumb and further due diligence is required to adequately value the business. You can get these industry multiples from research databases for free through your local SBDC for most industries, but not all.
If the business you’re buying has a lease, then you’ll need to find out if you can assume the lease or if you need to negotiate a whole new one. Depending on the terms of the current lease, it may be advantageous to assume the lease. Generally, if the lease has 2 years or less left then you may want to spend the money now and negotiate a new lease with a longer term.
9. Putting Together your Team
If you are serious about buying a business you’ll want to start conversations with 3 types of professionals. A good business broker who specializes in your industry to help you search and evaluate businesses for sale. An accountant who can help you analyze the financials and tax implications of buying the business. An attorney to help review leases and structure the deal to ensure everything is done correctly.
10. Purchase Agreements
The purchase agreement is a document that outlines the details of the purchase. Purchase agreements vary from deal to deal, but there are some items you might want to consider including in the agreement. Items that are often included in the purchase agreement outside of the purchase price are; non-compete arrangements, indemnification, how accounts receivables will be handled, if the seller will stay on for training during transition, staff carryover, items included and not included in the sale, due diligence timeframe, and many, many more. Consult with a licensed professional to review your purchase agreement.
By Sean SniderView the video here.
Funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.
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