1) See your Commercial Banker and find out how much money you can borrow then add this to the cash you already have to establish how much you can afford to invest in a business. Most people visit their local branch and speak to the first Banker they are introduced and assume that they will have no issues in getting financing. A good commercial Banker will be able to point you in the right direction and educate you on how business financing works and what is the maximum amount you might be able to borrow.
2) Meet with your accountant to tell them that you are looking to buy a business and ask them to review your structure (company, partnership or trust and taxation set up). Advise them that when you find the right business that they will be required for due diligence.
3) Establish what sort of business that you would like to buy. What are your interest? What are you good at? What skills do you have? Remember a business is a lifestyle change therefore you must buy something that you are going to enjoy. Four basic questions to ask are:
a. Is the business profitable?
b. Can the business generate sufficient cash to pay down the loan?
c. After paying the loan payments, can the business afford to pay me a wage to support my family?
d. What will be the return on my cash investment?
4) Know your income requirements and financial needs. If you need to earn $100,000 a year from a business to live comfortably and meet your financial commitments then this forms part of your criteria. Generally businesses net between 10 to 20% of their gross revenue, therefore look for businesses in that price range based on your income required to support your family.
5) So you know how much you can afford, what would interest you and your income requirements; now “start looking”. You need to learn what businesses meet your criteria are worth. You need to speak to business brokers, get information on businesses you see advertised and get to know what their real value is. This will take time however, it is time well spent.
6) Be prepared as you may not get everything you want for the price that you can afford. You may need to compromise which may mean prioritizing your requirements or criteria. There is no such thing as a “perfect business”. If you are looking for a perfect business, don’t buy one – start your own!
7) You have now looked at lots of businesses, spoke to many business brokers and received advice from everyone including the cab driver and your daughters’ gym instructor. By now if you are not totally confused or have given up you know exactly what you want, what it is worth and what is available.
8) You find a business that you believe is right for you. Do you place an offer right away or carry out due diligence before you make an offer? Neither answer is right or wrong. If you make an offer first, you are essentially entering into a contract with the seller to purchase the business and under the standard terms and conditions of the offer to purchase you must have sufficient time to do due diligence. In doing so, you have effectively taken the business off the market so that no one else can look at it and make a competing offer, while you complete your homework and be sure that all of the information is correct and that this business is exactly what you want. You are only fully committed to the offer to purchase once all of the conditions of sale have been met. By taking this step, you need to engage a lawyer to advise you on the contract and complete the legal due diligence and your accountant to complete financial due diligence. If you carry out due diligence before entering into a contract you may save on legal and accounting fees however, if someone else makes an offer in the meantime then you have effectively wasted your time and money. My advice, if you find something you believe is good and you like it then make the offer, as good businesses are always in demand and if you like it then you can be sure others do too. Also, to do a thorough due diligence most sellers will only give out detailed financial information once they have received a formal offer to purchase.
9) You have now made an offer to purchase a business. How exciting! Make sure that you have a good commercial lawyer that is experienced and understands business sale contracts as you need this person to guide you through the sale process and advise you at each step, beginning with the offer to purchase. Your accountant will ensure your structure is right and do a thorough financial due diligence. Your lawyer will ensure that contract deadlines are met for finance, due diligence and the receipt of information as well as transfer of assets, intellectual property and payment of encumbrances. When you buy a business, legal ownership is extremely important and requires the preparation and signing of a lot of necessary paperwork.
10) The business stacks up, passes due diligence, meets your criteria and you are moving on to settlement. Now you get very excited! You are one final step away from owning a business and making a lifestyle change. For the most part your lawyer will prepare everything for final closing and instruct you on what you need to do. You need to get your own house in order so that you are prepared to commence running this business the day of closing. The seller usually stays on for some period of time for transition and training.
There are no short cuts to buying the right business. Jumping any of these steps will only cause you unnecessary stress, expense and ultimately cost you more time. All throughout the buying process, the business broker is there to help you, chase up information and then at the contract stage manage the process so that everyone is happy and mutually beneficial outcome is achieved by all parties.