Buying a Small Business July 19, 2010ArchivesOff

Buying a Small Business

Here’s what you need to know to save time – and get into escrow.

By Peter Siegel

Know what you’re looking for. Before you start contacting business brokers, owner/sellers and agents, know what types, sizes and locations of businesses you are looking to buy. If you seem uncertain about your search criteria, brokers and agents will not spend much time with you. There are many more buyers than sellers on the market, and sellers like to work with buyers who are serious, motivated, and know what they are looking for. Compile an Acquisition Criteria sheet that goes over your current search criteria. It pays off and shows you’re serious.

Know what you’ll spend. Have at least a good idea of how much money you are willing to spend on a down payment for a business. You’ll probably have to put down at least 30 percent. The amount you’re willing to put down may determine the size of business you’ll be able to purchase. Also decide if you’re willing to use any real estate you own as collateral.

Know where your funds will come from. You have several options for gathering capital: your savings, friends and family, pulling equity out of your home, your retirement funds, SBA loans, bank loans and angels (just to name a few). Consider getting pre-approved for an SBA loan and other financing options before you write any offers.

Respect confidentiality agreements. To view any detailed information on businesses for sale, you will probably be asked to sign a confidentiality agreement. Respect this part of the process and keep the sale of all businesses confidential. You (and your lawyers) will be glad you did.

Line up professionals before you sign a contract. You will need the services of several professionals in this process: a CPA or due diligence consultant to review the business’s financials, escrow services and an attorney to review anything you sign.

Make an offer – get the process started. Too many buyers are too timid and not willing to “pull the trigger” and sign a purchase agreement. So too many serious buyers lose out on great deals because they’re too analytical or pensive about writing up an offer. Writing up an offer also usually “locks out” your competition for a period of time so you can take a look at important business records and info. After you sign the purchase agreement you will have a Due Diligence period with contingencies that must be met before the deal is final. If those contingencies are not met or records are not exactly as represented, you are usually able to pull out of the deal.

Keep the negotiating and communications moving forward.

Remember – time kills deals. Don’t let any situation sit too long.

Get into escrow. The sooner you get the signed purchase agreement into escrow and sign off any contingencies as they are removed, the better your chances to close. Go through the Allocation of Purchase Price in the beginning of the escrow process. Being in escrow usually closes off the deal to competitive buyers.

Peter Siegel, MBA, is a consultant and author with over 25 years’ experience selling, buying, and niche financing small to mid-sized businesses. Founder of BizBen.com and USABizMart.com, he writes a syndicated small business blog.

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