A Guide for Purchasing an Existing Business

Owning a business is part of the American Dream for many people. This type of decision should be made carefully after analyzing relevant facts and figures. Having a trusted guide to follow takes some of the stress out of the decision-making process. 

Evaluating a Business for Purchase

Once you find a business you’re interested in buying, it is time to ask the hard questions. You should not take the seller’s answers at face value. It is important to evaluate how well the rest of the data you gather matches up with what the seller tells you. Ask yourself whether the answers pass the “smell test.” Do they smell fishy? 

The first natural question to ask is why the seller is selling the business? Understanding why a seller is about to bale out will provide a lot of crucial information about how prepared the owner is to sell and how difficult the transition may be. 

Forbes warns buyers about the importance of getting a non-compete agreement signed by all owners. If you ask them if they are willing to sign a non-compete agreement and they aren’t, then you should forget about that business deal and move on. 

Since key employees are always a big part of business success, it is important to find out if the employees know the business is being sold. In cases where the seller is unwilling to tell his employees he is considering selling, you may have a problem on your hands. The seller should have a formal agreement signed by key employees stating that they won’t leave the business before training the new owner. In cases where new employees leave too soon, new owners can experience serious problems. 

Finally, you need to ask what the biggest challenge is that the seller faces running the business. While it is common for sellers to avoid shedding any bad light on a business they are selling, you need this information so you can carefully evaluate your chance for success. Press for the answer. 

Hiring a Professional Lawyer and CPA

There is a lot of paperwork in this type of business transaction that must be reviewed and created by competent professionals. Interviewing and hiring an experienced CPA and attorney is important for any serious buyer. Minimally, the letter of intent and sales agreement must be prepared. Financial statements, tax returns, contracts, and leases need to be evaluated and revised if necessary. 

Financing Options

Gone are the days when you were required to put on your best suit and walk into a bank to meet a loan officer to get financing to buy a business. There are many other ways to raise capital for purchasing your business. Kiplinger recommends borrowing from friends and family, crowdfunding, credit cards, microloans, cash flow loans, term loans, low-interest small business loans, SBA loans, and bank loans. Each of these sources has advantages and disadvantages and can come in handy when it is time to “put up or shut up.” 

Friends and family are a logical go-to source of capital, offering easy access and terms that are agreeable. This choice can be a quick source of funds when you need the money today. Typically, friends and family members should be viewed as a limited source of cash. Be forewarned – there are some serious problems that can arise when you mix family, friends and business. 

When you need the money fast, some other sources for quick cash are credit cards, term loans, receivables financing, and cash flow loans. Too often, the downside of most of these sources is the high-interest rates. That’s why so many people decide to turn to family and friends for fast money as a better option. 

If you aren’t pressed for time, then some of the most favorable terms are provided by SBA loans, low-interest small business loans, microloans, and bank loans. These options can take more time, but the superior terms may make it a better option if the seller is flexible. Owner financing also fits into this category as a creative way you can negotiate your way into a deal. 

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About the author: Wifred Murray

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