What Every Buyer of a Small Business Should Know
You’ve decided to buy a business. Maybe this is your first acquisition, or maybe you are a serial small business owner. If you’ve gone through this process before, you understand the drill.
90% of the buyers that decide to buy a business never follow through. No wonder brokers and sellers are very thorough in their buyer vetting process.
If this is your first time buying a business, here are seven tips:
- BE PREPARED
Update your resume and be ready to send it to the seller. Include a link to your updated LinkedIn profile. You will also need to provide your personal financial statement (PFS). (Sellers won’t waste time with a buyer that cannot get financing.) Better yet, have a supportive letter from a bank/SBA lender.
- KEEP THINGS CONFIDENTIAL
Understand that you will need to sign a Non-Disclosure Agreement (NDA) to review the seller’s sensitive financial and business information. Once signed, honor this commitment. Confidentiality is a huge concern for business owner’s; if employees, vendors or customers learn they are on the market their business could face extreme detrimental consequences.
- DO YOUR RESEARCH
If you just started looking for a business, you are at a disadvantage. Sellers want to talk to potential buyers that have evaluated multiple deals. If you recently lost out on an attempt to buy a business (for example, if your bid was not accepted) this is a good thing. This shows you’ve been through the process and have learned a few things and gained experience.
- EXPERIENCE OWNING A BUSINESS
If you have owned a business before great! Make sure the seller knows this right away. The seller likes knowing you realize the risks that come with business ownership. If you haven’t owned a business before but you’ve grown up in a family that has, that is important, too.
- RESPECT THE PROCESS
Do not try to drill into due diligence before a Letter of Intent (LOI) is signed. Nothing irritates a seller more than a buyer that continues to request documents without making an offer. You should receive a Confidential Information Memorandum (CIM) right away. You also should have the opportunity to meet the owner (preferably at their business). After the CIM, the meeting with the owner, and a few follow up questions, you should be in a position to submit an LOI. If accepted, that’s when the due diligence begins.
- TELL THE SELLER WHAT YOU NEED
Once a LOI is signed prepare your due diligence list so the broker and seller can provide that information in the dataroom (electronic storage with information about the business). Too often, an inexperienced buyer will assume the seller will just start uploading various documents into the dataroom. You need to tell the seller what you want to review.
- WE ARE ALL BUSY
Respect the sellers time. The owner is trying to run their business and meeting with potential buyers is time consuming.
Buying a business can be a very rewarding experience. Boomers are currently exiting their businesses at an extraordinary pace, and there is an abundance of buyers in the current market; you need to stand out. Follow my tips and you will have an edge in buying that perfect business.
This article was written by Sam Thompson. Sam is the president and owner of Transitions In Business, a Minnesota based M&A firm that specializes in selling healthcare, business to business, transportation, manufacturing, distribution and IT companies. Sam is a Certified Business Intermediary who has successfully guided countless business owners through the sale or merger of their company. Prior to becoming an intermediary, Sam was a successful CEO and business owner for 29 years before selling his $16 million business.