You’ve found a business that you are considering purchasing. Generally, the process of buying a small business follows the same pattern, from finding and choosing the right business to closing the transaction. We’ll walk you through the entire process briefly, so you know what’s coming:
Why You Need to Write a Letter of Intent
A letter of intent will outline everything you negotiate with a business, including the purchase price. It also states your intent to buy the business. This is a non-binding agreement, but it does show the seller you are ready to move forward in the purchase process. In addition, the letter of intent will ensure you have exclusive rights to buy the business for a set period of time, usually up to 90 days. This means that during that 90 days, you will be the only person who can purchase the business.
Enter Due Diligence
After the letter of intent is signed by both you and the seller, you will gain greater access to more information about the business. Before this step, your overview of the business will be basic. Sometimes, potential buyers arrive at the Due Diligence phase before they compose their letter of intent. Regardless of the order, during the Due Diligence phase, you will have access to a great amount of legal and financial information, including the following pertinent items:
- Contracts and Leases: This would include the current contract and leases the business is in. You will need to find out if these existing contracts can be assigned to a new owner, or if you will have to enter into your own brand-new contract.
- Business Licenses and Permits: This includes any business licenses or permits the current business has in place. You will need to find out about these documents and learn what has to be done to maintain the licensing or permits.
- Organizational Paperwork, Certificate of Good Standing: Again, you will need to examine all-important paperwork of the business, including a Certificate of Good Standing. Find out if this paperwork is applicable for new owners or what you need to do to maintain the standing.
Negotiating The Purchase Price
In many deals, this is the phase of the process where the buying process can fall apart. This is because in many cases, the new buyer and previous owners simply value the same business vastly different and therefore cannot come to terms on a purchase price. To get through this process, it can be helpful to hire a third party to help value the business. The purchasing prices should take into account the potential earnings, the business assets, and the market value of the business.
Get Your Financing Plan in Place
The next step of the buying process is getting the capital in place to make the purchase a reality. You can use personal or family money, obviously, but most people don’t have that option. Other finance options include seller financing, partnering up with another party to purchase the business, leasing the business for a time or more traditional financing.
Evaluate The Business’s Insurance History and Coverage
Finally, the last step you need to complete before truly considering purchasing a business is the business's insurance coverage and the history of their policy. Commercial insurance coverage will be an essential part of any business you decide to purchase, no matter the industry, and will be integral in protecting you against huge financial losses.
There will be various factors that should be considered when you evaluate the adequacy of the business’s current insurance coverage, but take time to get as much information as you can about the risks that can happen due to operations, as well as the business's insurance provider. Consider the following aspects of their coverage:
- Claim History
- Open Claims
- Coverage
- Claims-Made vs Occurrence
- Experience Mods
Mistakes to Avoid
Be sure to avoid the following common mistakes when purchasing an established business:
- Overestimating the value of a business.
- Failing to understand the motivation and emotions of the business’s seller.
- Lack of understanding as to what really drives the business’s revenue.
Bottom Line: Buying a Business Can be a Good Move, but be Careful
Once you buy a business, you buy everything that comes with it, and that includes any potential issues or problems. This is why it is vital to have the right financing insurance in place right from the start. Contact our team today to start a discussion.
