Many people dream of owning a business someday, but building one from scratch can be difficult. As per the recent studies, its said that, every year, half a million businesses are sold to new owners. As millions of business owners begin to retire and sell their businesses, that number is expected to grow. If you’ve never bought a business before, but you’re interested in doing so, you are in the right place. In this article, we’ll discuss everything you need to know about buying a business and by the end of this blog, I’m going to share some top tips for buying a business for beginners.
- Finding the right business
Buying an existing business allows you to generate profits without having to get a business off the ground yourself. However, acquiring a business isn’t necessarily a walk in the park, it is very straightforward when you know how. And this blog is for people who’ve never bought a business before, here I’m going to lay out for you the essentials that you need to know so that you can buy a business successfully. The first thing to decide is: what type of business do you want to buy? Now I’ve got to say that the majority of the people who are thinking about buying a business currently, may not have a distinct answer to this question, but that’s okay I can help you to find a solution for that.
So deciding the type of business that you want to buy is important because that is going to inform how you look for those businesses and how you strike the deal. Now my advice to all those budding business enthusiasts is that, you should buy a business that you understand. No, mere understanding doesn’t work in the long run, the business needs to align with your passions, skillsets, or previous experience. This increases your chances of success. Not only that, you will also be able to understand current business challenges and opportunities and be able to better predict the future trends.
Here is a pro tip for you: if you already own a business, buy a business that’s similar or identical to yours, buy part of your supply chain, maybe buy part of your distribution chain. But if you want to get into business, and of course, buying a business is the fastest way to do that, then check for a business that you at least have some understanding of, maybe even from the point of view of a customer of that type of business. At the very least, buy a business that’s easy to learn so that as it grows, we can hire or find someone who can help you, who can run the business for you.
Now, coming back to the point; once you’ve identified the kind of business you’d like to acquire, you’ll need to start searching around for the right business to acquire. Now, here are few ways to find available businesses:
- Find businesses online: Websites such as Businessforsale, Axial, Businesssellcanada, Dealstream helps you to connect with small businesses which are up for sale. These sites allow you to filter businesses by price, industry, seller financing, location and other important factors.
- Hire a professional advisor: M&A advisors or business brokers can help you in finding the right business considering your requirements. They often have specialized knowledge in industries or locations, which further help buyers in taking the right decision.
- Networking: A much simpler way to find businesses that are up for sale is to join business meetups and industry conferences specifically hosted in your locality. In certain scenarios I have seen many business owners directly attending these workshops in order for them to either grow their business or sell it to the right buyer.
ANOTHER PRO TIP: When you are speaking to a business owner, for the very first time, keep this in your mind, you should not keep this as a very casual chat. I have seen so many new business buyers spending long hours in building rapport, building a relationship, becoming the seller’s friend, and then they actually forget that they need to get down to business at some point of time. So, I have a structured plan of how each conversation with the owner of a business should go. You need to prepare a set of questions, consider all those important things that you need to ask, pieces of information that you need to acquire in order to establish whether this is a business that you are actually interested in buying or not.
I have curated a set of questions considering these many years of experience and if you are interested to dive deeper into this, you can schedule a 1:1 session with me where we will be discussing about how to organize meetings with the seller.
- Key factors to Discuss
Before winding up the meeting with the seller, as mentioned earlier, you need to clarify and note down certain important things about the business. This includes the very important factor, which is of course, the price.
Now, to make the process simple, what you should be doing is finding out what the seller wants, and then using a list of negotiating techniques to reduce that price down. But remember, it’s not just about the price, it’s also about how you pay the price. In other words, the terms. So, what you need to be doing is negotiating a price and the terms. How are you going to pay the price, will that work for the seller, obviously you need to check on this, otherwise they won’t sell the business to you, but also check whether if it works for you as the buyer. Because unless it works for you, there is no point in further discussing about the proposal with the seller.
Now we need to decide how we are going to buy the business. Are we going to buy the assets or are we going to buy the shares?
To my surprise, many people who’ve been in business for a very long time still don’t know the difference. I am planning to host a webinar on this topic anytime in the next few weeks, subscribe to my newsletter for future notifications. Anyway, let me very briefly explain the difference to you now. If you’re buying the company, then you are buying the shares in the company, which means that you’re going to buy each and everything. You’re going to buy the assets, you’re going to buy the liabilities, which further means, you’re going to buy the good things, the bad things, and the downright worst things. So, you get absolutely everything. The contract is longer, the negotiations obviously will take longer, everything just takes longer because you’re also buying liabilities and that’s where your due diligence will focus more on.
