Buying and/or selling a business means an investment in your future. It is unlike any other investment strategy available, and thus can be either the most profitable, or expensive experience you'll ever make. It is necessary to be prepared before making any business decision. Therefore, I will do my best to detail exactly what I mean by this below..
Before you get started, and even while you are running your business, it is important to have support. Like a coach drafting his/her professional team during the off-season, you too must surround yourself with experts that will help you be successful in your business venture. These people you "draft" must be people you trust and that have proven track records of high levels of service in their areas of professional expertise. While you may not be working with any of them daily, it's important to establish relationships so you know who to turn to in order to keep the operations of the business running as smooth as possible. This could mean finding a good CPA, attorney, Business Broker, lender(s), etc etc.
With that said, I will continue assuming you have a particular industry or type of business in mind, and how much money you are willing to spend (available now). Being able to prove your financial ability prior to opening lines of communication between buyer and seller is very important.
With many small and medium size businesses, lending resources have become fewer and fewer due to our unprecedented market conditions. It is therefore important to keep that in consideration, and have a realistic attitude regarding leveraging into a deal as you move forward. Leverage can come in the forms of seller carry-back, bank loans, etc. With the combination of fewer and fewer lending institutions lending money, and their criteria for business loans getting more strict, the options buyers have when approaching the subject of buying a business are becoming fewer. It is actually becoming increasingly common for sellers to work with their buyers by carrying back a portion of the note (at typically around an 6-8% interest rate), allowing a buyer to purchase the business they would otherwise not be able to afford. Typically what I am seeing is at least a 50% cash down scenario with a contingency that the seller would be able to take the business back should the buyer default before the note is paid off. As a buyer and investor, it is important to try to leverage your money as much as possible. If the business you are interested in will qualify for a bank loan (must have great books), you should still be prepared to put at least 20-25% down.
Now that the money is in place, it is very important to work closely with your business broker to track down all the businesses that meet your search criteria, and also so that you can be sure you are provided with all the business information that would be necessary to review before you can determine what the right amount of your offer should be. You'll want to review at least 3 years of profit and loss statements (if available), balance sheets, tax returns, equipment lists, leases, contracts, pro formas etc etc. Once you have done your research, determining the right amount of money to offer is crucial. This is why working with an experience professional is becoming increasingly important. Different markets demand different valuation standards.
Even after presenting an offer to purchase, you should still have enough time to verify the accuracy of the information provided to you by the seller or their broker. This is called the due diligence process. If you are still happy with everything after that, congratulations! You will now be among the ranks of business owners. As I said earlier, it could be the most profitable investment you can make!
Matthew A. Davis
First Choice Business Brokers
The Worlds Authority in Business Sales