Many believe that buying a business is the best option if you want to get into your own business, and this is in most cases true.  There are some real benefits to buying an existing business:

• A lower risk of failure
• Probably has proven processes and concepts
• Has an established set of products and services
• Suppliers and Vendors are already in place
• Has an established customer base
• A longer track record makes it easier to attain contracts
• A longer track record makes it easier to attain credit and loans

Bottom line, when buying a business there is far more known that what is unknown, unlike starting your own new business from scratch where there are many unknowns.
But buying a business could be a bottomless pit of pain if not done properly.  Remember, unless you really are, you are not buying a business from a friend.  The seller has the goal to sell his business for as much as possible and is going to make the company look as good as possible, and that also included the business broker (although the broker has a duty to be truthful) and you are trying to get it for as little as possible and/or the most for your money.
When it comes to starting the negotiation, there are these key items to consider and request – and don’t feel embarrassed, remember, the seller is not your friend; he is trying to take your money.  Together with this article, you should be reading the articles on Running your Business and Growing your Business as they will also guide you into looking out for certain aspects of this new business you are wanting to buy.

• First you may need to or be requested to sign a Non Disclosure Agreement (NDA)
• Ask why
• Get a complete asset register
• Get a complete stock register
• Get complete financials, tax returns and income statements for last 3 years, including the current year to date
• Get year to date and 3 years bank statements from all bank accounts
• Skeletons
• Client Base - Ask the question directly which clients will be content in staying even though the owner is leaving
• If the seller is open to this, try have a meeting with the staff
• Determining the purchase price
• Get the Business handbook and process manual
• Contracts
• Brokers
• Closing
• Sales agreement Checklist
• Now what?

NDA

Sign the NDA, but read it properly first (just as you would anything of course), this will get you on a footing with the seller that he is comfortable in handing you information.  Of course just as you are expecting the seller to be honest, so should you – at the end of the day, you do have a name and reputation to uphold, and always conduct any transaction with the eye on “what would people say about me on this deal after I die” and if you will be happy with that, you should be good to go.

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Ask Why

Asking why a seller wants to sell his business may let you in on a clue as to the status of the business.  Hopefully the seller wants to sell because of the desire to retire, or perhaps there is some reason for the seller to be forced to move, or perhaps there has been a family tragedy, or maybe a split between husband and wife, or a partner’s death – these are all fairly good reasons.  But if a business owner wants to sell because he is tired of the business, or because he wants to get a 9 to 5 job, you need to be asking questions; few owners of a successful business would just want to get rid of it.  Of course come sellers might just come straight out and tell you that they do not have the funds required to run the business, or that the business may need a cash injection to get it profitable.  All answers to this question are very important, and you need to listen very carefully to that answer and how it is provided.  However, at the end of the day, the business will be purchased based on income versus expenditure.

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Get a complete asset register

Obtaining the asset register is important, and detail on it which assets are bought and paid for, and which are on loans or leases or have money borrowed against them.  Assets that are not fully owned may not be able to be considered an asset yet, as the bank could still take it back, and if you do buy the business you will still be paying for the asset, so you cannot pay the seller for it as well.

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Get a complete stock register

It is important that the stock register is complete, and that the purchase price on each is listed and not the selling price.  It is also important to make sure that the price that the item was purchased at is listed, as you may need to write off a loss on the item, and also it is not worth paying more for a stock item that what you can buy it for now.  You may well make concessions here, but just keep this in mind.

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Get complete financials

Getting the complete set of financials is certainly what everyone asks for first, but be sure you not only know how to read them, but how to analyze them.  Remember, on the tax return the seller would  want show the lowest profit, because this is what taxes are paid on, and on the income statement income might be overstated because this is what determines the sale price, and whether the seller gets loans and leases, etc.   Get this information for 3 years, and do not ignore the current year to date – I huge drop in revenue in the last 4 months may be a reason for the seller wanting to sell.

