How to Make an Offer to Purchase a Small Business

Buying a small business is a unique process in many ways. Here is a list of "elements" of a contingent offer that might make sense when considering a purchase.

Contingencies are very important when making an offer. A buyer is not likely to get full access to all of the business books and records without first agreeing to a purchase price and terms CONTINGENT on full due diligence. Contingencies to consider when making an offer:

1. Small Business Financing - If you will need financing include a contingency for obtaining small business loans on terms and conditions acceptable to you.
   
2. Include a contingency for buyer and seller to agree on a specific training and transition plan.
3. Contingency for any agreements to be assumed by buyer to be on terms acceptable to buyer (example, facility leases, copier contract, machinery leases, etc)
4. Contingency for background check on the business and the seller's themselves. It's important for buyer to know who they are buying the business from.
5. Contingency for full review of all business records including tax returns, sales tax reports, bank statements, etc.
   

As always, reassure the seller that you understand the confidential nature of this information. Those 5 contingencies above are a start to buy a business, some specialized businesses require more specialized contingencies. For instance there could be a case where a particular supplier is extremely important to the business, a contingency might be for the vendor to approve buyer and agree to continue to supply the buyer after closing.

These kinds of 3rd party approvals can be very tricky, get good advice before heading down this path. Think through your small business ideas and build your contingencies to make sure that you've covered all the bases.

Due Diligence when Buying a Small Business - Part 4

In a previous post, Due Diligence Part 3, we talked about how to deal with tax returns, in Due Diligence Part 2 we talked about Sales Tax issues. Here in Part 4 we'll talk about a background check you might considered getting when you are in the due diligence process of buying your small business. Do diligence is not just about investigating the small business accounting, it's about the entire business..

A business background check might turn up nothing, which is probably good. Or a business background check could turn up everything from tax liens, lawsuits with suppliers or customers or even criminal activity. Basic background checks can be very inexpensive and are available online. One possible source is Background Now.

Due Diligence is supposed to give you comfort, if you check everything and there are no deal killers you can complete the purchase of your small business and sleep a lot better.

SBA Loans have new underwriting policy

A few days ago the SBA came out with a new lending policy to be used when buying a business. Business brokers are very excited about this change since it will facilitate more financing for small business purchases. About 15 months ago the SBA made a draconian change in their underwriting that eliminated business acquisition financing for goodwill in excess of $250,000. This 2008 policy change effectively dried up SBA lending for buying a business sales. Small business financing is a unique problem since the loans are usually not large enough for lenders to make much profit.

SBA loans are a very important part of the small business financing options. The newly released SBA business loan policy allows up to $500,000 in goodwill financing or if the buyer puts up at least 25% in equity the goodwill limit is uncapped.

This policy change is important because the goodwill value in the transaction is an indication of a highly profitable business.

SBA loans are back and business buyers and sellers will be more able transfer business ownership to retain jobs and help their communities grow.

Teaching a course at Lone Star College

I have agreed to teach a course on "how to find the right business" at Lone Star College. Course will be at 4 different campuses. For info go to http://bit.ly/4gQtlx.

How to deal with a Business Broker if you are trying to buy a small business

Business Brokers are not all alike nor are their processes. Here are 5 Dos and 5 Don'ts when working with a Business Broker:

Dos

1. Make sure the business broker tells you, in writing, who they represent. Usually it is the seller.
   
2. Make sure you know what your financial situation is before you meet with the broker. How much of your own money do you have to invest? Not how much you think you can get, not what your golf buddy says he'll back you for... YOUR money!
3. Make sure you know the minimum amount of income you need to support yourself when you buy a business. Not the most you'd like to make and not what you think you deserve...the amount you need.
4. Be open minded about the kinds of businesses that might fit your financial situation
   
5. Do your homework but do it quickly. Clear your calendar so you can take care of what needs taking care of in a timely fashion
   

Don'ts

1. Don't expect the business broker to re-arrange his whole world to accommodate your schedule.
2. Don't assume you know more than the broker ( you might, but don't assume it)
   
3. Don't bad mouth a seller. If you're not interested just leave it at that and move on.
4. Don't try to convince the broker you have resources and skills that you don't have.
5. Don't be maybe, maybe, maybe.... a fast no is better than a slow maybe. Move through the process efficiently.

Keep these tips in mind and you'll have a better chance of seeing the good businesses.