The Business Plan
Some believe in luck, and others agree with Seneca, who said "Luck is what happens when preparation meets opportunity." If you want to build a successful business from scratch, you'll need a little of that luck - and a lot of preparation too.
Sometimes the business is born out of a hobby that grows beyond its natural bounds, and sometimes it is cut from whole cloth, freshly minted. Whether you are starting from absolute ground zero, or you have floated some test balloons and like the result, this is a good time to lay some groundwork.
Betting on the Come
We've spent quite a bit of time talking about buying what someone else has created. There are a lot of reasons why buying an existing business may be the best choice for you. There are also reasons why it may not.
Sometimes there just isn't an existing business that does what you want to do, or its culture, market position, price, or other characteristics make it an undesirable acquisition. There may not be financing available. Or maybe you just really want to build your dream from the ground up.
Whatever the impetus, there are some steps you can and should take to minimize your risk and to establish a good foundation for the fledgling business.
Take the time to write a business plan. Aside from being a tool for obtaining financing, or investors, it imposes on the creator the discipline of fleshing out the dream, describing it in concrete terms, and assigning number values to the grand scheme. This process will help you determine if you need to obtain any sort of licensing in order to operate the proposed business, will help you establish pricing, and allow for a more objective view of the competitive landscape in which you intend to operate.
Tying it all together- Closing the deal
At the end of the day, all your efforts to negotiate a good deal, to investigate the business, and put together the financing will be an academic exercise if the deal doesn't close.
While the broker usually represents the seller, a business broker can be a great resource when it comes to getting things to the finish line, in part because that's the only way they get paid. It is not uncommon for issues to arise at the last minute: inventory that the buyer thinks is stale, last minute financial information that may affect the price, or simply cold feet. The seller's broker and the buyer's team can help by staying on top of issues as they arise, communicating to the whole group, and clearly identifying in advance what the make-or-break issues are.
The buyer and seller will each have documents to sign, which may include a bill of sale, stock transfers, non-compete and consulting agreements, and for the buyer perhaps some loan documents. The parties do not all need to attend a signing together, in fact it is usually easiest not to do so. Often a spouse will need to sign something as well, and a notary may be needed. If an escrow has been established, the escrow officer may facilitate the signing, or the buyer's lender may want to control the signing.
The actual transfer of keys, access to premises, books and operations must be scheduled, and a final inventory count may be necessary. If no escrow has been used, the buyer and seller will need to have agreed on how and when funds will actually be transferred.
The seller's broker and the buyer's attorney can and should work out these logistics in advance, allowing the buyer to pivot their focus to commencement of operations and control of the business.
While it is challenging to make a comprehensive list of items that a prospective buyer should investigate, what follows is a list of general categories and a few helpful hints. It bears repeating - this is why the buyer should engage their own team of experts. No one person can have the expertise or the time to cover all the bases that should be covered.
It helps to start with a high level perspective, and then to focus in on areas that pose the greatest risk of future economic impact, whether in the form of lost sales or penalties and legal costs.
The Consumer Finance Protection Bureau (CFPB), established by Dodd-Frank, has announced its 2016 Rulemaking Agenda. The CFPB is a multi-faceted entity, having been given rule-making, supervisory, reporting, and enforcement authority that has so far appeared to be broad in scope.
You can get the full text of the 2016 agenda here. In brief, here are the primary areas of interest:
The Bureau also referred to its longer term rule-making agenda, which was last updated in the fall of 2015, and includes an ongoing inquiry regarding credit reporting and its impact on the availability of credit, access to checking accounts, employment, and housing. Student loan servicers are also under the Bureau’s microscope, as it continues to monitor practices and evaluate potential rules.
 Dodd-Frank Wall Street Reform and Consumer Protection Act
Peeling the Onion
The process of disclosure by a seller is similar to peeling an onion. In order to pique buyer interest, some disclosure of a general nature is common, often in the form of a broker’s presentation or memorandum. The buyer will have signed a nondisclosure agreement and in exchange be given some high level financial and business information.
At this point an instrument known variously as a letter of interest, term sheet, expression of interest or something similar may be drafted by the buyer and presented for the seller’s consideration. They are usually nonbinding in terms of any commitment to buy or to sell, but the benefit is that they lay out the terms broadly, and the buyer will often have also gotten a stand-still arrangement wherein the seller ceases to market the business or entertain other offers. This is because the time involved, and the cost to the buyer of using their team of experts to assist them, is an investment that the buyer doesn’t want to see go up in smoke because the seller was still out looking for interested parties. Think of it as a pre-engagement ring- the couple has agreed that they want to get engaged but they are not actually yet engaged.
The Purchase Agreement- Inking the Deal
Handshake deals are a wonderful concept. However, given the risks involved in today’s world, especially that the person with whom you have an agreement may not be the one you end up dealing with later, they are simply not tenable in most circumstances. This is especially true for something as complex as buying someone’s business, even a very small one. While acquiring a going concern is often a very good solution for someone, there are several ways this can go very wrong. A comprehensive, well-written purchase agreement need not be a treatise, but it should encompass several things.