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Get Bank Statements

So many people disagree with this tactic – but let’s face it, if the company is being run 90% correctly, all income will be deposited into the bank account, and by analyzing this, you will not only be able to see all the incoming funds, but you will also see all the outgoing funds – and those together is what will give you a very good idea of what the business is doing.  And do not be shy to ask for all the bank statements from all the accounts, and this would include statements on loans as well so you can be sure that all loans and leases are paid up to date.

• If you get the bank statements in a softcopy – get them into a spreadsheet and get the seller to describe each expense, so you can compare it to the financials
• Here you will also see the expenses that may or may not be highlighted in the financials and tax returns such as owner salaries and drawings.

• Also, use the bank statement to corroborate any “unreported income”.  Many sellers will boast about income that has not been reported, if it is not in the financial statements, or shown on the bank statements, it did not happen, well according to you anyway.

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Skeletons

This may be a very pessimistic view, but unfortunately it is true more often than not.  Look for skeletons in the closet, and simply ask for any while you are at it.  There is a list of items you should be looking out for, such as:

• Outdated hardware, software or machinery
• Unpaid taxes
• Loans being called up
• Changes in rent, or the location might be turning sour
• Changes in the franchise
• New local competition
• Large clients that do not wish to renew their contract
• Etc, etc

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Client Base

When it comes to the client base – this is a very serious question!  Especially with small businesses, the clients more often latch on to the owner and stick with the company because of him or her, rather than the company, as they feel a personal connection to him/her due to long friendship, or due to the fact that they have simply been a client for so long, and would be concerned whether the new owner would afford them the same courtesies and service.  You need to on a list, have the seller detail which clients are simply clients, and which ones are very close, and should you come to a first draft proposal to buy the company, it should be considered whether you and the seller could make contact with the clients to ask them how they would feel.  Of course, it is very normal to contract the seller in for at least 3 months, and sometimes up to a year or even more to continue working for the business to ensure there is a suitable hand-over and clients can be retained.

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Meet the staff

If possible have a meeting with the staff to establish their feelings, and whether they are keen to stay on, and whether they are generally happy.  Of course they might well have issues with certain aspects, and you may also pick up feelings of resentment, or feelings of fear, or just simply feelings of anguish.  This is all to be expected, do not judge them.  They are wondering what you will be like if and when you take the business over.  They will be wondering if you will cut their hours, take away certain perks they had, make them do things they never had to in the past, and certainly some will wonder if they will even have a job when you take over.
It is your duty at this stage to ensure that there will be no immediate changes made, unless they are changes for the good and that you are 100% sure about these changes.  You will need to rely on the staff to help you get to know the business, and understand what works and what doesn’t.  If you take this approach, you may find a totally different atmosphere in the room.  Do not discuss too much, and also do not talk as if you have already bought the business.  Remember they also have feelings, and you do not want to raise their hopes for nothing.  Just be straight, and calm, and tell them you just wanted to meet them, and get an understanding of their dynamic.
Remember the staff is an important aspect of the business, just as much of an asset as the client base; if you cannot see yourself working with them, or if you do not think you will be able to control them, or mould them into thinking the way you do, it will just not work.  This means you will either have to buy the business without them, retrench them, fire them, or change your attitude… you will have to make up your mind on this one.
Of course some staff might at this stage just flat out say that they will not work for the company under new ownership, then you at least know where you stand, and will know what to do to get ready for.  

Be cautious though, as all businesses, especially small businesses have the one or two key staff members that make things tick – especially in a technical or mechanical type business, if one or all of these key members are not willing to stay, you might not have much of a business to continue with, unless you can replace them immediately.  DO NOT however let these key personnel hold you over a barrel, just take a serious note of it – it may be important, if not vital.

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Determine the Purchase Price

When determining the purchase price, there are various factors to be brought into consideration, and it is very highly advisable to speak to an accountant, and normally it is recommended to speak with your own accountant rather than the sellers’ accountant.  For instance, the percentage of the purchase price made up of assets, stock, or client income could determine tax implications for both parties, some to your benefit, and some to the sellers benefit.  By no means is it being insinuated that you should cook the price or the method of getting to the sale/purchase price, but just be sure you understand the consequences as you could be paying more than you anticipated if you are not careful.

