How Do I Buy a Business?

Last I checked, there are approximately 33.2 million small businesses in the United States, representing 46.4% of private sector employees. These businesses generated a total of $13.3 trillion of revenue or a simple average of $400,000 of revenue per firm. The revenue range of these firms is typically between $1 million to $47 million, employing up to 1,500 people. Needless to say, there are a lot of really good reasons to buy a business! Most sellers in this space care about 3 things: value of the sale, continuity of their life’s work, and protecting their employees. Buyers consider these along with considering if they are purchasing an entity with an investment return appropriate with the level of risk associated. This is not like buying a car, and to individuals unfamiliar with the process, purchasing or selling a company could appear to be a daunting undertaking.

The first step is understanding if you even could buy a business. Fortunately, Merger and Acquisition (M&A) professionals look for a consistent data set in qualifying potential individual buyers. Practitioners – particularly investment bankers and business brokers – will ask questions to validate the buyer’s qualifications and level of preparedness. Below is a sampling of these questions:

How much equity do you have to invest?
If you’re buying a company, per Small Business Administration (SBA) requirements, you will be expected to contribute 10% of the purchase price in cash. Having cash on hand of $250,000 - $750,000 will separate you from other buyers. If you don’t have that much cash on hand, you’re not out of the game just yet. There are ways to bridge an equity gap with subordinated seller financing.

 

Where is the equity coming from?
While it would be nice if we all had anywhere from $250,000 - $750,000 laying around that we could use to buy a business, that’s not the expectation. There are ways to use your other assets to support a business acquisition. For example, retirement funds are great collateral for starting or buying a business – and you shouldn’t incur penalties even though the money is being used prior to retirement age.

 

Does the buyer have previous, relevant management experience?
Dreaming is good, but such a large purchase does need to be grounded in reality at times too! Go where you know! Bankers and brokers are looking for alignment between your background and the business you are purchasing. While not a glaring red stop sign, this does cause a caution sign to go for up M&A professionals if these are out of alignment.

 

Have you bought a company previously?
This is not to say if this is your first purchase, you won’t be successful. M&A professionals are definitely prepared to be helpful, but there is a preference for individuals that have purchased companies historically. Just like in everything, if you’ve succeeded before, you’re a safer bet – but not the only bet!

 

In addition to a validation process, there will be some costs associated with buying a company. These due diligence costs can appear punitive; however, they are designed to uncover risks that may be outside of your expertise. Below are the costs in addition to an estimate for your general planning: