Whatever your reason, the process of buying a small business follows the same pattern. From finding and evaluating the right business, to closing the transaction, we’ll walk you through the whole process from start to finish.

Step 1: Locate the right business

The first step is not just finding an available business, but finding one that’s worth buying. There’s plenty of businesses for sale. But ones with financial promise that actually hold your interest aren’t so common.

When you’re ready to buy a business you should look for these things:

  • Positive cashflow (or a trajectory that shows potential)
  • An industry you’re familiar with
  • A diversity of customers (no one client should be more than 20% of revenue, roughly)
  • A long-term growth plan
  • A business that you could see yourself enjoying everyday.

Step 2: Value the business

Once you've identified a business you're interested in, it's time to figure out how much the business is worth. You'll find plenty of sellers that are willing to negotiate the right price. Henry Galasso will always say "A deal is not a deal until everyone walks away happy".

When valuing a business you have two options:

  • Do it yourself
  • Hire a professional

Step 3: Negotiate a purchase price

Once you've decided you want to move forward with a business acquisition and you think you have a good idea of what the business is worth, it's time to negotiate the price. You'll typically do this by making an unbinding offer, either written or verbal. If your offer is close to what the seller is willing to sell for, we will start negotiating with you.

With most business transactions, you'll go back and forth, negotiating different purchase prices and terms before you come to a tentative agreement between your broker and the listing broker here at East Coast Business Brokers.. These terms can be changed later if you find something during due diligence that changes your opinion on the company's value.

As part of the negotiation, you’ll decide whether you want to purchase the assets of the business or if you want to make it a stock sale.

A stock sale is preferred by most sellers for tax purposes In a stock sale you’ll be agreeing to take on any outstanding legal liability because the company operations will continue as is, just with a new owner. Some sellers will even give you a discount on the purchase price for agreeing to a stock sale.

Step 4: Submit a Letter of Intent (LOI)

Once you have a general idea of the terms and structure of the business purchase, you'll submit a letter of intent. This is a letter that outlines everything you've previously negotiated, including the purchase price, and states your intent to buy the business. This is a non-binding agreement that just furthers the business acquisition process. It shows the seller you're ready to commit and move forward in the process.

The letter of intent will also typically give you exclusive rights to buy the business for a time period, usually up to 14-90 days. This means that you'll be the only one that can purchase the business during the time frame, and the seller has to act in good faith to close your transaction if you're able to meet the terms of your LOI.

Step 5: Complete due diligence

When the LOI is signed by you and the seller, then you'll get access to more information about the business. Typically, when you first show interest in purchasing a business you'll get a basic overview of how the business is performing. But when you enter due diligence, you'll get access to any financial or legal information that you feel is needed to close the transaction.

We suggest making sure you review the following documents, at a minimum, before you close:

  • Organizational documents for the business (e.g. incorporation docs, certificates of good standing, business licenses, etc.)
  • Previous 3 years of business tax returns
  • Current year income statements, balance sheets, and cash flow statements
  • Revenue broken out by customer for the last 3 years
  • Information on existing business debt
  • Customer lists with proprietary information blocked out as necessary
  • Existing contracts—can these be assigned to the new owner?
  • Commercial lease or other property documents
  • Rent rolls if the property has tenants
  • Uniform franchise disclosure document (if the business is a franchise)
  • Employee and manager information
  • Marketing and advertising materials
  • Legal records for pending litigation, if any

Step 6: Obtain financing and Lease Assignment (if applicable)

Discuss this with your here agent at East Coast Business Brokers

Step 7. Close the transaction

If there were no surprises during due diligence, then it's time to close the transaction. This is where you'll draft a final purchase agreement and agree to every term of the deal with the seller.

You should always hire a lawyer to help you negotiate this part of the process. At the very least, they can review the purchase agreement to make sure you're getting what you negotiated through the contract. Here at East Coast , we have many transactional attorneys that have years of transactional experience.

As soon as you have possession of your business, you'll need to apply for any necessary business licenses to make sure your business operations have a smooth transition. Some states will let you operate with the existing licenses during the transition period, but don't let it slip out of your mind. If your business acquisition is a stock purchase then you may not have to worry about this at all since the business entity won't change.

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