Buying a business is an exciting adventure as well as an investment in your future. Yet, as a first-time business buyer, it can also be fraught with anxiety and uncertainty. This is because most first-time business buyers go into the process of purchasing a business with little experience and knowledge about how the process will playout. Below is some information to reduce the stress and unease of your first transaction.
The preparation for buying a business can often be a long process but is necessary to ensure that the investment of your time and money is not wasted. You will need to address three different elements, personal preparedness includes determining the criteria you will use to select a business including industry, the role you would like to play, and your strengths and weaknesses. Financial preparedness includes knowing how much money you are able to invest and developing your funding sources. Additionally, you will need to put together your deal team to evaluate opportunities and to complete due diligence.
The common adage of “stick with what you know” applies quite well to buying and owning a business. It is vital that first-time business buyers invest in a business located in an industry they are familiar with or that uses a skill set that they have developed in their professional experience. When we purchased our first business (coffee distribution) we didn’t know about coffee perse, but we did have experience with industry management, brand development and equipment maintenance. Direct industry experience provides you with familiarity regarding how the business should operate and can make taking over leadership of day-to-day operations easier. It will also give you an edge during due diligence when you are evaluating the operations of the business if you know how businesses in that field typically operate.
Develop a Plan for Funding
Cash is king and if you don’t have the resources to buy a business then the process will be difficult if not impossible. As a rule of thumb for smaller businesses, you will need a minimum of one year of cashflow for a successful transaction. That means if the seller’s discretionary income is $60,000/ year, you will need $60,000 cash for a successful transaction. If you are borrowing money, you will typically need 20% of the purchase price. Some common funding sources include:
The bottom line is that you will need to have some cash to invest personally because anyone lending you money is going to want you to have some skin in the game.
Assemble your Team
Buying a business is a team sport. Even seasoned buyers have a deal team that includes a busines intermediary, an accountant, a lawyer, a banker/lender and their financial planner. Before going into the process of buying a business, you’ll need to make sure that you are doing your homework. Your goal will be to gather as much relevant information as possible about the industry, the specific business opportunity and the current economic environment. Once you have identified a target acquisition your due diligence will begin. You and your team will be investigating:
Your team will be instrumental in minimizing expensive oversights and errors.
Once you are prepared you are ready to start evaluating specific opportunities. Once you find a likely acquisition target you and your team will use the information that you have developed to vet the opportunity a begin the negotiation/purchase stage of the process. This process can be very involved. (The seller will have a deal team too). A great busines broker will help you get through the process.
The Liberty Group of Nevada, Inc., has a team of business brokers who are committed to making the process of buying or selling a business an informed and pleasurable experience, with no surprises. For more information or to speak with one of our brokers, please contact us today! http://thelibertygroupofnevada.com/contact-us/
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Burkinshaw, V. (2019, September 16). The 7 step selling process. Beyond Business Groups. https://beyondbusinessgroups.com.au/the-7-step-selling-process/.
Chen, J. (2021, March 4). Due Diligence. Investopedia. https://www.investopedia.com/terms/d/duediligence.asp.
Prakash, P. (2020, October 22). How to Buy an Existing Business. JustBusiness. https://www.justbusiness.com/starting-a-small-business/buying-an-existing-business.