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Get the Business handbook

Getting the business handbook and process manuals will help you understand the business and how it operates.  Just because you may know the business, or have owned one before, it does not mean you know how this one runs, all you know is how it should be run, or how you think it should be run.  You may be surprised at how good or bad the business is run, and this may also be a clue as to how much work lays ahead of you to switch things around.  Also remember that staff is often very adverse to change, so this is a barrier that you need to contend with, and be aware of before you sign the contract.
On the flip side, you may very easily see that with some tweaks in the processes and methodology you could increase revenue dramatically in a very short period of time, making the purchase price even more attractive.  Too many buyers do not ask for this, and end up buying a lemon, and if the seller does not have one, then you need to know right off the bat that there may be problems, and you will need to sit with the seller to understand this first before you buy.  HOWEVER, because a company does not have a set of operations manuals, process manuals and business handbook it does not mean the company is a joke, in some cases it just means it has been run from the owners head.  While this does not mean the business has no direction, it is still not good for you as a buyer because you will not be buying his or her head with the business, it remain firmly on his or her shoulders when he or she leaves.

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Contracts

OK, I personally have tried this, and I have learned some hard lessons – so, I will be straight forward… unless you went and got a lawyers degree, you are NOT a lawyer, if you think you know how to put a buy/sell agreement in place, you may be in for a nasty surprise.  By all means, there are fill in the blanks documents – see our Vendors and Suppliers page for more suppliers or go to Resource Nation for more suppliers.  Get some agreements, and modify them to what you believe will suit you better, but once you are done, please give it to a professional.  You may accidentally let some loop holes crawl in with your changes, whether they are to the benefit of yourself or the seller.
For example, in almost any country, the basis of a contract has to be that it is fair for both parties.  So if you make a change, that you both may agree as fair now, might be argued as unfair later, in which case the contract may be set aside, and you will both need to return to the same state or position you were before the contract was entered into… and it is obvious as to how difficult this could be, and what the repercussions could be.
Yes, it is understood that legal help and advice has never been argued as being cheap, so to save money you could get a “fill in the blanks” contract, add and remove some clauses between yourself and the seller, and then take it to a lawyer or attorney to have it looked over and verified – and try let this lawyer or attorney be neutral, and you and the seller could split the costs – but I am sure the seller would not split the costs to pay your legal guys.
In closing on this topic, I would also like to add, that lawyers are the worst to bring in while negotiating – they are more often than not deal killers, this is not a dig at the profession, but more a warning to you as the buyer of a business, I would hate to be seen as over-generalizing.

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Brokers

Of course you could go with a business broker, and have it all handled that way  - far less painful on you, but of course consider the fact that they do charge for their services.
Brokers represent the seller, so you will not have much control over this, but perhaps you might want to recommend or encourage that, if that will make you more comfortable.  In some cases, brokers have been reported to accept a retainer fee to act on behalf of the purchaser to search for a business to sell, or to help the purchaser through the process.

Most smaller businesses are sold without the help of a business broker, simply because their fees are considered not worth it for the value of the sale.  A business broker would typically charge from 10% to 15% of the sale price for handling the sale of a business, and in higher priced companies they may come down to 8%.
Visit our Vendors and Suppliers section or Resource Nation for a list of business brokers.

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Closing

On the day of closing, you should inform the seller that on the day that you start owning the business (which should be the same day); you will need proof that all accounts, bills, utilities and services are paid up to date, unless you have agreed otherwise.  The last thing you want to do is walk in and have the power cut on your office for nonpayment, and find this and many other unforeseen bills and interest.

