Ten Steps to Buying a Business


Buying a business is one of the biggest life decisions you will ever have to make. It can be a long and laborious process or it can be a relatively simple transaction if you do your research, get the right advice and cover all the basics.

1) Identify your industry. It may sound obvious but your first step should be to define what kind of business you are looking for. All too often potential business owners are too impulsive, unrealistic and driven by factors like finding a bargain. A good place to start is by looking at the internet and trade magazines to gain insight and expert opinions on an industry. Conduct a self-assessment to find out what business would suit you. Identify your skill set and align it with the sector that interests you to see how compatible you will be. Buy a business that will thrive on your strengths and not suffer from your weaknesses. Before moving forward it is advisable to research the mid to long term prospects of the sector, paying attention to any potential issues that may arise. (rules and regulations, local competitors, legal concerns etc.).

2) Target the business you want. Once you have defined your sector, focus your search and make it specific. Have a set criteria in mind (with regards to the budget, location and annual revenues) and look for a business that matches your expectations. One of the main things to consider is what sacrifices you are willing to make for your investment. Ask yourself questions like: How far are you willing to travel? Are you willing to relocate for the perfect business? Make sure that you consider your lifestyle and your commitments before rushing into a decision – what you want might not be in your budget. Widen your options, think about businesses that are not actively seeking buyers as well as those who are advertising. Every business has its price and an unsolicited offer may prompt / convince owners that it is the right time to sell – there’s no harm in asking and you might be lucky.

3) Do your research. Once you’ve found the business that you wish to purchase, you should conduct an initial check to see if your assumptions about it are correct. Before you bring in the help of the experts it can help to do a little ground work yourself. One way of doing this to make sure to look at the initial paperwork provided and don’t just leave this to your attorney or accountant. This way, you won’t waste time and money on a deal that was never right for you. Also be sure to investigate the competition, drive around the neighborhood and look at reviews of your business online. Ask the owner and/or intermediaries to provide you with an initial package with the seller’s representation, subject to a confidentiality agreement. This information will often be a summary and contain limited information. Eventually you will want to perform a full due diligence but you may need to have an accepted offer to purchase in place to do this. In the meantime you can do some investigating on your own, but remember not to abuse your position of trust as you do not want existing employees or customers to know about the impending sale.

4) Enterprise valuation. Once you have seen the financial representations, you will be able to further evaluate the business you are intending to buy. You will then be able to make an estimate of value; traditionally this is usually done using a multiplier of yearly profit. Do some research online or ask your intermediaries for comparable sales. The valuation stage is the most important part of ensuring a successful purchase and the approach will vary depending on the type, size and the prospects of enterprise for sale. But don’t over think this step! Value is personal, therefore you’d be better off overpaying a little for a good business, than stealing a bad one. Most business sell for two to three times annual earnings. If you grow and prosper in a business, it will be paid off in no time.

5) Letter of Intent (LOI).  The LOI, though not a legally binding document, is nevertheless an important and useful stage in the negotiations process. It essentially condenses the key elements of a sale into a single document. Payment, responsibilities, periods of confidentiality will all be set down in the LOI at a point in the negotiations when each party is still free to walk away from the proceedings. Most importantly, the LOI will act as a timetable towards completion: explaining to each party the time-scale and deadlines for every step of the deal, from financing to the release of payments.

6) Negotiate. At this point in the acquisition you will have acquired a more detailed picture of the business and the industry. Having more of an understanding, you can begin your talks with the current owners and work towards negotiating a deal. One of the first points of negotiation will be the price, however your initial offers are not often legally binding. Don’t go in straight away with your highest offer – leave room to negotiate. An offer for purchase should include an “out” clause for any reason. This means that during the due diligence period you can rest assured that you can cancel the agreement if you find information that negatively affects your desire to close on the deal.

7) Conduct due diligence checks. Due diligence is one of the most important parts of buying a business. At this stage the seller is obligated to open up the business to investigation. This complete appraisal of the business ensures that there are no hidden surprises, and analyses all facets of the business (from finances to the day to day operations). Through carefully gathering information and checking the claims made by the seller it will establish the commercial potential of the business as well as any liabilities. At this stage it is crucial to seek the help of an accountant and lawyer. Make sure you have open communication with both sides through the due diligence. Don’t treat incidents as disasters and disasters as incidents. If you find inconsistencies, address them with the seller. If they are too numerous or onerous to overcome, get out of the deal.

8) Purchase Agreement and other documents. The sale and purchase agreement marks the full terms of the acquisition process and provides each party with their legal obligations of the sale. Attorneys may add documents like covenants not to compete, promissory notes, closing statement, and other agreements. Again, a good transaction attorney is essential in making sure everyone is protected in a transaction.

9) Pay. Financing can come from private means (seller notes), loans (SBA in the USA), banks, peer to peer lending or angel/family investors – it’s up to you to decide what will be best for your situation in particular. The method of payment will most
likely depend on the size of the transaction. It’s important that you don’t spend all of your money on the purchase as you will need to cash flow the business and your life in the first year.

10) Completion. With the payment completed and the final contracts signed you will have completed your business acquisition – congratulations you are now the proud owner of a new business! Make sure you spend time with the seller to gain all the knowledge you need to help you succeed in your purchase. Work hard and grow your business, that way when you are ready you can sell it for a nice profit!

If you would like more information concerning the purchase or sale of a business, please contact me at your convenience.


Charles E. Guy, II
Business Broker, Transworld Business Advisors Panama City, FL
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