10 Steps to Buying a Small Business

A version of this article previously appeared on AvvoStories

So you want to be the boss? If you’ve always wanted to call the shots, then buying a small business may be right for you. Before you take the plunge, follow these 10 steps to make sure your dream business is not a nightmare.

1. Find the right business

If you know of a small business that appeals to you, but it’s not advertised for sale, make the call anyway. You may find the owner is interested in making a change and your timing might be perfect. If you have no business in mind, then check local newspapers and online resources, such as the International Business Brokers Association.

2. Consider a broker

You may want to use a broker to find a business, but keep in mind that most brokers are hired by, and work for, the seller. Ask the broker how s/he is paid and also check to see if  s/he is properly licensed. States have different rules, so check your state’s directory to make sure the broker is compliant; also find out if he is registered as a Certified Business Intermediary.

3. Hire a business lawyer and financial team

Put together a professional team consisting of a business lawyer, accountant and financial planner, and ask if they know of businesses for sale. Work out a financial statement listing assets and liabilities, and be honest about your financial expectations and abilities. If you travel half the year then you may need a business that can survive without your presence. You will want to show your best side to the seller, so make sure your résumé is current and your financial house is in order. 

4. Negotiate like (and with) a pro

Whatever the business, if you can pay for it out of the business’ ongoing cash flow, then that is a savvy way to go. Some buyers lease their business with an option to buy. Just remember the rule to not give all your money to the seller because you will need to hold back some money for marketing and incidental expenses once you assume the business. As with all negotiations, it is best to have a professional on your side; so get your business attorney involved. 

5. Draft a letter of intent 

Once you determine a business is right for you, your business attorney can draft a letter detailing your intention to purchase the business. The letter of intent (LOI) should allow you to walk away from the deal, and any deposit should be refundable. You also want the LOI to hold both sides bound by confidentiality, and you want the owner to not “shop” the business around while you are doing due diligence. 

6. Complete your due diligence

Many deals are structured allowing due diligence for 60 to 90 days after the buyer and seller sign a letter of intent. This period gives you time to review the seller’s business data including customer information, sales, tax returns, cash flow statements, personnel records and all relevant financial documents. Have your financial team look over the data and remember that past performance is no guarantee of future success. You will also want to look outside the company for business information and trends, such as whether the real estate is in a changing district, or whether the business had its heyday two years ago. Also check for liens and employee benefit claims or settlements, and difficult supply channels. You want to know all liabilities and risks. 

7. Understand the price

Your financial advisor will determine whether the seller’s valuation is in range. The seller may have used a multiplier of gross monthly sales or profits, such as valuing the business at three times gross sales. Or the seller may use “book value” or Return on Investment (ROI), which is computed on how much profit is realized after debt and taxes. Don’t rely on the seller’s calculation; that’s why you have a financial team.

8. Avoid out-dated inventory and receivables

A savvy buyer should avoid getting stuck with out-dated inventory or receivables. If receivables are over 90 days old, they may be cold. Negotiate a lower price to leave stale inventory and receivables with the seller.

9. Require a fair non-compete agreement

Make sure to have the seller sign a fair non-compete agreement, so you don’t find him going into business a few blocks away next month. 

10. Have your attorney review the paperwork

Many brokers are also real estate agents, which helps if there is property involved in the transaction. Still, you will want your business attorney to review all paperwork, including:

• Licenses and permits
• Corporate resolution of sale
• Promissory note
• Security agreement
• Bill of sale
• Covenant not to compete or non-compete agreement
• Transfer of intellectual property including patents, trademarks and copyrights
• Compliance with any Uniform Commercial Code (UCC) or bulk sale laws

Congratulations on taking the steps to become your own boss!

This article is written by 

Janette Turner is an attorney and writer, contributing to local news outlets in the greater Seattle area. She also writes for AvvoStories, brought to you by Avvo, the leading online legal marketplace connecting consumers and lawyers. Avvo’s free Q&A forum with more than 9 million questions and answers, along with on-demand legal services that provide professional counsel for a fixed cost, make legal faster and easier.