Preparing to Buy a Business

Purchasing a business can be one of the most financially and emotionally rewarding experiences of one’s life. It can also be disastrous without proper counsel and preparation. Below are five steps that can help to alleviate (not eliminate) the risk involved with a new business acquisition.

1)     The first step is to gather the professional group that will be helping you. You will likely need an attorney and a CPA to help with the financial review of the business, entity formation and its tax implications, and someone to help write a purchase contract. You may also want a business broker or someone to help you navigate the business for sale market and you may need a banker.

2)     Have the financing or capital plan worked out in advance of the purchase. Spending a little time with banker will help identify what kind and size of a business the personal financial situation will allow. One of the biggest mistakes we see are small businesses being under-capitalized and thus cannot operate at full capacity. Under-capitalization is one of the top reasons businesses fail.

3)     Search within your knowledge base. The Small Business Administration (SBA) has substantial data on this subject. If you are purchasing a business in a sector that you understand well and have personal experience in, the chances of success are drastically increased. SBA standard operating policies require personal experience in the sector to be approved for an SBA loan.

4)     Complete a thorough due diligence. We see many buyers attempt to complete due diligence on their own. Unless you have experience in conducting due diligence, we do not recommend it being completed solely by the principal purchasing the business. There are just too many risks and places to be investigated prior to purchase to take this risk.

5)     Consider writing a contract. A contract that has earn-through components or a claw back clause along with a robust non-compete is helpful when purchasing a business. Having these types of clauses in the contract can help to keep the selling business principal involved in the business success. It will also protect from possible client runoff or contract retention issues that may come to play in a business purchase.

While purchasing a business is exciting, it is also likely to be one of the largest financial purchases you make and one that involves considerable risk. The above five tips will help to keep the risks down and allow a direct focus on growing or sustaining the business.

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