Easy guide to buying a business

February 9, 2022

Easy Guide to a Buying a Business

While everyone desires having their own business, not everyone has the appetite or the acumen to evaluate a business opportunity or start one from scratch to build wealth.  Such class of entrepreneurs are few but its not that one cannot develop an understanding of a businesses in his/her domain of profession or line of work.  Simple understanding of business aspects and finances and with the aid of finance and legal professionals, your desire to own a business can be reality.  In this article, we shall be touring you through some aspects that need to be looked at while evaluating buying any business.

Your objectives behind buying a business could be anything, be it acquiring your competition or simply expanding your investment portfolio to diversify.  Irrespectively, buying a business requires following certain standard practices – starting from finding a business to buy till closing the deal.  Let us stroll down this process so you can foresee what lies ahead in your journey to buy one.

Identifying a Business to purchase

The steppingstone to your acquisition journey is identifying a suitable business, something that is rewarding and having a value building prospect.  Umpteen businesses are for sale, however the ones with promising profitability and healthy on compliances, should ideally catch your eye.  Your business search should at least be based on objective filters such as: positive cashflows, your industry knowledge, diversity of customers, long term plans of the business, your enjoyability of running the business etc.  The broader your search, the more likely you are to find a jackpot.  So do not simply halt up when you find a business that meets all your filters but look at as many businesses as possible before you can rank your preferences.

Sources to turn over to identify a business could vary, e.g., Online business broker sites, local business brokers, lawyers, Chartered Accountants/CPAs, Franchisors, as well as businesses you know personally in your industry.

Valuing a Business

Upon identifying your choice of business to buy, computing its value or how much should it be bought for is crucial.  The seller of a business may even overvalue it however it is your job to assure you do not overpay.  Couple of options emerge to complete this exercise of valuation: a.) Self Valuation or b.) Hiring a Professional.  Engaging a professional could cost you, but if you are uncertain on your ability to make an accurate valuation, we would highly advise engaging a professional.  Contact GJM & Co. if you need help with this.

Business valuation is typically undertaken based on certain factors such as revenue, net earnings, or EBITDA.  It is difficult to choose the factor as every business is run differently.

Purchase Price Negotiations

Upon your decision to move ahead with the acquisition of a business and upon you having a decent idea on its value, you should commence with your negotiations.  Traditionally, you would make an unbinding offer, be it written or oral and in case your offer is close to the sellers’ expectations, they will start corresponding. Generally, negotiations go back and forth with parties having different idea on valuation, pricing, and other terms before reaching a tentative concurrence.  The pricing and terms of purchase can be changed should you later find anything during a due diligence that alters your opinion on the business’s value.

Business purchase can be concluded via two modes: 1.) Purchase of its Assets or 2.) Purchase of its Stock/Shares/Interest.  For businesses which are corporates, a stock/share sale is the most preferred mode, especially for tax purposes.  With a stock sale, you as the new business owner, shall take over all its assets and liabilities, and the business operations shall continue as is.

Letter of Intention (LOI)

Once terms and mode of business purchase is clear, as a buyer, traditionally, you may issue an LOI to the seller, outlining all negotiations till date, including therein a purchase price and the intention to buy the business.  Such LOI is conventionally non-binding in nature, but it only furthers the buying process.  It demonstrates the seller your readiness and commitment.  Such LOI can also be designed to seek exclusive rights to buy that business for a specific time period (usually 90 days), thereby binding the seller in good faith to not evaluate the business sale with any other party.

Due Diligence

Post LOI being signed off by the parties, as a buyer you shall get access to further detailed information about the business, which during initial rounds of discussion is basic and limited.  Conducting a due diligence, will enable you access to all financial and legal information that is necessary for you to close the deal.

Important documents and information that need to be accessed and studied include: Business charter documents, audited financials and cash flows, business tax returns, revenue segments (customer, product, geography wise), existing business loans, existing contracts, employee details, existing marketing strategies, legal records of ongoing litigations if any, etc.

The Due Diligence is usually left to a Chartered Accountants/CPA firm and a law firm.

Financing your Deal

Parallel to the due diligence process, you should also initiate your task of securing finance for the deal.  Financing your deal can be arranged through a mixture of debt as well as equity.  Meaning, you will either purchase part of it with your own capital and the balance through a loan.  Loans can be arranged through banks traditionally.

You could also evaluate the possibility of a seller financing prior to commencing due diligence.  Seller financing is a loan provided by the existing business owner instead of an outside lender.  This will require a lot of documentation to go through with if the seller agrees to it.

Hence, to plan your finance for the deal is crucial to assuring your deal go through.

Closing the Deal

Should the due diligence go through satisfactorily, it is time to close the deal.  At this stage, the final business purchase agreement shall be drafted, and every term agreed with with/by the seller shall be put in.  Your lawyer will assist you at this stage, at the least they will review the agreement from your side.

The business purchase will be signed off and binding legally, with the inclusion of a business transition date by which your lender (being bank typically) shall transfer the funds to the buyer.  Usually, funds would go into an escrow with a bank or law firm, until all documentation and terms completion is final.  When both parties give their approval, the monies are transferred to the seller and you shall be the owner of the business outright.

We trust this article was helpful and an easy guide to buying a business.  Should you have any queries or need consultation with your journey in buying a business, Schedule a Call today or write to us at info@gjmco.in.