So I’ve talked a lot about how to start a business over the past couple of months, but the reality is, the process of taking an idea and turning it into something tangible that works and generates a profit isn’t for everyone.
But just because you may not be interested in starting a business doesn’t mean you aren’t an entrepreneur. Being an entrepreneur can also encompass running, maintaining and/or scaling an existing business that someone else started.
Truthfully, a lot of successful entrepreneurs get their start by completely skipping the startup process and purchasing an existing business with a proven profit model, a book of customers, and/or steady cash flow. So if you don’t have an idea for a business or you don’t think you have it in you to go through the challenge of starting up a company (but you are still interested in the way of the entrepreneur), then you should consider buying an existing business.
Don’t get me wrong- purchasing a business can be very challenging, but when the right opportunity comes along and the transaction is executed correctly, it can be a great way to jump into the entrepreneurial life.
So if you are interested in and/or considering purchasing a business as your path into entrepreneurship, then listen up! I’m going to provide you with an overview of the steps you need to take to ensure you get into the right business on the right terms for you!
Step 1: Assemble Your Advisor Team
The first thing you need to do before you jump into the process of purchasing a business is put together a team of advisors that can guide you along the way.
I really can’t stress this enough.
I’m sure you’re a smart person, but if you decide to go this one alone and figure it out by yourself, there is a good chance you’ll pay too much or get into something that isn’t the right fit.
So surround yourself with competent advisors that have gone through this process before and know the pitfalls. You are going to want an accountant and an attorney at a minimum. Additionally, you should also consider a buy-side mergers and acquisitions advisor. M&A advisors can assist you in obtaining financing and identifying targets that you may not otherwise run across on your own. They can also assist in the valuation and due diligence phases of the transaction. Thus, they’re a great partner to have on your side if you decide you’re interested in purchasing an existing business.
So don’t skip this step- find a team of advisors that can help you navigate the process and get you into the right business!
Step 2: Identify Acquisition Targets and Negotiate Key Terms
Once your deal team has been assembled, it’s time to start looking for a business to purchase. Many entrepreneurs that get to this step already have an idea of what they are looking to acquire. If that’s you, focus in with your advisors on businesses that fit your criteria.
But if you don’t have a clear idea of what type of business you are interested in, no worries. Spend some time working with your advisors and mentors to figure out what industries might be right for you. What are you passionate about? What industries have you worked in before? Where do you have existing relationships with potential customers? Focus in on these areas when searching for a business to start. It may take some time, but if you are patient you will eventually find the right opportunity!
When the right opportunity is identified, you and the seller need to hash out the transaction’s key terms (ie purchase price, deal financing, consulting agreement, non-compete, confidentiality etc.). Once everything is worked out, these key terms are generally memorialized into a non-binding letter of intent (generally called an “LOI”). The point of the LOI is to confirm in writing the main terms that the parties have agreed on without binding either party to actually close the deal. And keep this in mind- because LOI’s are generally non-binding, terms can change as the parties continue through the transaction process.
Step 3: Due Diligence
After signing the LOI, it’s time to dive in and take a look under the hood! That’s what due diligence is all about. Due diligence is your opportunity as a buyer to confirm that the business is in the state and condition the seller represented prior to signing the LOI. You should look at the business’s financial statements, tax returns, corporate documents, leases, supply agreements, employment agreements, etc. You should also confirm the condition and title of all assets, including equipment, customer lists, key contracts, etc. These are just a few of the items that you need to analyze during due diligence- make sure to work closely with your accountant and attorney during this phase to confirm you have covered all your bases. Spending time analyzing the business in an attempt to ensure you are getting what you bargained for is one of the most important parts of the transaction- invest time, energy, and resources here- it can provide you with additional leverage to negotiate a better deal or assist you in avoiding jumping into a business that is not a good fit!
Step 4: Document and Close the Deal
After you confirm the business looks alright in due diligence, the next step in the process is to document and close the deal. Although I noted this as the last step, the reality is, while you are going through due diligence, your attorney is likely going back and forth with the seller’s attorney on the transaction documents (there are generally a lot of moving parts to most deals). Depending on the structure of the deal, these documents can include a purchase agreement, assignment and bill of sale, escrow agreement, promissory note, security agreement, consulting agreement, etc. This can take some time to work through, but if you and the seller are basically on the same page prior to going into putting these documents together it shouldn’t take too long. Once the attorneys work through all the details on the key documents and you and the seller approve, it’s time to close the deal! At closing, the seller will turn the keys over to you and you will be in the driver’s seat for the business!
It’s Time to Go Find Your Business!
This is a pretty basic outline of what is involved in buying a business. However, every transaction is different- if you decide to buy a business, the process of your transaction may or may not look like this. In actuality, purchasing a business can be a pretty challenging process. There are often lots of hurdles and barriers that need to be worked through. That said, purchasing a business can be an excellent way to jump into the entrepreneurship world. If you are going to go down this path, make sure that you are committed and that you surround yourself with a team of advisors that can help you find the right opportunity and get the deal closed! If you are patient, spend time vetting the opportunities that come your way, and commit to the process, you will be much more likely to find success. So what are you waiting for? Go get started finding your business!