How to make an offer to buy a business
Essentials when making an offer to buy a business
Purchasing an existing business can be a strategic move, offering benefits like an established customer base and proven operations. However, it’s crucial to approach the process wisely. This guide offers steps, advice, and contingencies to help ensure a smooth transaction.
Initial Steps and Information Gathering
- Secure Basic Financials
- Start with high-level financials (profit and loss statements). Full tax returns and deeper details are often available only after an offer.
- Make an Offer with Flexibility
- Use an Asset Purchase Agreement (APA) or a Letter of Intent (LOI), with contingencies that allow adjustments if issues are uncovered during due diligence.
- Understand Contract Types
- Asset Purchase Agreement: Common for smaller businesses.
- Letter of Intent: Frequently used for larger businesses, non-binding, and often preliminary.
Due Diligence Contingencies
- Due Diligence Period
- Allow 2-3 weeks for due diligence.
- Pre-arrange support from an accountant and attorney.
- SBA Loan Financing
- If financing, approach multiple banks (2-3) and have a timeline for approval.
- Standard SBA loans may require 10% down, with potential loan terms of 10 years (or 25 years if real estate is included).
- Landlord Lease Transfer
- If leasing, ensure landlord approval to transfer or renew lease with terms satisfying SBA requirements (typically, a lease or options totaling 10 years).
- Immigration and Visa Considerations (if applicable)
- Seek guidance from an immigration attorney to navigate visa requirements, especially if purchasing as a foreign buyer.
Additional Requirements (Franchises, Employees, and More)
- Franchise Approval
- If the business is a franchise, confirm franchisor requirements, including training, updates, or remodels.
- Team of Advisors
- Engage a business broker, attorney, and accountant with industry experience to support legal and financial reviews.
- Escrow Deposit
- Negotiate a meaningful but manageable escrow deposit. Ensure it’s held by an independent third party like an escrow attorney.
- Reasonable Offer
- Make an informed offer. Avoid paying above value unless the business’s quality justifies it.
Cash Flow and Financial Planning
- Assess Cash Flow Needs
- Project if the business’s current cash flow will sustain loan payments and personal income requirements.
- Future Plans for Improvement
- Plan and budget for potential improvements or upgrades that may enhance business performance post-purchase.
- Review Seller’s Disclosure
- Utilize a seller’s disclosure form with clear yes/no questions on potential liabilities, grievances, or hidden issues.
Building a Connection with the Business
- Set up Observations
- If possible, visit the business as a customer to get a feel for its environment and operations.
- Arrange a Meeting with the Seller
- Prepare questions and documents in advance, respect the seller’s time, and take detailed notes.
Checklist for a Business Purchase
Initial Research
- ☐ Sign an NDA to access financial information.
- ☐ Review initial documents like profit and loss statements.
Making an Offer
- ☐ Decide between an APA or LOI.
- ☐ Include contingencies for due diligence, financing, and lease approval.
Due Diligence
- ☐ Arrange for accountant and attorney support.
- ☐ Secure SBA loan pre-approval and define timelines with banks.
- ☐ Confirm lease terms with landlord.
- ☐ Check visa requirements (if foreign buyer).
- ☐ Complete franchise approval (if applicable).
Financial Preparation
- ☐ Verify cash flow sustainability for loan payments.
- ☐ Identify potential improvements needing capital.
Building Relationships and Final Checks
- ☐ Meet the seller, observe the business, and take notes.
- ☐ Review seller’s disclosure document for hidden issues.
By following these steps and maintaining flexibility, you’ll position yourself to make an informed and secure business acquisition.
Find the right business for sale:
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Automotive – Gas Station – Convenience Stores
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Businesses Netting over $100K
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Franchise
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Internet Related
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Medical – Dental Businesses
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Professional-Licensed Businesses
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Restaurants
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SBA
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Visa Likely Businesses