Looking to Buy a Business?

by Arnold Pierce Kelsey 13th of March, 2023

Looking to Buy a Business?

Whether in the pages of magazines or on countless posts in social media, we are regularly presented or should I say bombarded with articles advising sellers the process of selling a business and what they will be required to do from the time the thought of selling comes to mind until the business sale is settled.

What if you are a buyer, especially a first-time buyer? Most would say that they do not have any idea of where to start or what will be required?

In most cases a potential buyer will make the decision to purchase a business, whether their first or not. In the majority of cases, they will search the internet and find a business or several businesses that appeal to them, online. They will then contact the broker, by phone, a text message or the most common, they will lodge an enquiry online. That’s the easy part, what happens next?

Any reputable business broker will not provide any confidential information about a business, including the name or location without having a Non-Disclosure Agreement or a Confidentiality Agreement completed. The reputable business broker will also qualify the potential buyer by requesting information about their background, their ability to fund the purchase of the business and many more questions.

The information is critical for several reasons, two of the most important are:

Finance: It is extremely difficult to obtain finance to purchase a business. If the buyer doesn’t possess solid assets and doesn’t already have a very substantial portion of the purchase price, obtaining finance will be very unlikely. The buyer’s background, experience in the industry can also come into play.

Lease: The landlord is very unlikely to assign the existing lease or offer a new one to a buyer who doesn’t have proven experience in the industry. The landlord will also want to know if the buyer has the funds to cover the rent bond and the first month’s rent. Even if the buyer has the funds to purchase the business and cover the bond, if he doesn’t have the experience in the industry, the landlord has every right to decline the assignment of the existing lease or provide a new lease.

Once the business broker qualifies the potential buyer, they will provide an Information Memorandum prepared by the business broker or his agency. The Information Memorandum will generally provide all relevant information about the business, including the name, location and financials, such as Profit & Loss for the past few years.

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After analysing the Information Memorandum, which can be confusing, especially for first-time buyers, the potential buyer will usually have a number of questions for the broker. The broker might be able to provide the answers and if not, will obtain the information from the seller. If the potential buyer is satisfied with the information that is provided, the next step is an inspection of the business premises and a meeting with the seller.

If everything moves forward satisfactorily, the price will be negotiated and agreed to by both parties. This is part of the sale process where dealing with an experienced, capable business broker is absolutely priceless. Eventually, it will be time to sign a contract.

The buyer will be required to pay a deposit, generally 10% of the purchase price. I realise that certain business brokers will attempt to have a contract signed and a deposit paid as soon as possible. I completely disagree with this practice. In my opinion, there’s absolutely no point going to contract if the buyer doesn’t have the funds, is not in a position to obtain finance or if he’s not going to obtain the landlord’s approval.

This is where a broker properly qualifying a buyer in the beginning of the process, is in my opinion critical. Keep in mind that even the most capable, experienced and reputable broker is mostly relying on the information provided by the potential buyer to be accurate and factual, there’s a limit to what a broker is able to check.

Potential buyers need to be honest and upfront about all the information they provide about their background, their financial position and be prepared to fully divulge all the required information to the business broker.

A number of potential buyers refuse to complete a Confidentiality Agreement and or answer the business broker’s qualifying questions. Personally, I shall never pass on any confidential information about a business without a Confidentiality Agreement completed and my qualifying questions answered.

If you are considering buying a business and require more information about what appears to be a mine field, an experienced, reputable business broker will make the process easy and seamless. If you require any assistance and would like a clearer understanding of the process, do not hesitate to contact me.

Tags: buying acquisition growth success