However, if you buy the assets of the business and considering my experience, I’d recommend anyone buying a business with under one million of annual sales to definitely buy the assets. If you’re buying the assets of the business, what happens is that you’re leaving all the liabilities behind with the company, you’re just buying only the assets out of the company, which means that you get those things that you actually want and leave behind the things that you don’t want.
Now, as per certain studies the majority of the acquisitions happening are asset sale, because everyone prefers a faster sale as this is not asking for much due diligence when compared to the share sale. As the buyer knows exactly what he is going to get, it is far simpler and everyone gets the result that they want. So, understanding the difference between buying assets and buying shares is absolutely critical. It’s really important to have a plan when you’re buying a business. The people who take the longest time buying a business, sometimes running into 2 years, are typically the people who don’t really know what they are doing, they are making it up as they go along, they are using a trial-and-error method to get the deal done. Always remember, TRIAL and ERROR always cost more money. So, if you’ve got a very, very clear plan, we can get this deal over the line in a matter of weeks, especially if it’s an asset purchase as it always takes a little bit lesser time when compared with a share deal.
As a pro tip, let me tell you this; you definitely need to have a proper team. Before taking this huge decision, especially since it’s involving a lot of money, you need to have a good coach to guide you, a right accountant, not just any accountant, but the right and best accountant, a right lawyer, and a best M&A advisor. This is going to make your life so much easier.
Now, I do have few of my clients who already have full-time jobs but still have time to buy a business, because they have other people doing the heavy lifting for them. I always say that you can let other people do 80% of the work. This is going to keep your mind fresh as you need to make sure that you are not getting tired before reaching the final leap of acquiring the business ownership.
- Understand the seller’s motivation
Before buying a business, you should understand the actual motivation behind the sale. An owner may want to sell due to many reasons, may be to retire or accommodate a lifestyle change, or even for a business transition. However, some owners put their businesses up for sale after a major setback, such as an expensive lawsuit or public scandal. If it’s the latter, you are going to face a lot of issues getting the business up and running.
In addition to asking the owner about their decision to sell, check other sources as well, maybe ask the existing customers, employees, or neighbouring businesses how the business has been running in the last few months. This will give you a comprehensive view of the business’s perception.
Let me tell you this, while no business is perfect, certain problems require more capital, creativity, or sweat to fix. Whether or not these problems are worth solving will depend on your capacity as a new business owner. But, before taking a big decision, it’s your responsibility as a buyer to check the business at its 360-degree level.
- Evaluate the business earnings
Once you’ve determined whether a business is worth your time, you’ll need to decide whether its purchase price is actually right or not.
My suggestion is that it’s always best to consult an advisor as they are the right people to help you with this highlighting those actual reasons.
Now, coming back to the major ways on how to value a business based on its earnings, future projections, and current balance sheets. Here are three of the most common business valuation methods:
- Asset-based valuation
This involves calculating the total fair market value of a company’s assets, including real estate, furniture, equipment, and intangible assets like patents, goodwill and customer lists. This total is then reduced by the company’s total liabilities, such as mortgage payments, equipment loans, and lines of credit, to determine its value.
Asset-based valuation is appropriate and it makes sense only when the primary source of income production is the company’s assets, as seen in businesses like rental companies.
- Market-based valuation
The method entails examining recent sales of similar companies to establish a price based on comparable transactions within the industry. This method is applicable only in established industries where comparable sales data is available. For niche businesses, market-based valuation may not be feasible as it doesn’t give you proper clarity.
- Income-based valuation
Now coming to the last method, this estimates a business’s future cash flow over a specified period and factors in the current value of those projected earnings. This type of valuation is most suitable for profitable companies capable of reliably forecasting the future earnings.
Unfortunately, I won’t be able to pick the best method from the above mentioned three, as it all depends on the type of business that you are going to acquire. So, you need to have a proper understanding about the business, its nature and the market.
- The Importance of a Letter of Intent
Buying a business involves careful planning and strategic steps to ensure a successful acquisition. One critical component of this process is issuing a letter of intent (LOI). Here’s why this document is crucial and how it can benefit you as a prospective buyer.
Before giving you a clarity on why it’s important, I think I need to explain What is a Letter of Intent (LOI)?
