Are you thinking about buying a business to build your future, gain personal freedom and independence but not sure where and how to start? How do you get started and find the right business? What are the steps involved to find the best business for you?
Before you start your search for the right business, we suggest you step back and look at what types of businesses are for sale. It will surprise you how many different types of businesses there are. We also recommend keeping an open mind with respect to business types and look at broad industries, even look at some that you had not necessarily considered.
- Search & Identify Prospective Businesses:
The first step involved is to search the businesses for sale listing sites such as Bizbuysell.com, Bizben.com, CABB.org etc. There are a wide range of businesses available at any given time in a variety of industries. You will be able to search by industry and location plus the amount of earnings and price that fits your financial situation.
- Get Your Finances & Financing Together:
Before you inquire about a business for sale get your finances in order. How much cash do you have for a down payment? Remember you will also need working capital for operating expenses, closing costs etc. If you are going to use SBA financing (which we highly recommend) you will be able to leverage your down payment to buy a much larger company. See our SBA financing page for more information on using SBA financing to buy a business.
- Inquire about the business:
When you find a business that you are interested in, submit an inquiry from the listing site and you will be sent a Confidentiality Agreement and Buyer Profile to fill out and sign. Your inquiry will usually go to the listing broker for the business. Make sure you fill out the Buyer Profile completely, including providing the requested financial information. Brokers will not provide any confidential information about the business for sale without a complete Buyer Profile and if you do not provide financial information they will assume you are not qualified. The majority of business sales are Dual Agency transactions, which means the broker represents both buyer and seller in the transaction. This is common in business brokerage.
- Sign NDA & Receive Confidential Information Memorandum or Business Profile:
After you have signed the confidentiality agreement and buyer profile the broker will review both to determine if you are qualified to purchase the business. If everything is signed and you qualify you will be sent a Confidential Information Memorandum (CIM). The CIM should have enough information in it for you to determine if you are interested and want to move to the next step. Be careful not to rule out a business too quickly because the business profile (CIM) lacks detail. While our firm, Pacific Business Sales, prepares comprehensive business profiles, most brokers prepare a very brief overview of the company. If the company looks interesting, give it the benefit of the doubt and contact the broker for more information.
- Contact Broker for more info:
The next step is to contact the broker that provided you with the CIM to discuss the opportunity, provide your background, and if you are interested ask the broker to set up a meeting with the seller to further discuss the business. Again, if it looks interesting, go ahead and set up a meeting. Buyers often have the expectation that everything they need to know will be in the CIM or obtained in a quick phone call with the broker and often prematurely pass on a business without really learning about it. You won’t buy a business from your laptop in your pajamas at home, you have to go to the business, meet the owner, and learn about it.
- Seller Meeting & Visit Business:
At the seller meeting you will be able to discuss the operations of the business, the sellers role, customer concentration, marketing, employees and their rolls, and general questions about financials such as average inventory, A/R and backlog. There may be other questions depending on the type of business and industry. The first meeting is not the time for asking detailed questions about the financials and tax returns or to start asking the seller to prove his figures, that is done after an offer is made during due diligence. During Due Diligence you will have full access to the company financials and plenty of time to drill down into the details to prove the revenue and earnings of the business. Note in many cases there may be more than one Seller meeting. Consider the first one an introduction and the second one is where you learn more about the details of the business.
- Write an Offer:
After your Seller meetings and perhaps some additional phone calls with the broker you will have enough information to write an offer for the business. The broker will sit down with you and go over the contract and guide you through the process. The broker will discuss the down payment options, the best lenders for the transaction if you are using SBA financing, and Stock vs. Asset sale, transaction structure and timeline. We highly recommend using an industry standard Purchase Offer such as the California Association of Business Brokers (CABB) Asset Purchase Agreement or Stock Purchase Agreement.
- Broker Presents Offer:
When you have completed and signed the Purchase Agreement your broker will present the offer to the seller. If the Seller sends a Counter Offer the broker will review it with you. Note that with the offer you will provide the broker with an Earnest Money deposit. This deposit is usually held uncashed until you have removed your Due Diligence contingency in writing at which time the deposit will be sent to escrow to formally open escrow.
- Offer Accepted, Due Diligence Starts:
Once the offer is accepted by both parties Due Diligence starts. You will be asked to provide a due diligence list of the information you wish to review. This typically includes bank statements, 3 years of tax returns, employee info, etc. Due Diligence typically takes 2 to weeks once you have received the information and the timeline is specified in your offer. On small businesses it is common for the buyer to do their own Due Diligence review. In some cases buyers may elect to have a CPA assist them with the financial review and on stock sales or larger transactions buyers sometimes also engage an attorney to advise them. Regardless of if you engage professional advisors or not, at the end of the day, it is your decision to buy the business or not. We highly recommend buyers to be directly involved in Due Diligence and not to solely rely on advisors.
- Due Diligence Complete & Escrow Opens:
When you are satisfied with due diligence escrow is opened and your broker will provide you with a closing checklist in addition to the closing checklist from the bank and escrow. If you are using SBA financing the bank will have a long list of documentation required and lots of paperwork. We recommend starting the SBA application as soon as possible as this is the longest lead time item.
- Escrow Closes:
Once your loan is approved and everything escrow needs is completed the transaction closes and you now own your own business.
- Training Starts:
Training starts after the close of escrow. Your Purchase Agreement will have a training period specific with a number of weeks and hours per week that are included in the purchase price. This is typically 4 weeks, sometimes up to 6 or even 8 weeks. This is negotiable but keep in mind that Sellers do not want to provide extended training for free, especially if the price was less than full price. A consulting agreement is often included in the Purchase Agreement for extended training at a specified price.
During and after training remember you have bought a business that has been successfully operating for perhaps 20 or 30 years. We recommend avoiding the temptation to immediately start “fixing” or improving things as the new owner or boss. Remember there is likely a lot of loyalty to the old owner and employees know the current systems. Often there are reasons for the way things are done that you may not immediately understand. Learn the business from the owner, be patient, and only implement changes after you thoroughly understand the entire business from front to back.
For more about how to buy a business preview my book, “Own your Future, Straight Talk about Buying a Business and Building Your Future.”