Buying a Business

This self-paced training provides an overview of the process of buying a business and provides resources to help you decide if buying a business is right for you. Topics include how and what to research, how to determine the value, and how to transfer ownership of a business.

1.2 Course Objectives

The course has three key objectives:

Identify the advantages and disadvantages of buying a business.
Describe the steps involved in buying a business.
Identify the resources available to assist in buying a business.

1.3 Course Topics

This course covers areas such as:

How and what to research about a business that you are interested in purchasing
How to determine the value of a business, and
How to transfer ownership of a business

Let’s get started!

Buying an Existing Business

Buying an existing business can be less risky than starting a new business from scratch because the existing business is already generating cash flow and has established customers, reputation, and employees. However, it is important that you ensure that you are making the right choice in your new venture.

Even though there are steps you can take to help make the best decision, only you can determine the right business for your needs.

Deciding to Buy a Business

The first step is to decide whether buying a business is the best option for you.

Let’s look at the advantages and disadvantages of buying a business. It helps you choose the option that works best for you.

One of the advantages is that you may be able to acquire legal rights to patents and trademarks, which may increase profitability. In addition, buying a business involves reduced startup costs and immediate cash flow and inventory.

However, the downside is that the purchasing cost may be considerably higher than the cost of starting a new business. This could be the case because of the initial business concept, customer base, brand, and other fundamental work that has already been completed.

There could also be existing problems associated with the business – such as debts that you may inherit.

Steps to Starting

Here are the steps to start with when you decide to buy a business:

1. Pick an industry that you are familiar with and understand.

2. Consider your interests, skills, and experience to help you eliminate unrealistic business ventures.

3. List your conditions of purchase, such as location, size, and time commitment. It is also important that you find answers to questions like “Are you willing to buy a business with multiple locations?”

4. After you have considered these factors, look for businesses in your preferred location that meet your requirements.

5. Hire a business broker who finds buyers and helps you negotiate deals, prescreens businesses for you, helps you pinpoint your interest, and assists with paperwork.

Due Diligence

The next step in buying a business is to put together an Acquisition team consisting of lawyers, bankers, and accountants. The Acquisition team will be able to advise and help you address specific items before you enter into a business agreement or transaction. This process is called due diligence.

After due diligence is completed, you will know what you are buying and from whom.

Due Diligence―Initial Research

Due diligence begins with an initial research of the business that you are interested in buying.

Your Acquisition team would be able to help you find answers to questions like:

Why is the business for sale?
How is the business perceived?
What is the future of the business?
Will the business stay profitable?
And how has the company evolved over time?

Then reach out to business associations and organizations to ensure that there are no complaints filed against the business you are buying.

You should also speak to customers and suppliers about their relationship with the company.

If you are satisfied with the results of your initial research, then the next step would be for your Acquisition team to inquire about an asking price.

Determining the Value of a Business

You should refer back to your initial research while determining the value of a business. Take into consideration factors like inventory, office equipment and property, liabilities, debts, accounts receivable, market history and reputation, and location.

There are a number of different methods that help you determine a fair and equitable price for the purchase of a business.

Among these methods are Asset-based Approach, Market-based Approach, and Income-based Approach.

In Asset-based Approach, the value of the business is determined based on the costs to replace the tangible assets. If the earnings will not support a value greater than the assets, then at best, the value of a business is the value of its tangible assets.

The Market-based Approach forms an indication of value using ratios or factors. These ratios or factors are derived from the earnings, sales, and/or assets of past transactions of similar businesses. They are then applied to the subject company’s sales, earnings, and/or assets to derive an indication of value.

The third method, Income-based Approach, derives indications of value by converting some level of earnings into a value using a capitalization rate, discount rate, or a multiple thereof.

For more information, refer to SCORE’s article on How to Value Your Business.

URL: https://core.score.org/resources/how-value-your-business

Purchasing Options

Business owners have several options when it comes to transferring ownership rights to another person or entity. These options are outright sale, gradual sale, and lease agreement.

Click each option to learn more.

