So you want to own your own business - Part 2

​Assembling the Team
Whether your decision is to buy or build a business, you will find that it’s not something you can do entirely on your own. Often a prospective buyer is anxious about spending money before they have a done deal, not wanting to spend money just to eliminate prospective purchase opportunities.  Except perhaps in the rare circumstance where the buyer is a very experienced acquirer in the particular industry, and the sale is a fire sale, it is essential that the buyer perform due diligence to avoid a bad buy, overpaying for a business, or avoiding undue future exposure to liability.  I liken this to the process of buying a home.  

​​A buyer of a new home wants an appraiser to compare the attributes of the property to like properties and advise them as to what a fair price would be.  Additionally, the buyer will obtain property inspections, pest reports, well tests and other information from independent third parties who are experts in the particular area being investigated.

A business owner is taking on much more uncertainty and exposure to risk than the typical homebuyer, and will want to investigate appropriately as a result. To some degree, the degree and cost of due diligence should be in proportion to the cost and prospective income stream.  However, certain due diligence is warranted in any case.

In an acquisition, the negotiation process between buyer and seller is rarely conducted on a level playing field.  One or the other often has more experience with the process, and perhaps takes fuller advantage of the knowledge of experts at key steps in the process.
Not every purchase involves every kind of expert listed here, and some may involve others not listed, who have specialized knowledge in the industry or related to the particular circumstances. However, it is beneficial to consider including at least several of these to assist you with the various steps in identifying a business, negotiating a deal, and conducting due diligence, among other tasks.  Most people buying a business either don’t have the time, or the particular expertise, to handle all of the aspects of a purchase alone.

​A well-chosen team of individuals who contribute to the process will help produce a more satisfactory result in the form of either a reduced purchase price, better terms, or better protection from future problems.

• Attorney
  • An attorney can draft, review and negotiate the documents involved in a purchase transaction, including a letter of interest, a purchase agreement, and other ancillary documents such as a seller note, consulting agreement, non-compete agreement, and closing documents such as a bill of sale or corporate formalities.
  • The attorney who is familiar with business transactions can advise on the relative value of specific clauses, whether bulk sale laws apply, and a myriad of other decisions that will impact your ability to maximize your return on your investment.
  • In some cases, decisions need to be made about entity types, agreements between co-owners, and how the entity will be managed. 
• Accountant
  • An accountant (CPA) can discuss the tax implications of the possible structures of the transaction, such as a stock sale vs. an asset sale
  • The accountant can review the initial financial information provided by the seller to determine free cash flow in each period, look at trends, opine on value, and point out areas where due diligence will be required.
• Broker
  • The broker usually represents the seller in a transaction, and this should be kept in mind by a prospective purchaser.  However, they are the primary conduit for information and communication with the seller, and will be an important part of the process, keeping everyone up to date on status and piloting the process to closing.
• Lender
  • A typical buyer does not have the means, or perhaps the desire, to pay all cash for a purchase, and therefore a lender may be involved. There are a variety of financing vehicles that may be available in a given transaction, and none should be ruled out until they have been investigated. A business start-up will usually have fewer options for funding. While crowd-funding or venture capital may be available in some cases, the most common form of new business funding is the owner, or their friends/family. As a result the focus here is on a buyer of an already established business.
    • Seller financing- sometimes a seller wants to carry a note on part of the purchase in order to allow them to take advantage of installment note income, which may be beneficial to them.  It can have a secondary effect of keeping the seller motivated to help the buyer succeed in the transition as well.  It is important that the buyer not inadvertently overpay for the business by having the seller finance the ‘premium’ over the market value of the business (more on this when we discuss emotional involvement)
    • Other private party financing- if the buyer has access to family money or an investor who wants a return but not involvement in the business, this may be an option. It should always be well documented, and care should be taken to make sure all involved understand repayment terms and expectations.
    • Conventional bank financing – Commercial lenders will consider financing a change in ownership in a business, contingent on the buyer’s experience, access to additional capital, and other factors that are in addition to underwriting the business itself.  They will typically require a larger down payment, or equity investment by the buyer than other sources of financing may require.
    • SBA financing – Often SBA (U.S. Small Business Administration) financing is a good option for a business acquisition, because lenders are incented to provide this financing, making it relatively competitive.  It allows the buyer to minimize their capital injection, and the program allows for more flexibility in terms of historical cash flow, buyer experience, collateral coverage, and other possible credit weaknesses.
    • Equity in real estate - If a new business owner has equity in their home or other real property, they may be in a position to extract some of that equity to pay for the new businss.  It's important to remember, however, that most lenders look at a borrower's ability to pay in addition to collateral value, so it's a good idea to consider this option before you hand in your two-week notice at work.

A potential entrepreneur looking over this list may see dollar signs dancing in front of their eyes.  It may help to keep in mind that a) most businesses regularly use the services of an attorney, an accountant, an insurance agent, and payroll services.  The use of their expertise during the acquisition is a good opportunity to build a relationship and set expectations for ongoing engagement. 

​Additionally, not all the players need to be involved at each step.  A buyer is well advised to determine a point person, who can keep the process moving, and identify and collaborate with other experts as needed throughout the process.  They may also be able to serve as a more objective third party for the buyer, who is likely to invest emotionally at some point and may need that calm voice of reason.