Buyer FAQ

Once you think you want to buy a business, the next step is to decide the terms upon which you want to buy the business and prepare either a letter of intent or a purchase offer. In many cases, the seller’s broker will handle both sides of the transaction. It is in everyone’s best interest that the seller and buyer get to know each other establish a win/win proposition. If you have not purchased businesses in the past you will need some advice on how to structure your purchase offer. Most seller brokers are willing to help but it is important for you to understand their primary relationship is with the seller and make sure to seek your own counsel.

Knowledgeable market watchers estimate that at most times there are approximately one million businesses for sale. Some are never listed to the general public and will trade hands without any listing for potential buyers to see.

There have been many studies trying to answer the question of why people go into business instead of working for someone else. The following list provides the most common reasons in descending order from most to least important.

  • Want to control your destiny and do it your way
  • Tired of working for someone else
  • Use your skills and talents in a manner that you feel is best
  • Make more money than as an employee

The following are additional reasons given in response to surveys:

  • Opportunity to enter a family business
  • Inheritance of a large sum of money
  • Relief from conflicts with employers/take more control of the future
  • Response to being laid off or fired

The startup phase of a business has the highest failure rate. An existing business has a track record and a customer base. The seller, unless there has been a death or other medical reason, will be willing to help train a buyer over a reasonable period of time. Statistically, the failure rate of small business in the first 3 years is around 80%. Obtaining financing for a startup business is also much more difficult than for an existing business that has historical financial information. In today’s financial market, most sellers are willing to provide some financing to qualified buyers, which may be all the financing necessary. In other instances, the seller’s willingness to help finance the purchase provides extra stability for other potential lenders. Please read our blog post on “Five advantages of buying an existing business

There are many factors that should be considered. First and most importantly, to be successful in a small to medium size business, you as the new owner must have a passion for the business. Additionally, your available financial resources will enter into determining the size of the business. It is possible to buy larger businesses with additional equity partners in the venture. But, keep in mind that, with partners, sometimes control is given up to obtain their investment.

A careful analysis of your skills is important identifying a target industry or business. Your background, next to your financial capabilities, is an important consideration when deciding the correct direction for your search.

When you look at a business, you should feel that you can do better than the current owner. If you don’t feel that way, you will likely pay too much for the business.

In general, the value of a business is what a buyer is willing to pay. It doesn’t matter what the seller’s opinion is, or that of an advisor, valuation specialist, friend, business broker or someone who just sold a similar business. Most valuations are based on the principle of how the business will pay for itself. However, strategic buyers are more concerned about items such as the number of subscribers or customers, types or placement of facilities or perhaps a specific product that they want to add to their existing business.

Professional business intermediaries and business brokers have experience with many different deals and types of people involved in the process. They also have access to and working relationships with a wide selection of other professionals that may be needed to complete the acquisition and help make the business successful after the purchase. Business brokers are professionals who can help advise you of the value of the business and the financing options that may be available, and help you avoid common pitfalls in the buying process.

Buying or selling a business is one of the most complex transactions that you are likely to encounter. It is possible to do it without professional advisors, however, we strongly recommend that both buyers and sellers have their own legal and financial advisors, who have experience in the purchase or sale of a business, for the transaction. We have seen many buyers that did not use professional advisors who felt, in retrospect, that they agreed to terms that caused them difficulties after the purchase. For example, some have agreed to payment terms that were unrealistic to be funded by the businesses operations; others have failed to properly understand the need for an adequate training and transition agreement. Buying a business is best done with a team of trusted advisors.

Bear in mind that any advisor will have his or her specific point of reference about the transaction. You will have to make decisions. However, when the agreements have been completed, a good way to find out if they are done well is to ask the advisors if they would sign them.

A lot of intermediaries or brokers fail to tell the buyer the importance of a well-thought-out transition plan. The success of the transition period can determine the success of the acquisition. Most sellers are willing to provide some training. After a period of about one month of free training from the former owner, it may be important to have the option for more training and transition. This will normally require additional compensation to the seller. A training period of up to one year may be necessary to make the transition successful for certain businesses.

No. In today’s market, sellers either have to be willing to provide some financing or the business should be capable of obtaining a commercial loan for part of the purchase price. It is common for the purchase to be made using a combination of money from the buyer, financing from the seller, money from an investor group, and a commercial loan. When considering how much cash you have to put into the purchase of a business, remember that you need to retain some to cover necessary operating expenses during the transition.