Are you considering purchasing a business? Here are some basic pointers to get you started. Incidentally, this article should also be of interest to anyone thinking of selling their business. At Provest Properties, we’ve found that the process becomes easier when both the buyer and seller have information and knowledge.
What’s the Profile of a Typical Buyer? The typical small business buyer is often looking to get out of an uncomfortable job situation or deal with a lost job. Most of these buyers have never owned a business. A buyer will more than likely have less than $100,000 in which to invest in the purchase of a business. More than 70% of buyers will have less than $250,000 to invest. A buyer’s funds will usually come from personal savings and additionally from family members.
Potential buyers are looking to do their own thing and they want to break free from the cycle of working for someone else. While making money is on their priority list, this typically isn’t the primary motivation. He or she will understand that it is necessary to take a leap of faith.
If you are a buyer looking at a potential purchase of a small business, you’ll likely have to dig up a lot of information. Often the business records will not be as orderly as you might have hoped. However, don’t allow this factor to make you skip over a business that is the perfect fit for you. Take time to learn about the industry and its earning power.
Negotiating the Deal
There are many facets to consider when negotiating a deal. While price is always at the top of an investor’s/seller’s mind, allocation and financing are equally important. Understand what is most important to you. Is the monthly payment/project affordability most important? Would you prefer that the seller take less of a downpayment? If you have a lot of cash to put down, you can try to reduce the price. However, if you are bringing a low amount of cash to the table, don’t try to substantially lower the full price. Also we advise buyers to only accept debt structures that they can actually afford. Also realize that in most cases in today’s marketplace, the seller is required to finance some portion of a small business transaction.
Don’t try to push the seller to the wall. It is essential that the buyer and seller have a good relationship. After all, the seller will be teaching the buyer all about the business and communication will be necessary. Don’t over-negotiate on small irrelevant issues. Deals can quickly fall apart when either the buyer or seller becomes stubborn, and this often occurs due to some minor detail.
What About Due Diligence?
It is a buyer’s responsibility to thoroughly investigate a business. We advise buyers to not simply depend on someone else to do this work. Also only begin due diligence once at least a tentative agreement has been reached. Also it is a good idea to keep your outside advisors up to date on your intentions. They can be invaluable in ensuring you understand your risks. The key thing to remember is that with any deal there is going to be risk. The goal is to minimize your exposure. If you are risk adverse, business ownership is not for you. Since you are the one planning to enter the world of independent business ownership, you should plan to get your own answers and reach your own decision.
