Important Steps to Complete When Buying a Business

May 2020

When buying a business there are certain steps you should take prior to signing on the dotted line.

1. Enlist the help of a professional business broker.  They will help guide you through the deal from beginning to end making sure you are presenting the absolute best and complete offer you can.  They will help you perform the due diligence and submit a Letter of Intent (LOI) that lists the terms and conditions of the sale.  It is important that all the proper steps are taken, and all documentation is filled out correctly and the details spelled out exactly on what and how you are purchasing the business. Ideally, ask your business broker if they hold the CBI (Certified Business Intermediary) from the IBBA (International Business Broker Association), this designation will help ensure you are working with a professional and experienced business broker. If they don’t hold the CBI, be leery of working with them. They may not have the experience or expertise that you will need.

2. You will want to request the business owner’s last 3 years of financials including tax returns and profit and loss statements.  This is also a good time to enlist the assistance of a good accountant to help you review all the documentation and determine the viability of the business. This process is known as the due diligence process and a good business broker will help protect you in your offer outlining what due diligence items you need and giving you flexibility if you determine the business is not what you thought it was during the due diligence process so you can back out of escrow and get your earnest money deposit returned without delay.

3. Protect yourself by obtaining an indemnity from the seller.  Even though you have reviewed the seller’s books there could be items that you are still unaware of that could open you up to future lawsuits, judgments, and other items tied to the business prior to you owning the business.  Obtaining indemnity from the seller protects your future and in return, it also protects the seller from anything that you might do once you become the owner.  You should also have the seller complete and sign a seller’s disclosure form that further protects you.

4. If the business owner leases their space, you will want to find out if you can assume the lease and what are the terms of the lease.  Is there a security deposit?  If so, will you need to reimburse the seller or is this included in the sale price?  All this information will need to be decided and included in the final closing documents. A good offer will be contingent upon lease assignment approval or a new lease being negotiated.

5. Look for any prepaid expenses the seller might have that will continue to occur after the deal has closed.  Are there long-term agreements for advertising, social media, etc.  If there are then you will want to include this in the closing adjustments listing how and if the owner will be reimbursed and the pro-rated amounts. Has the seller sold $10,000 on Groupon that has not been fulfilled and after closing, you are stuck providing the goods/services but not able to collect any money? This and other important items are part of your due diligence process.

6. Make sure to include a training period where the owner will stay on for a few weeks to help train you on the day to day procedures of the business.  You will want the owner to help you transition as the new owner with the employees, customers, and vendors. 

7. Finally, and probably the most fun, come up with a fun and ingenuity way of announcing you are the new owner of the business.  Make sure to include any improvements you will be making, changes, or any special deals you will be offering.