how to make an offer to buy a business
Buying a Business: Essential Guide
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.