By Gal Barzilay / COO
Congratulations on considering buying a small business! It can be a complicated process, but don't worry, we're here to help you through it. With many moving parts and parties involved, it requires a significant amount of due diligence and preparation before you can finalize the sale and take over the business. However, if you take the right steps and do your research, you can successfully buy and run a small business.
The Process of Buying a Small Business
Before diving into the details of the checklist, it's essential to understand the process of buying a small business. The process can be broken down into four main parts:
Searching for a Small Business
Submitting an LOI
Due Diligence & Acquisition
Closing and Transition
1. Searching for a Small Business
When looking to buy a small business, there are a few key factors to consider. First, decide on the location - do you want to buy a business nearby, or are you willing to move? Or do you consider an Online Business? Next, consider the type of business you want to run. Some buyers have specific criteria, while others are more open-minded. Size is also important, as it is usually based on the buyer's budget. Finally, SDE is crucial - buyers want a business that generates enough income for them to live comfortably. By narrowing down your search, you can find the right business to buy.
2. Submitting an LOI
Now that you've found a business that you're interested in, it's time to submit a Letter of Intent (LOI) to outline your intention to buy the business. This is a crucial step, as it will help you move forward with the process of due diligence and acquisition. Review financial statements from the past three years, leases, contracts with customers and vendors, the organizational chart, and any intellectual property or required licenses and permits. The LOI is non-binding, but can turn into a closed deal if there are no major issues.
3. Due Diligence & Acquisition
After submitting an LOI, you'll go through formal due diligence and draft the necessary legal documents to acquire the business. This involves reviewing financials, licenses, permits, zoning information, employee list and payroll, leases, inspections, equity structure, and governance documents, insurance policies, inventory lists, accounts payable, accounts receivable, litigation, PPP loan forgiveness, and debts. While this can seem daunting, it's critical to understand and feel comfortable with the purchase, and identify potential issues or risks.
4. Closing and Transition
Assuming the acquisition is successful, you'll work with the seller to transition into the business as the new owner. This will involve transferring licenses and permits, setting up new bank accounts, and notifying customers and vendors of the change in ownership. It's crucial to have a clear transition plan to ensure the business runs smoothly.
What should I ask for in due diligence when buying a business?
Once the LOI is signed, most buyers operate from the position that they are going to buy the company they've been looking at. The goal of further due diligence and the purchase agreement is to get 100% comfortable with what you are buying, and then actually buy it.
Normally, you'll want to start by providing the seller with a full list of documents you'll need to see as part of your due diligence checklist, which often includes:
Three years of tax returns
Three years of monthly profit and loss statements
Annual Balance Sheets
Monthly statement of cash flow
Sales Records and Sales Tax Returns
Licenses, permits, zoning information
Depending on the business purchase, you'll need to understand how the licenses and permits will transfer to you as the new buyer. You'll also want to ensure the prior business is in compliance with all local laws, regulations, zoning requirements, etc.
Full employee list and payroll
You'll want to deeply understand the costs associated with payroll, whether the employees will likely stay with you when the business is sold, and if they don't, what kind of risk that represents to you as the new owner.
To ensure a successful business acquisition, consider these lease-related factors:
The nature of the leases, their dependence on the business purchase, and their transferability.
If the seller owns the real estate, decide whether or not to include it in the transaction. If it's not included, negotiate a favorable lease agreement with the seller.
If the seller doesn't own the real estate, check the remaining lease duration. If the lease is about to expire, extend it with the landlord before the acquisition. Unexpected rent hikes could ruin the business post-acquisition.
Verify that the lease is transferable. Meet with the landlord to understand the nature of the business-landlord relationship before the acquisition.
Equity structure and governance documents
You'll need to understand who owns what as part of the business so that when you do finally buy it, you're paying the right people.
It's likely a good idea to have an insurance agent review these policies and start thinking about how you'll transfer them.
Inventory list, accounts payable, and accounts receivable
If the business buys/sells physical goods, you'll want to have an understanding of how much inventory they have, the cost of that inventory, and how that will impact your ability to run a successful business immediately after buying it.
If they have large accounts payable and/or accounts receivable, you'll want to understand who is getting paid/paying what based on when you close the business and how that might impact the purchase price.
Details of any litigation or threatened claims from customers or employees
Make sure to dig into the documented history and status of any past or current litigation, claims, or threats from customers or employees. It's important to understand what open items may be on your plate post-acquisition.
Proof of PPP loan forgiveness
You'll want to review documentation of a PPP Loan, if the business received one, to make sure the forgiveness is all squared away.
Request a list of all debts and loan agreements
These will usually be paid off during the purchase process. You and the buyer may pay off the lender directly to avoid any outstanding liens on the business after the closing.
After requesting these documents, we recommend running a UCC lien search with an attorney.. This search is a good way to determine the seller's honesty. Do they have any outstanding loans or liens on the business that they're not disclosing? If so, why are they hiding it?
We hope this checklist has been helpful in guiding you through the process of buying a small business. Remember to take your time, do your due diligence, and seek out professional advice if needed. With the right preparation and guidance, you can successfully buy and run a small business.
Why did we build boosst?
It can be a very difficult process to buy or sell a business, both financially and emotionally. We built boosst so you would never feel alone in the process. We believe that we can empower founders and give them insightful data in order to create their future according to their terms.
Looking to sell your business? Check out how boosst can help.
Looking to buy a business? Check out how boosst can help.
Book a free call with our M&A team lead here > Click here.
About the Author
Gal Barzilay, Co-founder and COO of boosst. Gal is a former software engineer who has experience working with global banks and developing tech solutions for eCommerce brands such as Adidas, L'Oréal, and HP. She grew up with two parents who owned small businesses, when they wanted to retire, they couldn't find anyone to continue their companies.
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