The How to’s on Purchasing a Small Business With Due Diligence
When you’re ready to buy a small business, it’s important to sift through all the options to find a company that aligns with your skills, resources and goals. A thorough due diligence process will also help you determine whether the existing business’s revenue stream is stable and if it has any unforeseen financial liabilities that would burden you as a new owner.
To narrow down your search, research business for sale listings online at sites such as BizBuySell and BizQuest. You can also set up alerts to notify you of businesses for sale that meet your criteria. Moreover, you can look for companies in specific industries and locations on Craigslist and in local classified ads. Another option is to work with a business broker, who can connect you with brands that match your requirements. Business brokers typically have a deep understanding of different industries and company values, as well as context into the history of many organizations.
Once you’ve narrowed down your selections, ask for a Letter of Intent (LOI) from the seller to show your commitment and to protect yourself against a bad deal. The LOI will detail your interest in the company and include the business’s price, terms of sale and other essential information. A good business broker should be able to draft up a letter of intent for you in about two weeks.
When evaluating the financials, be sure to review all the company’s tax records and financial statements carefully. Make sure that the tax returns and financial statements have been audited by a certified public accountant. You’ll also want to assess the business’s income stream by reviewing its customer base, sales performance and expansion opportunities. For instance, if the majority of the business’s revenue comes from one client, this is a red flag that could spell trouble for you as a new owner.
You should also be wary of any outstanding debts or legal liabilities that will transfer over to you when the business is sold. These can be costly to resolve and may even lead you to abandon the business. To avoid these headaches, you should be in touch with the current business owner and any other creditors before you finalize the purchase.
To ensure you’re financially prepared to buy a small business, you’ll need a business acquisition plan that includes the initial purchase price and other anticipated expenses, such as renovations and marketing costs. This is a great time to consult with your lawyer, accountant and banker to discuss how to best finance your venture. They can help you secure a loan to buy a small business or come up with other professional funding options. You can also consider a Small Business Administration (SBA) 7(a) loan, which is backed by the federal government but available through private lenders. These loans are available to individuals who have strong business management experience and have a high credit score. The SBA’s website provides more information on these financing options.