So you want to buy a business and you think you’ve found a business that you like. You met with the owner and decided this is something you want to get serious about. You’ve reviewed a limited amount of financial information and you’re interested enough to make an offer as long as the numbers are as good as the Seller claims. What’s the next step?
Sometimes business owners will share a lot of information up front. More often, before giving you copies of financial and business documents you might want to see, Sellers want to know that you are serious about buying their business. Collecting and preparing all that information for your review takes a lot of time and effort by the Seller. These activities take away from their business productivity. Providing this information to prospective Buyers also potentially exposes a Seller’s internal business processes to outsiders as well as possible competitors. This situation may make Sellers hesitant to share information unless they firmly believe that a prospective Buyer is serious.
Usually Buyers and Sellers use an Asset Purchase Agreement (APA) to establish an agreement of terms between the Buyer and Seller. An APA is really your offer to purchase the business. It spells out the terms and outlines contingencies or conditions that need to be met for you to buy the business. Alternatively, a Letter of Intent (LOI) may also be used but that is typically reserved for larger deals. Our office has a standard APA template that can be modified to meet the needs of our customers.
Sellers normally expect an escrow deposit to hold the business. This amount is agreed upon by the Buyer and Seller. It allows you, the buyer, time to conduct your due diligence as well as make sure this is a business that you want and can purchase.
If the Seller counters your offer by making changes to the contract, then you have a decision to make. You can the accept the changes and go forward with the purchase or decline those changes. A well-written asset purchase agreement will cover many things like the fact that all equipment must be in working condition or that inventory must be good and usable. If you’re using a broker, ask for a copy in advance and review the details.
Always carefully review the contract. Always consider getting professional legal and financial help.
Whenever you’re in doubt, get help. This is very important!
Due Diligence: Successful due diligence is necessary to prove that the stated numbers represented in the Seller’s claims can be verified
Financing: Contingent upon Buyer obtaining Seller financing or third party (typically SBA lender) backed financing
Lease: Buyer is able to take over the lease or get a same or similar lease
Franchise: Buyer is approved by the franchisor, if there is one
Visa: If Buyer is from another country, make sure that visa is approved before being obligated to purchase the business.
Other: The above list is not exhaustive but it includes the more common conditions and contingencies we’ve observed.
* Note that you may have to put all the money in escrow but you should write your offer up so that you’re entitled to get it back if you are not approved.
Never feel pressured or obligated to make a purchase.
Consult your attorney and/or accountant for help with anything you don’t understand or are unclear about.
Negotiate proper training. Reserve a certain amount of the money to be paid once hours of training are complete. Consider holding some money in escrow for after the final sale (negotiate this in the APA.) You might even want to outline the training schedule in the APA. We have heard stories of Sellers who get their money and move on without fulfilling their training obligation. The amount of training varies depending on the business and the expertise of the Buyer. Insist on getting the time you need. Businesses with updated operations manuals and many franchises make the training process much easier. Note that the Seller might be more generous and more open when you’re doing that early on in the process.
Due Diligence. Be specific specific the due diligence items you will ask for and the criteria you need. If the business is advertising that it’s grossing $1 million and netting $100,000 based on the last 12 months, then you want to verify that those are the numbers within a specific variance.
Non-Compete Terms. Insist that the Seller agree to reasonable non-compete terms. Again, what is reasonable may depend on the type of business. Excluding the Seller from going into business within a ten-mile radius may be effective for a pizza restaurant but not acceptable for most online businesses.
Legacy Venture Group is here to help you buy a business. Feel free to give us a call at any point during the process, whether you are just starting out or are ready to close!