The five most critical things to know when buying a business
Maybe you have always wanted to be the boss, maybe you're looking for a second career after retirement. Whatever the reason, if you're thinking about buying a business then there are a ton of things to consider and these 5 are some of the biggest.
- Understand the business broker or business intermediary(s) role in the transaction and what it means for you. As someone buying a business, you will likely work with a broker or intermediary who represents the seller of the business. This presents a unique problem for many people, since business brokers work differently than real estate agents. A business broker may or may not co-broker, meaning that they may or may not split a commission with a broker who represents the seller. For this reason, most businesses are listed with a business broker who represents only the interests of the seller.
Most business brokers are competent and professional, but to make sure your interests are represented, you should move on to the second critical item and take it very seriously.
- Assemble your deal team early. Your deal team consists of you and any business partners, along with your attorney, your CPA, and your lender. Assembling your team is ultimately going to cost something, so be sure they are knowledgeable and experienced. This may be one of the most critical pieces to the puzzle when acquiring a business. The attorney and CPA you work with up front should be long-term partners in your business, and the relationship should grow as the business grows. Your lender should be experienced and understand what you are trying to accomplish; ask for a term sheet that spells out the structure and conditions of any proposed financing to be sure you are on the same page.
- Understand the cash flow of the business you are looking to buy. You will likely be asked to sign a nondisclosure agreement for the broker. Once that is done, you should be able to get a breakdown of the historic income of the business you are seeking to buy, along with the financial documentation to back it up. Learn to calculate EBITA and understand how the bank is going to view cash flow and repayment ability.
For a detailed explanation of how cash flow is calculated by the bank, call or email me for a free copy of my eBook, Singing The Underwriter’s Song: A practical guide to buying a business with SBA financing.
- Understand the financing options available to you and the requirements for getting a loan. Acquiring a business is likely a once-in-a-lifetime event for most people, and getting the financing right is important. For purchasing a very small business (under $100,000), there may be alternative sources of financing. A home equity line of credit would be sufficient in many cases. For larger business purchases, where there may be $1 million or more in unsecured debt, an SBA loan is often required to get the project across the finish line.
- Know your lender. Interview the lender you plan to work with. Be absolutely sure that your lender is an expert in SBA lending and that the bank participates in the SBA Preferred Lender Program, otherwise, you may be in for a very long and disappointing process. Ask what the bank’s policy is about goodwill and under-secured debt: Is there a written policy? Does the loan officer know and understand the SBA rules? A little bit of research will insure you have a good experience and that the project crosses the finish line.
**Opinions of the Author are his own and not necessarily the same as the publication and are neither endorsed nor reviewed by them.**
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