Closing Checklist:
It is important during the closing to make sure that you have legal counsel available to review all documentation necessary for the transfer of the business.
The following items should be addressed in a closing:

• Adjust Purchase Price — this would take care of prorated items such as rent, utilities, and inventory up to the time of closing.
• Review Documents Required to be Provided by the Seller — These would be a corporate resolution approving the sale, evidence that a corporation is in good standing, or any tax releases that may be been promised by the seller. Check with your local department of corporations or secretary of state.
• Signing Promissory Note — in some cases, the seller will carry back financing, so have an attorney review any Note documentation.
• Security Agreements — these documents may be necessary if you are going to finance your purchase. A Security Agreement lists the assets that will be used for security as a promise for payment of the loan.
• UCC Financing Statements — these documents are recorded with the Secretary of State in the state you have purchased your business. Again, these documents are necessary if you are going to finance your business.
• Lease — if you have agreed to assume an existing lease, you will be required to execute the assumption. Make sure that you have the landlord's concurrence to assumption of the lease. You may have negotiated a new lease with the landlord instead of assuming the existing lease.
• Vehicles — if the purchase includes vehicles, you may have to execute the transfer documents for the vehicles. You can check with your local Department of Motor Vehicles to determine the correct procedure and necessary forms.
• Bill of Sale — the bill of sale will be proof of the sale of the business and will transfer the ownership of the other tangible business assets not specifically transferred on their own.
• Patents, Trademarks, and Copyrights — May need to execute the necessary forms if part of the transaction.
• Franchise — May have to execute franchise documents if the purchase of the business was a franchise.
• Closing or Settlement Sheet — the closing or settlement sheet will list all financial aspects of the transaction. Everything listed on the settlement should have been negotiated prior to the closing, so there should be no surprises.
• Covenant Not to Compete — it is a good idea to have the seller execute this agreement. This will help add to the success of your operation of the business without any interference from the previous owner.
• Consultation/Employment Agreement — if the seller has agreed to remain on for an amount of time, this documentation would be necessary.
• Complete IRS Form 8594 (PDF file), Asset Acquisition Statement — this document will indicate how the purchase was allocated amount the various assets. Important for your tax return.
• Bulk Sale Laws — Make sure that all bulk sale laws have been complied with in the transfer of the business assets.

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Sales agreement Checklist

    This is a list of items you should have on the agreement:

• Names of Seller, Buyer, and Business
• Background information
• Assets being sold
• Purchase price and Allocation of Assets
• Covenant Not to Compete
• Any adjustments to be made
• The Terms of the Agreement and payment terms
• List of inventory included in the sale
• Compliance with the Bulk Sales laws of the state
• Any representation and warranties of the seller
• Any representation and warranties of the buyer
• Determination as to the access to any business information
• Determination as to the running of the business prior to closing
• Contingencies
• Possibilities of having the seller continue as a consultant
• Fees, including brokers fees
• Date of closing

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Now what?

Well, you run the business.  Unless you really know the business you should not change a thing, at least for the first couple of months anyway.  Just running in and making changes will make clients and staff nervous.  You need to sit on your perch and take a good look at things first – of course there may be things glaring you in the face that you may want to change, but try and keep them very limited.

Good advice at this time is as good advice as what you would get in many situations, "talk less, listen more"... "measure twice, cut once".  Any hasty decisions you make at this point in time could be potentially catastrophic, but if you listen well enough, and measure well enough, they could throw this business from barely making it, into the big time.  The point that needs to get across it that too many people buy an existing business, and cannot wait to make changes... just be watchful.

Congratulations, you are now a business owner, maybe for the first time, maybe this has happened before, or even numerous times before.  We wish you the best of luck, and hope you will stick around on our page to get more helpful information going ahead through the stages of your business.  Again, never forget or hesitate to contact us if you have anything to add, or anything to say.

Buying an established business certainly holds many benefits, and it is a wise move if you can find the right business to buy.  You need not always buy the business you know everything about, or something you would have imagined yourself doing – remember you role is to manage the business, you can hire people that can do the work while you learn the trade.  Obviously buying a business in an area that you are skilled in is certainly better and easier, and is highly recommended, but there are many cases of a doctor that bought a Mc Donald’s or an IT guy that has bought a plumbing company and has made a great success.

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