5 Great Tips for First-Time Business Buyers

It is absolutely a blessing to be able to consider purchasing a business. If this fits you, a big ole’ congratulations is in order. Beyond that, purchasing a business can seem like a scary thing… unless you’re prepared. If you are considering purchasing a business then you’re looking for a steady stream of income, a pathway to self-employment, a growth opportunity or something very similar. These are some typical reasons given by entrepreneurs who want to purchase a new business. I have 5 tips for you that you should keep in mind as a first time Business Buyer.

An experienced Business Advisor or Attorney can help you understand what you’re really buying. A professional can make sure that your purchase terms include everything you need in your contract to make your new business successful. You are buying more than a profit or a cash flow. When you buy a business, you buy a whole lot more, such as buying the inventory, leasing rights, contracts, licenses, a website, business equipment, merchandise, a customer list, a vendor list, goodwill, reputation and sometimes the liabilities of that business.

The best example I can give regarding this tip is to ask this question—would you by a car without looking under the hood? Probably not, right? This is the same concept that should be applied to the purchase of a business. You are not going to buy a
business without looking at the tax returns, financial statements, and other indicia of what are the true earnings of the business. In business, this is considered “under the hood.” As a buyer, you want to review at least three (3) years’ worth of tax returns, profit and loss statements, and balance sheets. Also look at the industry trends for the business industry you’re considering investing in and review reported revenues, expenses, and typical net earnings for your business type. Verify earnings against bank records and records of deposit. If you are not well versed with reviewing financial records, you may want to add a qualified expert on your team, such as a Financial Planner, or an Accountant.

Most first-time business buyers need some form of financing such as SBA-backed loans. It helps a Buyer to form a relationship with an SBA-backed business lender early. It can help you with understanding the size and type of business you can afford before starting to make offers.

Buyers should consider businesses which can support the additional loan cost the business will incur upon purchase. Businesses with stable earnings are more attractive to lenders. As a general rule, each $1 million borrowed under an SBA loan costs about $108,000 annually in debt service—so a $2 million business should be generating around $216,000 in net earnings to qualify.

The best advice I can give you when it comes to due diligence is to trust but verify. Once you find a business you are ready to purchase, it’s time to verify what you think you’re ready to buy. Review all licenses and make sure they are all valid and up to date; make sure all leases are transferable; review the number of employees and employee classifications; make sure there are no pending legal disputes or tax liabilities. Be sure to review supplier relationships and customer relationships to gauge business strength and revenue stability. An Attorney, Accountant or Business Advisor is very invaluable expert help. An Attorney can review contracts and compliance. An Accountant can verify financial accuracy, and your Business Advisor can help you negotiate the terms of the purchase agreement, help keep you on track with deadlines, help you create a transition plan and help you get the deal closed.

No one wants to see a business falter under new ownership. A Plan is needed to set out a path for how business operations will be assumed, for retaining key employees and for making sure a business can continue to run smoothly so that customers hardly even notice the change, unless the changes they notice are for the better. Strive for a smooth transition. The goal isn’t just to buy a business—it’s to buy one that thrives under your new ownership.