Being financially independent is such a melodious phrase that recalls sweet dreams about wealthy life pleasures. Everyone thirsts for this, to be materially satisfied and independent, to be able to manage their own schedule, and to work as hard as possible for the prosperity of their business.
Possessing your own gainful business is great but what about cons?
Indeed, we hear endless stories of brilliant successes from newbies in the business world, and what about the opposite side of reality? the fact that the loss rate is much higher. According to the U.S. Bureau of Labor Statistics (BLS), approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. Only 25% of new businesses make it to 15 years or more. Apparently, it’s not simple to build a successful business from scratch, so what alternatives are available to choose from? Can we try to buy an existing and operating business with steady cash flows and a certain experience? Undoubtedly yes! This decision can save us from some disgusting probability of failures and bring more stability. Buying a business that is already operational will fetch many benefits, including an already established product or service, well-trained staff who master the business, and enough success to have kept the company afloat for a period of time. However, we have a difficult routine to go through in order to make a good business acquisition in the right order of things. Once we have decided to buy an existing business it’s indispensable to plan meticulously all our future steps to avoid the crash of our dreams)
Let’s muster up the all necessary steps related to the obtention of a business.
- Step 1: Choose the sphere of the business
- Step 2: Search a business to purchase
- Step 3: Estimate the value of the business
- Step 4: Get a good price
- Step 5: Submit a Letter of Intent (LOI)
- Step 6: Fulfill due diligence
- Step 7: Get financed
- Step 8: Close the deal
Step 1: Choose the sphere of the business
Regardless of the rentability of the business, you want to acquire you need to master the activities area you want to jump into, otherwise, you may shatter all the business and end up with bankruptcy. Pick a business that you know all the information about and love, yes it is not a mistake, in order to be successful you have to love your business activities and the ways in which it solves certain problems for your customers. The main goal of a successful business is to meet the needs of customers in a prudent manner, a business that loves and cares about its own customers is bound to succeed.
Step 2: Find a business to purchase
The first step is not just finding an available business, but finding one that’s worth buying. There are plenty of businesses for sale. But ones with the financial promise that actually holds your interest aren’t so common. You need to find a business that’s primed for profitability and isn’t hiding any skeletons.
When you’re ready to buy a business you should analyze these factors:
Primary concentrate your attention on the Roi or Return on investment which is typically calculated by taking the actual or estimated income from a project and subtracting the actual or estimated costs. That number is the total profit that a project has generated, or is expected to generate. That number is then divided by the costs.
- Positive cashflow
- Diversity of customers (no one client should be more than 20% of revenue, roughly)
- A long-term growth plan
- Future-oriented business
- A business that you could see yourself enjoying
The amplify your search, the more likely you are to find a gem. Don’t just stop looking when you’ve found a business that ticks all the boxes. Look in as many places as possible before you start ranking your favorites.
How can we perform the search of an existing business?
Take profit from online broker sites like https://www.businessesforsale.com
Where you can research various categories of businesses and explore their characteristics.
- Local business brokers
- Local attorneys
- Local CPAs
- Existing small business owners in your ideal industry
Step 3: Get a good price
Being chosen the desired business in parallel estimated its real market value it’s time to proceed with price negotiations. If you are convinced that the asking price does not match the actual market price, try to make a documented case and underbid the starting price.
Step 4: Submit a Letter of Intent (LOI)
Once you have a general idea of the terms and structure of the business purchase, you’ll submit a letter of intent. This is a letter that outlines everything you’ve previously negotiated, including the purchase price, and states your intent to buy the business. This is a non-binding agreement that just furthers the business acquisition process. It shows the seller you’re ready to commit and move forward in the process.
The letter of intent will also typically give you exclusive rights to buy the business for a time period, usually up to 90 days. This means that you’ll be the only one that can purchase the business during the time frame, and the seller has to act in good faith to close your transaction if you’re able to meet the terms of your LOI.
Step 5: Complete due diligence
When the LOI is signed by you and the seller, then you’ll get access to more information about the business. Typically, when you first show interest in purchasing a business you’ll get a basic overview of how the business is performing. But when you enter due diligence, you’ll get access to any financial or legal information that you feel is needed to close the transaction.
We suggest making sure you review the following documents, at a minimum, before you close:
- Organizational documents for the business (e.g. incorporation docs, certificates of good standing, business licenses, etc.)
- Previous 3 years of business tax returns
- Current year income statements, balance sheets, and cash flow statements
- Revenue broke out by the customer for the last 3 years
- Information on existing business debt
- Customer lists with proprietary information blocked out as necessary
- Existing contracts—can these be assigned to the new owner?
- Commercial lease or other property documents
- Rent rolls if the property has tenants
- Uniform franchise disclosure document (if the business is a franchise)
- Employee and manager information
- Marketing and advertising materials
- Legal records for pending litigation, if any
Step 6: Obtain financing
Parallelly with other steps, you should take care of the financial phase of your deal. Most businesses are purchased with a combination of debt and equity, meaning you’ll come up with part of the purchase price and the rest through a loan. Otherwise, you can completely cover your transaction by getting a business acquisition loan. A business acquisition loan is a small business loan that’s designed for financing the purchase of an existing business or franchise. The amount that can be borrowed and the qualification requirements vary by lender.
Many financial institutions prefer to furnish loans for business acquisitions solely if they’re guaranteed by the Small Business Administration (SBA). There are various SBA-backed loans, but the most common is the 7(a) loan. It’s available in amounts of up to $5 million with terms up to 25 years.
The SBA limits the rate that lenders can charge for an SBA 7(a) loan.
Therefore, the rate on an SBA 7(a) loan tends to be less than that on a conventional loan. Financial institutions may favor SBA-backed loans because the SBA guarantees all or part of the loan if the borrower were to default on the terms of the loan. This enables financial institutions to reduce their risk and receive incentives for making what normally might be considered risky loans.
SBA loan eligibility requirements include being a small business located in the United States with a demonstrated need for the loan. The business must operate in an eligible industry and be owned by U.S. citizens. In addition, loan applicants generally must have:
- Good personal and business credit scores
- Sufficient cash flow (both business and personal) to can make the required monthly loan payments
- No recent bankruptcies, foreclosures, or tax liens
- At least 10% down payment and adequate collateral
- A prospective business plan and financial projections
Industry experience isn’t required, but it’s preferred. Firsthand knowledge about the industry in which the business will be involved can provide prospective lenders with greater confidence in making the business acquisition loan. More information on SBA loans can be found at https://www.sba.gov/.
7. Close the deal
After you passed all the aforementioned steps it’s time to close the transaction. This is where you’ll draft a final purchase agreement and agree to every term of the deal with the seller.
You should always hire a lawyer to help you negotiate this part of the process. At the very least, they can review the purchase agreement to make sure you’re getting what you negotiated through the contract.
After both parties sign the purchase agreement, you’re ready to choose a closing date and have your lender fund the purchase. Your funds will typically go into escrow (meaning a bank or law firm will hold the money for sake keeping) on the day you’re supposed to close until all documentation is final. Once both parties give their approval then the money will be given to the seller and you’ll own the business outright.
Congratulation, you acquired your new business. It’s time to muster up all your energy and to take up his further development.