So you are ready to buy a business...
While there has been lots of speculation about what is responsible for the Great Resignation - one thing we do know for sure is that people are going into business for themselves in record numbers. The pandemic has also made baby boomer entrepreneurs move up their timeline for selling or retiring. That, coupled with inexpensive loans, means it’s a great time to buy a business. We have dealt a lot in our newsletters about selling your business, but what if you are in the market to buy? Here’s several areas you need to think about.
Figure out what you want and your means to get it
- Consider what industries are of interest to you and research them. Ideally, you should match your interests and skills with something you have some experience in. While it’s true that business skills translate from industry to industry, you really need to understand what floats your boat and what might drag you under psychologically. As the buyer, you need to do as much work in your own headspace as the seller will do with such a large change of life.
- Understand the labor stressors in the industries you pick. Right now, it is really tough to find workers generally but it’s even trickier in specific industries such as food service, home healthcare, hotels, cleaners, and any place with lower wage workers. That is a fact you will have to deal with no matter how excited you are to own a business.
- Know your own numbers ahead of time. You wouldn’t buy a house without knowing how much of a loan you could afford. It’s the same assessment for buying a business. Meet with a lender and strategize an analysis of what you can qualify for. If you decide to do an SBA loan, understand that your house will likely be on the line as collateral unless you have other assets. Don’t be afraid to think creatively either—many owners may be willing to do a seller carry or work with you on terms.
Know the process
If you find a business you are interested in, begin reviewing, learning, and understanding the process:
- There will be questions from the seller or their broker you will have to answer—motives, interest, experience, etc. Be prepared to answer these openly;
- They will pre-qualify you before they really let you take a look. This is why you need to understand how you will finance the purchase;
- You will need to sign a non-disclosure agreement (NDA) before you get any substantive information;
- Don’t push to know the identity of the business—that will not be greeted warmly by the seller or their broker and tag you as a “rookie”;
- Listen more than you talk. In my experience, you can learn a lot about what’s important to a seller by asking engaging questions. This will help you later in negotiations;
- Dig into the financials. I mean really dig. If this isn’t your strong suit, get someone to help;
- Conduct due diligence. I know this seems obvious, but you would not believe how many people I talked to who bought a business without really looking at contracts, financials, etc. Painful surprises could await you if you don’t;
- Put some effort into your letter of intent (LOI). A well drafted LOI will save you pain down the road;
- Don’t just agree to all of seller’s terms. It’s normal to negotiate terms of the definitive purchase agreement; and
- Don’t forget to discuss and plan for taxes.
- Don’t leave your working capital number to chance. You need to understand this. Make sure you have enough of a runway to get through at least six – nine months.
- If there is more than one of you in the venture, don’t skimp on things like your operating agreement. Anytime there is more than one person going into business together, plan for the worst but, more importantly, work towards the best.
Finally, and most critically, line up a team to help you through your transaction. You absolutely need to consult with a CPA, attorney, and maybe a business broker who you pay hourly. Don’t do this alone. One of the most distressing meetings I ever remember was with a husband-and-wife team who bought a business without help and then found out within the first 60 days that NOTHING was the way the seller represented. They had little recourse in the contract and it was a disaster which could have been so easily prevented. They weren’t going to have enough money to fight the seller and also fight to keep the business alive at the same time.
However, for every sad tale there are absolutely happy endings. You increase your odds of having a happy ending by understanding what you are getting into and preparing to succeed.
Good luck and contact me if you are looking to buy a business and need attorney assistance.