Buying a business is both exciting and scary. It’s exciting because of all of the potential that you see and you’ve probably got several ideas on how to improve the business. It’s usually scary, too, because you may not have ever bought a business before and you don’t know what to expect. Knowing the buying process and having a road map will help you be more confident in your decisions. Here’s an explanation of the 5 steps to buying a small business:
Stage 1 – Gather Information and Structure the Deal. During this stage, you should be consulting with your small business attorney and explaining to him or her what you’ve negotiated so far. In order to put the structure of the deal together, your small business attorney may recommend that you gather more information from the seller, or he or she may recommend that you do some independent investigation. After you’ve got the necessary information together to structure the deal, your small business attorney may create a Letter of Intent for you and the seller to sign. You don’t want to incur the costs of preparing agreements and documents if the seller isn’t on board with the basic terms. A Letter of Intent outlines the basic deal terms and even though it is usually not binding, it gives you reassurance so that you can confidently move into Stage 2.
Stage 2 – Preparation of Agreements and Documents. During this stage, your small business attorney prepares all of the documents needed for you to buy the business. While you may think that the transfer should be “simple” – and we love to keep things simple! – the reality is that the law isn’t simple. There are complex rules that we must keep in mind and be sure to follow, which means that even the most simple small business transfer needs to have the right agreements and legal documents in place. NOTE: If you are dealing with a business broker, they usually have prepared forms for at least one of these agreements. Since a prepared form does not fit all circumstances, it’s best to have a small business attorney take a look at it before you sign.
Stage 3 – Due Diligence Period. During this stage, you really dig in and get to know the business. Most sellers won’t release their confidential information unless a Purchase and Sale Agreement has been signed (or a Non-Disclosure Agreement has been signed). That means that the due diligence period usually comes after the deal has been negotiated and all of the terms have been agreed upon – but it doesn’t have to. Sometimes this stage overlaps and happens at the same time as another stage. Due diligence is your chance to see if the business meets your expectations. You look at all of the financials, all of the obligations, all of the relationships and all of the little details that matter. Not only does this give you the chance to make sure that the business is what you think it is – but it allows you to start getting to know the business and make plans for the transition.
Stage 4 – Negotiations and Finalization of the Agreements. Sometimes this stage comes right after the preparation of all of the agreements and documents – and sometimes it happens after due diligence – but in most cases it happens at both times. Here’s what usually happens: your small business attorney prepares the agreements and documents. The seller’s attorney reviews them and they may want to negotiate some of the terms. Once the agreements and documents are negotiated to both parties’ satisfaction, they are signed. If due diligence happens afterwards, then the agreements and documents may be renegotiated if there is information that is discovered in due diligence that needs to be addressed. For example, you may need to make arrangements for certain accounts receivable or accounts payable.
Stage 5 – Closing the Transaction. This stage is where the ownership of the business actually changes hands. The transfer documents are signed and the purchase price is paid. This can happen at a meeting where all parties are together in person or it could happen electronically. When you get up from the table (or your computer) you will be the new owner of the business. Congratulations!
While these five stages are separate phases of the process, sometimes they can occur out of order and even occur simultaneously with another stage. The important part is that you understand the purpose of each stage and how to buy a business. We want you to be confident and make great decisions!