infoTECH Feature

October 22, 2020

5 Tips for Buying a Business

Buying a Business? You Need a Proactive Plan

It doesn’t matter the industry or location; buying a business is something that must be taken seriously and executed in a diplomatic fashion. Whether it’s a six-, seven-, or even eight-figure business, there are certain processes and systems that must be followed in order to achieve the desired result. Are you prepared?

5 Helpful Tips for Buyers

Buying a business requires an investment on multiple fronts. It commands money, time, and mental energy. And if you don’t fully commit to the process of buying a business the right way, you could end up making decisions that eventually come back to haunt you.

Whether it’s your first business or one in a deep portfolio of companies, you may find the following helpful in guiding your thought process and decision making.

  1. Ask Yourself Why

It’s imperative that you level with yourself before getting too far along in the process. More specifically, you need to ask yourself this simple question: “Why do I want to buy this business?”

That might seem like a very obvious question, but the answer will tell you a lot about your motivations and expectations. Take the time to explore other related questions like:

  • Is this business in an industry where I have experience? You don’t need to know everything there is to know about the business or industry, but it’s certainly helpful to have a little familiarity with the space. This will streamline the process and give you an advantage after taking over.
  • How do I benefit from the purchase? It’s usually obvious if a purchase makes sense from a business perspective. It’s not always immediately evident if it makes sense from a personal standpoint. But you’re highly encouraged to consider this aspect. Will it improve work-life balance? Is it a business that can involve your kids? Can it provide the financial flexibility you need to reach your retirement goals? The more specific, the better.
  • Am I passionate about this business? It’s always a good idea to buy a business where you have some passion for the company, industry, or marketplace. It makes the entire purchase process that much more meaningful.
  • Why is the business for sale? This is a very important question. It’s one that you should ask both yourself and the current business owner. The reasons will vary, but the answers to this question will give you a feel for the circumstances.

If you can’t answer these questions, you probably shouldn’t buy the business. Clarity (News - Alert) is the first ingredient and it’s imperative that you take the time to filter out the distractions so that you can analyze the elements that matter most.

  1. Do Your Due Diligence

Regardless of how confident you are in your “why,” there are still risks associated with purchasing a business. A thorough due diligence process will help identify as many of the negatives and “booby traps” as possible. Here are some elements to consider:

  • Hire a CPA. While you can certainly look at financial files on your own, your untrained eye probably won’t pick up on some of the more nuanced elements. Hire a CPA and request to see tax returns from recent years, cash flow statements, and other financial statements from (at least) the last five years.
  • Meet with employees. Once you get far enough along in the process, the current business owner should let you engage with some of the existing employees. This is very important, as it helps you get a feel for the culture and figure out which key employees are willing to stick around (something that’s vital in a smooth transition).
  • Consider bulk sales laws. Though some states have done away with them, many still require the buyer to notify the seller’s creditors that a transaction is underway. A failure to do this can actually hold up a sale and give creditors an opportunity to rescind the transaction.

This isn’t an exhaustive list by any means. Your due diligence could take months to follow through on. The important thing is that you uncover as much information as possible and pursue any questionable insights that are uncovered. Where there’s smoke, there’s typically a smoldering fire.

  1. Determine Funding

Financing is obviously a very tricky and complicated aspect of buying a business. This is something that you want to get 90 percent squared away prior to beginning your search for a business. The other 10 percent will then need to be ironed out once you have a target.

Every situation is different, but it may be smart to work with a full-service brokerage firm - particularly if you’re buying a business in a specific niche where there are nuances and strict requirements.

Let’s say, for example, that you want to buy a delivery route. There are actually full-service brokerage firms that specialize in helping people purchase FedEx routes. Working with one of these companies gives you a massive advantage and will allow you to avoid so many of the pitfalls that typically trip up buyers. They understand financing and can help you structure the deal in a way that’s most profitable.

  1. Get Specific With Sale Agreements

When it comes to drafting a sale agreement, you need to be as specific as possible. Operate under the assumption that something will only be done if it’s in writing.

Indemnity is one such example. No matter how much you’ve poured over the seller’s tax returns and books, it’s always possible that something could be overlooked and/or uncovered later on down the road. And the last thing you want is to get sued for something the previous owner did.

Entrepreneur Cliff Ennico advises buyers to, “Get an indemnity from the seller, promising to defend the lawsuit and pay all judgments and fees if that should happen. Likewise, you should be prepared to give the seller an indemnity if he gets sued because of something you do - or fail to do - after the closing takes place.”

Clauses like this might seem like small potatoes, but they can be supremely important. You want to be as prepared as possible, even when it feels like overkill.

  1. Make Sure the Seller Sticks Around

It’s always a good idea to work the contract so the seller sticks around for a while after the transaction is complete. This helps you ease into the new role and have someone around who can answer questions and facilitate a smooth handoff.

If you do want the seller to stick around, be specific about the expectations. Somewhere between one to six months is adequate in most cases. (Again, specificity is a must. Write these details into your sale agreement.)

Put Your Best Foot Forward

There are no shortcuts for buying a business. If you want it to go smoothly (before, during, and after), you have to be purposeful and disciplined in your approach. Doing it halfway won’t work. Hopefully this article has supplied you with some insights to implement a proactive plan that guides you from start to finish.


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