As a business broker, I have been apart of many business sales. From my experience, there are several very important high level tips for individuals who want to buy a business. Here they are:
Tip 1: Act Fast
I have sold many businesses, some better than others. One thing I’ve noticed is the best business offerings do not last long. Usually they go under-contract or LOI within the first couple weeks, sometimes sooner. So if you find a business you are interested in, I recommend doing your pre-LOI due diligence quickly. If the business has potential, then submit an offer with a due diligence period and exclusivity clause. This will ensure you get an opportunity to buy the company and still allow you to walk away if something isn’t as advertised.
Tip 2: Finance rather than pay cash
I recommend financing the purchase rather than paying cash. The reason is because the bank will perform their own underwriting and valuation of the company. This will allow a second set of eyes to review the business, make sure there are no major issues and the valuation is accurate.
That being said, don’t assume the bank’s underwriting process is sufficient due diligence. You should perform a detailed due diligence process in addition to the banks review.
Tip 3: Find the right advisors
I can’t stress this enough. Using truly experience advisors (Lawyers, CPAs, etc) is very important. For example, if you hire an attorney who only does business transactions once a year, they are going to miss important items and fight for things that may not be necessary. Either way, you end up with a big bill and sometimes the deal never closes because of the stand still an inexperienced attorney may cause.
When it comes to CPA’s, keep in mind they probably never sold a business before. So, take any valuation they provide with a “grain of salt”. When it comes to valuations, look at comparable businesses on the market.
Tip 4: Find the right bank
Not all banks are the same. In the past, I’ve noticed big banks like Wells Fargo, Chase, or Bank of America have a very black and white approach to business acquisition lending through the traditional SBA 7a loan process. These big banks really have strict guidelines and industries they feel comfortable lending to.
Smaller banks tend to offer better rates, lend to more business types/industries, and review applications on a more personal basis.
Tip 5: Get a pre-approval
Having a pre-approval is handy when there are multiple offers on a business. As a business broker, I always advise my clients to pick the offer with a pre-approval and proof of funds attached. The sales process takes time and we do not want to waste it on someone who can’t qualify or is not very serious about buying a business. The pre-approval shows there is some level of seriousness that the buyer wants to buy.