A letter of intent is a formal document that outlines your interest in purchasing a particular business. It serves as a preliminary agreement between the buyer and the seller, setting the stage for further negotiations and due diligence.
Why Issue a Letter of Intent?
- Expressing Serious Interest: By issuing an LOI, you demonstrate your serious intent to purchase the business. This commitment gives you a strategic advantage, as sellers are more inclined to engage with many buyers who have shown genuine interest. So let me tell you this, if you literally serious about buying that business, then you need to send the LOI to the seller without wasting much time as he might receive requests from other buyers as well.
- Right of Refusal: One significant advantage of an LOI is the “right of refusal.” This clause grants you priority in buying the business should another buyer come forward during negotiations. It provides a level of security, ensuring that your efforts in pursuing the acquisition are protected.
To make it easier for you, let me give you a clarity about the key elements of LOI; Purchase Price and Terms, Due Diligence Period, and Confidentiality and Exclusivity.
To summarise, issuing a letter of intent is a critical step in the process of buying a business. It demonstrates your commitment, secures your position as a potential buyer, and facilitates the necessary due diligence to assess the business’s viability and value. By understanding the importance of an LOI and effectively utilizing it in negotiations, you can navigate the complexities of business acquisition with confidence and clarity.
- Due Diligence
Before finalizing the purchase of a business, conducting due diligence is essential.
So, what is due diligence?
This process actually involves gathering and reviewing critical financial and legal documents to ensure you make an informed and right decision about buying the business. Now, let me give you a detailed glimpse on what to consider during due diligence and why it matters?
Understanding the financial health and operational side of a business is crucial before making any investment. It not only allows you to assess whether the business aligns with your goals but also, it represents a sound investment opportunity.
Apart from checking the major features of the business, it’s also important to do a financial audit by a certified and authorised person to ensure the accuracy and reliability.
To be more precise, conducting thorough due diligence helps mitigate risks, uncover potential issues, and verify the business’s financial health and legal compliance. By investing time and effort in due diligence, you are indeed positioning yourself for a successful acquisition and long-term business success.
- Close the deal
Now since we have done all the steps, we are good to go from here!
Embrace this journey with confidence, knowing that each step taken brings you closer to achieving your vision for the business and creating opportunities for growth and prosperity in the years to come.
Acquiring a business presents an exciting opportunity for all the young business aspirants who are badly seeking to enter the entrepreneurial world without building from the ground up. However, there is a need for the prospective business owners to dedicate their efforts to overcome certain challenges before enjoying the rewards of ownership. Conducting comprehensive due diligence, clearly assessing the financial stability of the business, and securing adequate funding are essential steps in this rewarding yet demanding journey. These preparations lay the foundation for successful business ownership and future growth prospects.
Now since we are pointing and aiming towards that completion date, as we’re going get closer and closer, there are going to be some bumps in the road. So let me tell you this, you need to be a determined individual and you have to be resilient because some days you might feel like the deal is off. But if you know what you’re doing and you are confident in yourself, you can bring that deal back on track and get it over the line. According to me, if you have a taken a decision to buy a business and reached this much far with that decision, then the deal is on and it is going to close today or tomorrow.
So, congratulations, you’ve bought your first business.
Now you might think that, since you’ve bought the business, all the work has been done. NO, now there is an important thing we need to do.
We have to take over the business in its full form. To make the process easier, I have created a checklist where it gives you a clarity on the major transaction requirements. Get that ready with you. so that, the moment you own the business, you can have all that information, for example, all the passwords, these are the things that previous owner forget to give you once they’ve sold the business.
Now, since you have taken over the business and also, you have hired someone and he is helping you in running the business and the profits of the business are all going to be yours, I think you’re extremely happy for it and you might think of doing it again and again, buy more business, own it and celebrate the success.
So how do you feel right now? Do you feel excited about the possibility of buying a business?
If so, why don’t you spend an hour with me where I will educate and train you up, and give you all the knowledge that you need, to confidently go out and buy a business? I’ll also teach you all the ways where you can buy a business, and not only that I can teach you on how to make it successful, how to build it and how to sell it for the right price at the right time. So, what are you waiting for, grab a cup of coffee and book your slots with me!
Disclaimer:
Any information provided here is for information purpose only. It should not be considered as legal, accounting or tax advice. Prior to making any decisions, it’s the responsibility of the reader to consult their accountant and lawyer. N3 Business Advisors and its representatives disclaims any responsibilities for actions taken by the reader without appropriate professional consultation.
