WHAT IS THE BUYING PROCESS?
The buyer must have a complete understanding of the acquisition process before proceeding with a purchase offer. A competent, professional business broker can streamline the process.
- Decide what you want. Evaluate your strengths and passions to determine the type of business that is right for you. Determining your financial capabilities and your objectives can help you focus. Educate yourself on what it takes to buy a business and make sure you are up for it.
- Identify potential targets. Write down your criteria and create a profile. Research and find target businesses that match your criteria. Resist the temptation to buy the first business that looks good; step back and look at it objectively. Keep in mind that not all businesses are listed on commercial media.
- Keep it confidential. As you narrow your search, you will be presented with a Confidential Business Opportunity Report (CBOR) that provides details about the business for sale and the opportunity it represents. A signed confidentiality and non-disclosure agreement will be required prior to receiving the CBOR to protect the confidential nature of the transaction. Your advisors, your employees, and anyone involved in the process need to understand that if word gets out, the information that the target business is for sale can have disastrous impact on the success of the purchase. They should discuss this process with no one outside the purchasing process team, and particularly not with employees, customers or vendors of a target business.
- Check seller intentions. Sometimes an owner is just testing the water. Other times an owner has unrealistic expectations of the value and the time period required for this process.
- Meet with the seller. Spend time getting to know each other. If you and the seller cannot get along, the sale should not be completed. Lack of understanding between buyer and seller can create insurmountable problems during the transition period.
- Visit the business facilities. While financial statements and other printed documents help understand a business there is no substitute for physically viewing the operations and the employees, without, of course, disclosing that you are a potential buyer unless you have authorization to do so from the seller.
- Determine the value of the business. Obtaining a fair value for the business is complex. In the end, it doesn’t matter what the seller thinks a business is worth, or what an accountant, banker, attorney or best friend thinks the business is worth; the marketplace will decide the true value. We can make this process easier by providing a broker estimate of value, however, you may want us to recommend a licensed business appraiser; a 3rd party valuation will be required in any event if an outside lender is involved.
- Make an offer. After meeting with the owner and completing the analysis on the financial statements, you may want more information. When you are ready to move forward, the two most common legal vehicles for extending an offer are a Letter of Intent or an Offer to Purchase. The main difference between the two documents is the level of commitment. An offer to purchase is normally a binding agreement. However a letter of intent is generally non-binding and cannot be specifically enforced:
- Offered purchase price
- Type of sale, Asset or Stock
- Non-compete terms
- Financing terms
- Equipment list
- Closing date
- Negotiations and structuring the purchase. The seller will either accept, reject or propose other terms. Low ball offers are often met with outright rejection, killing the deal. Our experience in negotiating terms can help make deals win-win arrangements.
- Obtain 3rd party financing, if needed. Typically this process is started once the price has been set but while the rest of the deal is being negotiated if closing is contingent upon getting outside funding. In today’s market it is unrealistic for most sellers to not provide some part of the financing, and many deals also rely on financing from commercial lenders. Lenders can impose new terms and conditions that can make or break a deal. We can help with introductions to various lenders. Sometimes brokers will obtain for good deals a lender pre-qualification letter, that will be contingent on the buyer qualifications, but the business will be pre-qualified for a loan.
- Exercise due diligence. After the basic terms have been agreed to by both the parties, you will want to exercise due diligence by verifying that the seller’s representations were true, complete and accurate. Frequently, CPAs and attorneys are hired by the buyer to complete this process and give a report to the buyer. Due Diligence is conducted within strict time limits. Critical milestones must be accomplished for the transaction to survive including:[custom_list style=”list-11″]
- Escrow of deposits
- Delivery of documents
- Document review
- Accountant and attorney reviews
- Lien search
- Insurance review
- Financial analysis
- Operational review
- Environmental studies
- Many more areas
- A good due diligence check list may be 50 pages long; for small businesses a 2- to 6-page checklist is frequently adequate
- Close. We recommend that closing be conducted by a Transaction Attorney who prepares the necessary documents. A closing statement is prepared detailing the sources and distribution of funds at the closing. A preliminary set of closing documents is provided for review by the parties and their legal representatives a few days prior to closing. The closing package may include the following:[custom_list style=”list-11″]
- Buyer and seller closing statements
- Asset allocation agreement
- Corporate resolutions
- UCC-financing statement
- Promissory note
- Security agreement (chattel mortgage)
- Non-competition agreement
- Bill of sale and general assignment
- Equipment list
- Assignment of trade name
- Collateral assignment of lease
- Conflict of interest disclosure and consent & waiver
- Closing agreement
- Escrow closing agreement
- Transition Period. Failure to have a written understanding of the transition and how it will proceed can make a good deal go bad. You should not assume that the transition will be a smooth process and you must provide for contingencies. Transition problems can significantly reduce the value of the business if, for example, key employees are not retained, customer introductions and vendor arrangements are not handled smoothly or business culture differences are not recognized and addressed. A well-thought-out written transition agreement is critical to the long-term success of the transaction.