Buy A Business Process
Interested in buying a business?
1. Execute Non-Disclosure and/or Confidentiality Agreement
Confidentiality in the business sale process is extremely important for most sellers. Buyers who respect the confidentiality requirements and make it clear to the seller that they will comply will have an advantage over buyers who take this issue casually. Sunbelt Business Brokers Texas will provide a standard Non-Disclosure/Confidentiality Agreement for your review and approval. Click here for more information on importance of Confidentiality.
2. Buyer Provides Summary Financial Information and Profile
This information is important for your Business Broker, the business Seller and you, the Buyer. Being as accurate as possible with this information will eliminate wasting time looking at businesses that aren’t a good fit for the buyer. Our Business Brokers have the experience to guide buyers to businesses which they have the best chance for a successful transaction. A Buyer’s financial situtation will have a huge influence on the options available to a business buyer.
3. Business Buyer Receives Confidential Information Regarding Specific Businesses
Refer to item 1 above for the importance of maintaining confidentiality. The information a buyer receives at this stage will be detailed and highly sensitive. The information should include the name, location and financial summary information about the business. In addition, many businesses for sale will have a Confidential Business Review (CBR) which may include more in depth information including industry, market and competitor information.
4. Conference with the Seller
Once a buyer has reviewed the CBR and has decided they have a serious interest in trying to determine if they want to buy that business its usually a good idea for the buyer and seller to meet personally. This meeting has two purposes. 1) The buyer can look at the facilities and 2) The buyer and seller can discuss the day-to-day duties of the seller. The buyer needs to find out quickly if they feel like they can replace the skills of the seller once the seller has left the business.
5. How do business buyers structure and finance a deal when they buy a business?
Most small businesses are sold with either seller financing, a SBA Loan from the Small Business Administration or a combination of both. Occasionally buyers will pay all cash from their own funds when buying a business. This is typically done when the business buyer uses their 401(k) money to purchase a business. Current IRS rules allow this to be done without incurring taxes on withdrawals. Please consult with a CPA firm that specializes in 401(k) rollovers for buying a business. Click here for more information about using your 401k to invest in your own business.
An SBA Loan from a bank participating in the Small Business Administration Loan Guarantee Program is often the best choice for the buyer and seller. The loans are normally for 10 years and are priced at the Prime Lending Rate plus 2.5% – 2.75%. The advantages for a buyer is that the SBA will provide a 10 year loan with a down payment far lower than a seller would accept if the buyer wants the seller to provide the financing.
6. Offers, LOI or Terms Sheet Proposals
At this point the buyer generally has enough information to decide if they would like to make a Contingent Offer on the business. Tis offer can be in any number of different forms. Here is a general description of some of the common types:
Agreement To Purchase (ATP): This is a fill-in the blank type of form used often by business brokers. Its designed to cover all the basic elements of typical offers.
Letter of Intent: Commonly called LOIs, these are often written by attorneys and are similar in nature to an ATP in that they cover many basic elements of a possible transaction.
Terms Sheet: This is the list detailed of the forms of an offer. It general just outlines the price, payment terms and time elements. If buyer and seller agree on the term sheets elements the next step is generally drafting an LOI.
7. Buyer and Seller Due Diligence (DD)
The Buyer will prepare a request list for information they need in order to make the final decision to purchase. Often this list is prepared with the buyers accountant and/or any bank where the buyer plans to try to obtain financing.
The Seller often also does DD on the buyer. Some sellers request background checks, credit reports and other information from Buyers. Sellers often want to know that they are selling the business to people who will treat the employees well, take care of the customers and continue the good name of the business.
8. Final Sale Documents
Once the parties have completed their Due Diligence the attorneys need to prepare final closing documents which are used clearly define the elements of a transaction and any agreements among the parties. In addition to other documents based on the specific transaction these closing documents normally include a Purchase Agreement, Non-compete agreements, Bill of Sale and training and transition agreement. Upon signing of these documents and the completion of any obligations related to them the sale is considered closed.
9. Post Closing
During the post-closing period the Buyer (now the new owner) and the Seller (now the former owner) work together to accomplish the obligations spelled out in the closing documents. The buyer and seller management of this process is extremely important in creating a transition that preserves the relationships with employees, customers and vendors.