First-Time Business Buyer
Q: I'd like to purchase a business. What do I need to do to start the process?
A: There are several factors you need to consider before purchasing a business, the first being the type of business you'd like to buy. Once you've determined that, your to-do list will be lengthy: You must identify businesses of that type that are for sale, contact the seller, complete a basic analysis of the business, make an offer, conduct extensive due diligence, negotiate final purchase documents, close the transaction, transition your management, and contact your customers and vendors (if appropriate). My first piece of advice is to retain an experienced mergers-and-acquisitions attorney and an accountant to help you evaluate your opportunities and work through the legal and financial aspects of any deal.
Because it appears this is your first time buying a business, I'll address the first few steps in more detail.
With regard to determining the type of business you'll purchase, there are several considerations, including:
- Your expertise
- If you've established expertise in a certain area because of your past business experience, or even an active hobby, this may help you narrow down your industry of interest. It may also help you to be more open to a variety of industries because you have general business or financial expertise.
- Often, individual buyers are more concerned with the geographic location of the business they want to purchase than the specific industry in which it operates. Relocation may not be feasible or desirable because of family and other personal interests. In this case, your business search may span a variety of industries but concentrate on a tight geographic region.
- Size of the business/funds available for acquisition
- The amount of money that will be required to purchase a business varies greatly depending on the amount of assets in the business (that you can use as collateral for bank financing), the industry and the seller's expectations. As a general rule of thumb, you should plan on having approximately one-third the value of the business in cash if you're purchasing an existing, profitable business. Seller financing may also be available (in other words, the seller carries the note and receives payment from you over time); you should determine this early on in your conversations with the target company.
- Franchise option
- An alternative to consider for your first business venture is the purchase of a franchise. The advantages of a franchise lie in the fact that the franchisor has a vested interest in helping you succeed-therefore, they'll often train you and provide financing and ongoing support. If you decide to pursue this option, make sure you investigate the franchisor thoroughly. You may want to research a number of franchise options simultaneously to compare the levels of franchisor support and the success rate of existing franchisees. A list of franchise opportunities can be found at Entrepreneur.com's Franchise Zone.
As for locating a business for sale, one option is to contact a local business broker who may be representing a number of businesses in your area. The International Business Brokers Association, for instance, allows you to search for a business broker by geographic location. A third option, assuming you are interested in franchising, is to contact franchises directly. They can tell you about opportunities for new franchises or about purchase opportunities for existing franchisees in your area.
Loraine MacDonald is director of advisory services at USBX, an investment banking firm specializing in the mergers and acquisitions of small to midsized businesses. She has been involved in the valuation and sale of privately-held businesses for over ten years.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.