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Why buy an existing business?

Its a good question with a lot of good answers. Most Buyers want the cash flow. An existing business has customers, products and services, suppliers, employees and the necessary infrastructure to generate cash flow. Sometimes, its the opportunity to better utilize your professional skills and create a lifestyle that corporate bureaucracy simply won't permit. Some Buyers are expanding their existing business by buying a similar or regional company. Maybe its the opportunity live and work in a community that offers a better life for your family. Whatever the question, its good to ask.

A few points to consider when buying a business:

Start with the obvious...Be Prepared!
What type of entity will you establish to execute the purchase (i.e. Corporation, Limited Liability Company, Partnership, etc...)? What type of entity structure should you establish if unique financing solutions are needed such as the use of 401(k) funds created from a previous employment? Knowing the answer to these and other questions (in advance) can make the acquisition process a lot easier. Many buyers utilitze a Structuring Specialist or "Transaction CPA" to assist with these complex issues. In addition to good planning it tells sellers you are serious about buying a business.

An Overview:
Get as much general information as you can. Determine if the products and services are of interest to you, the general location is somewhere you desire and the cash flow after debt service is at a level you are comfortable with. Look at the down payment requirement or financing options. If the down payment is not close to an amount your willing to invest its probably best to look at a different business and save everyone a lot of time.

Detailed Information:
If the general information presented peaks your interest, ask for more detailed data. In most cases you will be asked to sign a confidentiality agreement and in some asked to provide evidence of financial sufficiency. Do not be offended by this. It shows the seller you are a serious buyer and who knows, the seller may also become your banker. Look at the historical revenue stream and cash flow. Is the business growing? If not, ask why. Is the owner suffering from burnout and just coasting? Was there an extraordinary event that affected revenue? Determine how much of the transaction the seller is willing to carry. A seller who offers some form of financing has confidence in the business and an incentive to help it succeed. If there is no seller financing, ask why?

Lets take a look:
During your visit to the business take time to know the owner. Dont worry about negotiating a price. That could create tension and your Broker or Intermediary will handle this anyway. Determine if the seller takes pride in the operations and service given to customers. Find out if there is any technical expertise or licensing you would need to successfully run the business. If possible, find out if there is a way to increase or expand the business and what would be involved. Is the staff trained and loyal? Will the owner stay with the business for a specified period to assist with transition? Do not be afraid to ask about both the positives AND negatives. Most sellers (especially those who offer financing) will want you to be aware of the details involved in managing the business so that you will succeed. Be sure to look at the furniture, fixtures and equipment to determine the general condition. Ask if any Capital Expenditures are needed.

Analyze the data:
Beware of paralysis by analysis. Consider all the information you now have but keep in mind that there is no such thing as a perfect business. The most important part of an acquisition is knowing what the challenges are and having a plan to manage them. Give close analysis to the cash flow of the business looking at the historical trends and try to determine the likelihood that it will continue. Calculate the annual debt service to see what is left over for new owner discretionary spending. If you feel more comfortable seeking professional advice then do so. It might be a good idea to consider the strengths of the business and weigh them against any changes you are considering. And finally, ask yourself if you're trying to find a reason to buy it or eliminate it from consideration. An honest answer to that question is probably the most revealing research you can do.

Make an Offer:
A good offer to purchase should cover many issues, not just price and terms and should be in writing. An oral offer is never taken seriously. Earnest money deposits also help demonstrate commitment to the sale and the seller is usually more receptive. There are many parts to an offer besides the most obvious such as parties to the offer, description and price. First, base your offer on something substantial rather than guessing what the seller might accept. It could be discretionary cash flow after debt service does not meet your requirements. If so, consider offering different terms that might increase it to the point that is does. When your offer is based on sound financial conclusions both parties benefit and the negotiations remain cordial. Remember, the seller may also be your banker and you may need technical assistance during transition. Always consider placing a contingency in the offer stating it is subject to review of the records of the business and shall not reveal a material change, especially on larger businesses. Other important issues include if desired: covenant not to compete, inventory, accounts payable, accounts receivable, consulting agreements and any other considerations you feel are important. Remember, the main purpose if to find out if the seller will accept your terms or counter with a different proposal.

Due Diligence:
Due Diligence is the process by which you (the buyer) reviews the books, records, assets and liabilities of the business and can this begins only after a definitive offer has been agreed to in writing by both parties. This is the time you should verify that everything being purchased is as represented by the seller. For most businesses, it can be a relatively simple and rapid process. It can take longer when bank or other commercial financing is used. If you have considered outside advisors this may be a good time to get them involved.

Closing the Transaction:
The actual closing can be relatively simply provided all contingencies have been satisfied. Its a good idea to have an attorney review the documents on your behalf before the closing date to avoid last minute delays.

A Final Thought:
Buying a small business is a major investment for most and thorough consideration and analysis is always in everyones best interest. Probably the most important aspect of small business acquisitions is the realization that tough, brutal, negotiations are for the most part, a thing of the past. With seller financing being such a big part of todays transactions, buyers and sellers work more closely together now than ever before to ensure the new owner succeeds. The goodwill associated with the seller must be transferred to the buyer and thoughtful, honest negotiations help deliver clear title!

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