An insight report published by BizBuySell, an online marketplace you can use to buy a business, found that there were more businesses bought and sold in 2016 than any other time in its history, 7842 to be exact. This number is bound to rise as the entrepreneurial fever keeps spreading. Moreover, the decision to buy a business has several advantages over the choice of starting a company from scratch.
When buying a company, you are actually purchasing:
- An entity that already has a customer base;
- A proven track record;
- A stable group of employees.
As a result, anyone affiliated to the business world, or aspires to eventually, needs to know what it takes to both buy a company. What follows is a brief step by step guide that details everything you need to know to buy a company.
10 Steps You Should Take When You Buy a Business
1. Know Thyself
Before you start looking for a company to buy, you need to figure out what you’re looking for. So, first find the answer to these question.
- Which industries would you like to delve in?
- How big is the company you’re looking for? (The answer to this question is closely related to how much money you’re planning to invest)
- Where would you like the company to be? After all, geographic location plays a huge factor.
- What type of lifestyle do you prefer? It goes without saying that buying a new company will drastically alter your lifestyle. Therefore, you should consider what you want your new life to look like.
2. Scouting for the Perfect Business
Armed with your criteria, you should start looking for the business that suits your needs. There are several avenues for you to explore.
- Start by asking friends and family. They’re bound to know someone who wants to sell.
- Business contacts are also a viable route to take.
- Some local newspapers will post ads for businesses wanting to sell in their Business opportunities and Businesses for Sale sections.
- Conversely, you could run an ad in a newspaper, where you express your desire to buy a business.
- Investigate business selling platforms like BizBuySell. Many of them are bound to have good deals.
3. Reach Out to a Business Broker
Business brokers can act as excellent intermediaries when you want to buy a business. Additionally, they can help you with the pre-screening process along with the negotiation process and the ensuing paperwork.
4. Perform a Preliminary Investigation
This will help you know if you want to get serious about a specific purchase. So before you start thinking more about the company, you need to ask around to make sure whether this company is truly worth your time. Here are a few questions you should find the answer to.
- Why is the owner selling his business?
- How does the general public perceive the industry and the business?
- What do the forecasts for the company and the industry look like?
- How much of the market share does the business control?
5. Form an Acquisition Team
Once you’ve made a preliminary choice, you’ll need to perform your due diligence. This is where a team of specialists with the prerequisite experience can come in very handy.
A bare-bones team will be constituted of an accountant and a lawyer. Later down the road, they can help you identify the fair market value of the company and compare it to the seller’s asking price.
6. Perform an In-Depth Analysis
Now, it’s time for you to get into the gritty details of the company. You and your team need to scrutinize the following documents.
- The organizational chart;
- Copies of contracts and all legal documents;
- Tax returns for the past five years;
- Financial statements for the past five years (which usually include the cash flow statement, the income statement, and the balance sheet);
- The financial projections for the next three years.
7. Make the Deal You Want
Is everything as it should be? Are all the company’s affairs in order? If so, then it’s time to structure the deal. This includes agreeing on a price, on a method and timing of payment, and on the nature of the purchase.
- A major part of agreeing on the price is determining the fair market value. There are numerous ways to do this. But the gist of it is that you need the financial statements, for each and every method. Bear in mind that the more prepared you are, the more leverage you’ll have.
- When paying the seller, you need to figure out how you are going to do that. You already need to know where you are going to get the money. These arrangements including whether you’ll pay the seller over installments or you’ll pay everything upfront. Should you place a deposit, how much is it?
- When it comes to the nature of the purchase, there are two ways it can go, each with its own pros and cons. You can either purchase the assets of the company or purchase the shares of the company.
8. Get the Money You Need
Luckily, finding finances for you to buy a business is not an issue. Most investors and banks are more comfortable pouring their money into a company with a track record instead of a small risky startup. As a matter of fact, you have payment options that can facilitate matters for you without the introduction of foreign capital. Here are a few sources of finance available at your disposal:
- Traditional lenders, such as banks.
- Angel investors or venture capitalists.
- Another partner equally interested in the company you’re considering. You can partner with him.
- Seller financing. The seller himself could agree to finance you. In return, you can pay him in installments, which will include the original capital plus interest.
- Leasing the company, with an option to buy. This option allows you to make use of the company, without having to pay a large amount of money upfront.
- Creating employee stock options. By selling the employees non-voting shares, you can still retain control of the company. You do this while buying it at a fraction of the cost.
9. Recheck the Final Contract
Hopefully, at this stage, you only need one signature to buy a business. However, just because you’re almost done doesn’t mean that you should take things easy.
Make sure that the contract is exactly everything you and the seller agreed to. It goes without saying that you should have your attorney present to advise you in those final moments.
10. Keep a Close Eye on the Transition
It’s important for you to remember that a transition of this magnitude can cause strong ripples all through the business. Thus, you would do well to prepare for this transition as early as possible. Do this by making sure that the owner is content with the direction you plan to take the company. After all, the owner will probably spend a considerable amount of time grooming you for the role you are about to fill.
Even in later times, the owner will be a valuable consultant. Besides the owner, you need to gauge how the employees are feeling about this change. They are your greatest asset. So you should confer with them when it comes to any big decisions.
To the Deal
The process required to buy a company is pretty straightforward, but it requires a lot of work. You just have to put in the hours. In the meanwhile, there are a few pitfalls you are better off avoiding. The first and most important one is not to be anxious. You can figure out the rest along the way.
For more information, there are several websites that explore this topic in much more detail. For example, there are pages devoted only to company valuation. Also, please leave a comment and tell us what you think.
The images are from depositphotos.com.