Buying an existing business can provide advantages including existing operations and customers, immediate cash flow, an existing brand and goodwill, and many more. But if you are thinking of buying a small business, you will need to examine several important business, legal, and financial factors. In this article, I discuss the 12 key factors you should review when buying a small business.
1. Review multiple business opportunities
It’s helpful to review multiple opportunities of businesses for sale, so that you can compare and contrast the companies. Do a search on business-for-sale websites such as BizBuySell and BizQuest, and consider using a business broker to bring you opportunities. Business brokers in your area can be found on the same business-for-sale websites you are already searching.
2. Do due diligence
The most important thing you need to do is thorough due diligence on the business you are hoping to buy. Books have been written on due diligence, but here are some of the key areas:
Review past financial statements and tax returns, especially monthly financials to spot trends. Have sales been going up or down recently? How profitable is the business?
Review assets that come with the business
Review any debt or other liabilities of the business
3. Decide on a type of business to buy
Determine what type of business is ideal for your situation. A brick-and-mortar business or an online business? A franchise? What personal time commitment can you make to run the business—full-time or part-time? Ideally, you will want to buy a company with a business you know something about to avoid the problem of “you don’t know what you don’t know.”
4. Prepare a good term sheet or letter of intent
Before you get into the complexities and costs of preparing a definitive purchase agreement, you will want to prepare and get the seller to sign a letter of intent or term sheet to spell out the key terms of the deal and make sure everyone is on the same page. A letter of intent shows that you are serious about doing a deal. Here are key terms to include in such a document:
Purchase price. All cash? Part cash and the rest payable in installments? Seller financing through a promissory note? Adjustments to price based on account receivables collected or working capital at closing? Escrow of some of the cash in case of breach of reps and warranties by the seller? Understand that the price and terms are almost always negotiable.
Structure of deal: asset or stock purchase?
Exclusivity/no shop period for buyer to finish due diligence
Key conditions to closing
Timing of deal
Any continued involvement or employment of selling owner to ensure a smooth transition
Non-compete by selling owner so he or she doesn’t set up a new competing business
Confidentiality obligation of seller
Access to employees and books and records during exclusivity period
By systemically and carefully taking these factors into account, you will significantly increase your chances of closing a successful small business acquisition.