How to Buy a Business

If you are looking outside your immediate area, you can still inquire of these people because professionals often talk cross-country about things and may be able to put you in contact with professionals in your designated location.

If all these contacts fail to identify a business for sale that you would be interested in buying, your next recourse is to work through "Business Brokers." These are people who function exactly like Realtors, except they list and sell businesses. The seller pays their fee, so you do not have to worry about that…except they usually charge a very high fee and the seller always factors that into the asking price for the business. They will also try to tell you how to buy a business…that is why it is always best to work through professionals you know if at all possible.

All business brokers today work through the Internet, so the best place to find them is by searching the Internet for the type of business you want to buy and you will receive a number of potential brokers to contact. The Internet will also provide lists of businesses for sale everywhere, so you can pick out either a broker to work with, or a business to pursue. Either way you will end up working through a broker.

The broker will often require you to sign a non-disclosure agreement, but they will send you substantial information on any business you are interested in, and answer most of your questions to this point. The broker will also work as an intermediary between buyer and seller, and will arrange for you to visit the business.

Meet the Owner and Visit the Business

This is the most important lesson on how to buy a business…meet and greet. The broker will take you to meet the seller and view the business. This is where you need to ask your most penetrating questions of the seller. This will be your primary opportunity to decide if you want to continue pursuing buying the business, or should you walk away?

Obviously, you will have reviewed P & L Statements and any other pertinent operating documents before, but this is the time to ask all your pertinent and penetrating questions. If there are no, or poorly maintained, documents, you will need to request additional information, or perhaps walk away from the deal. This is where you do not want emotion to enter into your decision-making. Buying a business based on emotion is NOT how to buy a business.

Assuming you receive the information you need and are still interested in pursuing buying the business, the next task for you, as the buyer, is to determine what a fair market value is for the business.

Determine The Price You Are Willing to Pay For The Business

The first thing you need to do is be clear on whether you are looking at a stock sale of the business, or an asset sale. If the business is a "C" Corp, the seller will be asking for a stock sale to avoid double taxation. As a buyer you should stick to an asset sale, because you do not want to assume any lingering liabilities that might dog the business. This could be a sticking point in your negotiations, but although there can be a special case for buying stock; you should most likely stick with your asset purchase requirement.

A fair market value is often described as the value that would likely be reached by a willing seller, and a willing buyer. However, sellers usually do not want to work with "market" values because they almost always believe their business has "premium" factors that make their business more valuable. You should also try to determine just how "willing" the seller is when you do your meet and greet. In any case you need to watch out for premium add-ons to fair market value by the seller.

By the same token, you obviously will want to pay less than market value. But, it is still a good idea to do the best job you can of determining the fair market value, because that gives you a benchmark to negotiate from. This would be a good place to seek some advice from an outside advisor that has experience in how to buy a business.

Actually, coming up with a value is no simple task. There are many methods for approaching this process, and they all have some merit for specific cases and types of business. Because the topic is so broad I have written an entire report on the subject, titled Business Valuation Methods and you can access this report here.here.

Negotiate Price and Terms with the Owner

After you have done your value analysis (hopefully with some professional help), you need to sit down with the seller (and most likely, the broker), and make an offer. The broker will prefer to be the intermediary, just like in a real estate negotiation, but I suggest you meet face to face with the seller so you can explain where and how you arrived at your valuation of the business. Most often, the seller has not done the detailed processing of the value of the business that you have. The broker usually has not either (even though they should have).

Obviously the seller and the broker will want to talk things over—or reject your offer outright. At this point you need to be prepared to walk away. If the seller is flexible in their price, the broker will contact you later with a counter-offer. If not, and you believe the price is too high…walk away for good and start looking for something else. Sometimes, NOT buying the business is the most important thing to remember when learning how to buy a business.

If you and the seller can come to agreement on price and terms, an agreement in principle (different brokers may use different terms) will be signed by both parties, contingent upon your "due diligence"…and now your work really begins.

Perform Due Diligence

Due diligence is the second most important lesson on how to buy a business, and is such a broad topic that I have prepared an entire report for it. You can access the report HERE. Just make sure you do not take this step lightly—you could buy more trouble than you bargained for if you don't do this process thoroughly. So get some help if you need it, but don't skimp on your due diligence. Check everything. This is your last opportunity to step away from the deal and you sure don't want to buy a "pig in a poke."

Here is the link to the due diligence report again.

Close The Sale

Assuming you found no major problems going through your due diligence, or at least none that the seller would not take care of, the next step is to close on the deal. This is usually done in an escrow or attorney's office, and is where money changes hands and you receive the keys to your new business—whether actual or virtual.

Have Fun!

The business is now all yours and all you have to do is run it and make it successful. Hopefully, you can do this and have some fun and enjoyment along the way.

And that is how to buy a business! Sounds simple, but depending on the size of the business, it can get complicated along the way, that is why you would be wise to involve professionals as you get into the process.

Any business that has an inventory that must be figured into the transaction creates a whole new set of problems that must be dealt with during the negotiation and due diligence process. This factor has ruined more sales deals than any other single thing. That is why I have prepared an entire report on Small Business Inventory Management for both the seller and buyer to study. As the buyer, you do not want to enter into the negotiating process of buying a small business without reading this report first.