1. Confidentiality is critical
- Meet with the business broker at the broker’s office.
- If the business seller’s employees, suppliers, bankers and customers don’t know the business is for sale the business operations remain less affected by change in ownership.
- It is often important that the business buyer’s employer doesn’t know a move is being considered.
- After one of the businesses for sale is identified as an acquisition candidate, visit the businesses without announcing yourself as a buyer (incognito) to get a “feel” for the business. DO NOT make any contact with the owner or employees as a potential buyer or engage them in any conversation other than as a “customer”. Compromising the confidentiality of the transaction may make you liable for damages to the business.
2. Concentrate on exploring businesses for sale you think you like and can manage
- Find something that you can look forward to doing every day
- You don’t have to know everything – the seller will help train during the transition
- Only general knowledge and business skills are important for many businesses
3. Key considerations when selecting businesses for sale
- Location
- Track record
- Management
- Why is the owner selling? In most cases, a “human reason” drives the business sale.
4. Don’t expect 100 percent bank financing
- Most banks are asset-based lenders
- Banks can’t run a small business if borrower leaves
- Banks view small business tax returns differently
- Buyers should expect to pay 20 percent minimum for down payment
5. Alternative financing may be needed
- A portion of the deal structured with owner financing demonstrates seller’s confidence in the business
- If something goes wrong after the sale, the seller has an interest in helping it go right.
- You can use your 401k or IRA funds to buy a business without paying a withdraw penalty. This may create some liquid capital to fund a business acquisition.
6. Look at multiple businesses for sale
- There is no perfect business to buy. All will have some flaws, some more or less than others.
- You can’t buy a business by just looking at financial statements. There is usually more to the story that you can only uncover by meeting with the business owner.
7. Write a contingency offer
- A contingent offer or letter of intent is non-binding. It starts to put together a framework for a potential deal.
- An offer shows a seller that you are serious potentially getting them to explain more about the business that would not be told to other buyer prospects.
Understanding the buying process may allow you to go from a striking out when evaluating businesses for sale to hitting a home run with a hidden gem.