Consider Seasonality When Buying A Business

Very few businesses have steady and equal activity each month of the year. As such, it’s critically important to understand the seasonality of any business you may be buying. The obvious issue of course is the working capital requirements when you take over a business.

First, let’s define “Working Capital”. In accounting terms, it’s the company’s total current assets (i.e. cash, accounts receivable) less its current liabilities (payables). The only problem with this formula however is that in most small business purchases, the seller takes the receivables and pays off the payables at closing to deliver the business “free and clear”. Or, in numerous businesses, there may not be much in the way of current assets.

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The Importance Of Making Offers And Purchase Agreement Details When Buying A Business

When the time comes to making a formal offer on a business, you will do so via a Letter of Intent (LOI) or a formal Offer to Purchase Agreement (PA). The one you will use depends upon several factors including deal size, what terms have been agreed upon thus far and the buyer’s goal with the offer.

Generally, smaller transaction may skip the LOI portion, however my rule for an LOI versus a PA has always been: if the seller’s asking price and my valuation are far apart or I want to lock up the business quickly, or, perhaps I may be using the offer to access additional documentation from the seller, I use an LOI. It’s quick, non-binding (most clauses) and inexpensive to have an attorney draft.

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Reality Check – What Many Buyers Are Looking For Doesn’t Exist

“I want to find a solid business where the owner wants to retire and doesn’t have any family members to take it over. I want to offer him a way out and cut a deal where I don’t have to put much down and over the next few years he’ll teach me the business.”

What a wonderful idea!

Brilliant in fact!

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Use Every Available Resource To Help You Buy A Business

It’s understandable that many people think that all they need to do is to use a business broker to search for a business and then engage an accountant and lawyer to assist them with the financial and legal details involved with buying a business. These buyers consider this group as their team of advisors and look no further.

While these groups certainly play a role in the process, the intelligent business buyer understands that the scope of what they have to do to be successful goes far beyond these three professional groups.

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Setting Deadlines When Buying A Business

There’s a major difference regarding timelines when buying a business versus a real estate transaction. In a typical real estate deal, there are hard deadlines set by lenders, closing agents, buyers (who may be vacating a current house) and sellers (who may be using the proceeds on another property). In a business sale however, deadlines are more guideline oriented for the parties rather than drop dead type dates.

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Buying A Business You Can Run Absentee

How wonderful it would be to buy a business, hire a top notch manager who will oversee the operations while you sit on the beach and relax. This is the vision some people have in mind when buying a business and specifically those who are interested in purchasing an “absentee business.” Now comes the reality: you can’t start off that way; you have to evolve into it.

The first problem is that you cannot possibly hire the right manager until you know exactly what that job entails. To do so, you have to do the work. In other words, you have to get a clear handle on the operations and all of the various moving parts inherent in any business. Once you do so, then, and only then, can you consider stepping back and letting others run it. Obviously, the business has to be able to afford it.

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Avoid The Panic – Know Exactly What You’re Getting When Buying A Business!

Imagine that you complete the purchase of a business. You get the keys to the place, and on day one you walk in totally excited to take advantage of the wonderful opportunity only to discover that there’s no furniture in the building. Oops! You immediately panic and call the seller who informs you that the purchase agreement did not include any of the office furnishings so he sold them to a used office supply store the prior week. How can it be? You bought “the business” and surely that means everything that goes along with it – right? Wrong!

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