Outright Sale

Outright sale involves buying a business in full. In outright sale:

The ownership is transferred immediately
Payment is expected right away

Gradual Sale

Gradual sale is a flexible option in transferring a business which often benefits individuals who cannot afford to purchase a business through an outright sale, but are instead able to finance a long-term payment plan

Lease Agreement

When you agree to a business ownership through a lease, you will commit to a contract that details the conditions and payments you will make for the temporary rights to the business.

Sales Agreement

To buy a business officially, you need to prepare a sales agreement.

The sales agreement is the key document in buying the business assets or finalizing the purchase of the business. This agreement defines everything that you intend to purchase, including business assets, customer lists, intellectual property, and goodwill. It is important that you have a lawyer who can help you draft the terms of the sales agreement and review it before you sign it.

Checklist for Closing on a Business

The final step to buying a business is the closing.

You need to follow a checklist for closing on a business. It is important that you address all of the items listed on the checklist at the time of closing.

Click the button to view the details of the items listed on the checklist.

Details of Checklist Items:

Adjusted Purchase Price: This will include prorated items such as rent, utilities, and inventory up to the time of closing.
Review of Required Documents:The documents that you need to review include a corporate resolution approving the sale, evidence that the corporation is in good standing, or any tax releases that may have been promised by the seller. You may check with your local department of corporations, state corporation commission, or Secretary of State for more information.
Signing Promissory Note: In cases where the seller has back-financing, have an attorney to review any note documentation.
Security Agreements: This lists the assets that will be used for security as a promise for payment of the loan.
UCC Financing Statements (UCC):Uniform Commercial Code documents are recorded with the Secretary of State, in the state in which you will be purchasing your business.
Lease: If you agree to take over the lease, make sure that you have the owner’s concurrence. If you are negotiating a new lease with the owner, make sure both parties are in agreement about the terms of the new lease.
Vehicles:If the purchase of the business includes vehicles, complete the transfer of documents for the vehicles. Check with your local Department of Motor Vehicles to determine the correct procedure and necessary forms.
Bill of Sale: The bill of sale proves the sale of business. It also explicitly transfers ownership of tangible business assets.
Patents, Trademarks, and Copyrights: If there are any patents, trademarks, and copyrights associated with the business, complete the necessary forms to acquire them as part of the transaction.
Franchise: If the business is a franchise, you may need to complete franchise documents. See the FTC’s Consumer Guide to Buying a Franchise for more information.

URL: https://www.ftc.gov/tips-advice/business-center/guidance/consumers-guide-buying-franchise

Closing or Settlement Sheet:The closing or settlement sheet will list all financial aspects of the transaction. Everything listed on the settlement should have been negotiated prior to the closing.
Covenant Not To Compete: It is a good idea to have the seller sign an agreement not to compete against the business. This will help prevent any interference from the previous owner.
Consultation/Employment Agreement: If the seller is agreeing to remain on for a specified amount of time, this documentation is necessary for legal reasons.
Complete IRS Form 8594 (Asset Acquisition Statement):This document will indicate how the purchase is allocated and the amount of assets, which are important for your tax returns.
Bulk Sale Laws: Make sure that you comply with bulk sale laws, which govern the sale of business inventory.

Transitioning

The transition process starts before the deal is complete.

At this stage, you should make sure the owner feels good about what is going to happen to the business after he or she leaves.

You may talk to key employees, customers, and suppliers before you take over the business. Inform them of your future plans and goals for the business and make the transition easier for them (and you) by getting them involved.

Finally, ensure that the seller provides business operations training. It is important to include a training plan in your contract and confirm whether the seller is open to consultations on an “as-needed” basis.

Summary

We are at the end of this course. Here are some key points to remember:

Before you buy a business, the first step is to decide whether buying a business is the best option for you.
Pick an industry that you are familiar with and understand.
Put together an Acquisition team to advise and help you address specific items before you enter into a business agreement or transaction.
Start the transition process before the deal is made by ensuring that the owner feels good about what is going to happen to the business after he or she leaves.

Next Steps

Now what should you do? Follow these steps to begin applying your knowledge of buying an existing business to actual practice.

Identify the industry in which you would like to purchase a business
Consult with a business mentor, coach, or other seasoned business advisor, and
Use the gathered information to begin the process of buying a business