The process of buying a business includes several activities. The business buyer must search for an appropriate business, analyze the business and financial data, develop a viable offer, close the sale and transition to the new business. The business transition step is critical because after the sale is finalized the original owner may not be available to answer questions.
The business seller should start grooming the business for sale several years before actually putting up. This period is crucial because it allows the business seller to organize the following documents:
- Prepare financial statements for three to five years.
- Corporate tax returns for three to five years.
- Inventory value and capital expense and equipment.
- Customer lists and list of employees.
- Documents related to leases and franchise agreements.
- Artifacts related to transitioning the business to the new owner.
Completing all artifacts for smooth transition significantly increases the chances of a business being sold as it reduces risk of owning a business for the new owner. Some common areas both buyers and sellers must discuss include:
- The business seller must be clear why he is putting up the business is for sale and document the reasons. The buyer must ask this question and the business seller must provide a detailed explanation.
- The buyer and seller must determine the value of the business and set an asking price range. The asking price breakdown must include asset value, interest expenses, business quality, business value and goodwill. Goodwill amount is the difference between the total value of assets and the selling price.
- The business seller must create a marketing plan that contains the type of business, the industry the business belongs to along with trends and projections for the industry. The marketing plan must include market share, growth potential, target market and other elements. The marketing plan must include competitive analysis and rank the competition.
- Location of the business and the history of the location. Both parties must be clear if the business can be re-located and / or merged with another business.
- The seller must create a customer list. The customer is the most valuable asset in a business, so it critical for the buyer to understand the customer profile and behavior. The Buyer must evaluate any customers who account for more than 10% of the business as losing this business can significantly impact profitability.
- Define all products, services and document their history if they have changed over time. The business seller must document how the products or services are priced and create a list of all suppliers.
- The seller must also document proprietary processes or trade secrets that must be transferred to the new owner.
- All operational tasks related to how products and services are produced from start to finish. Buyers must gain access to payment terms of suppliers, operating manuals and handbooks and any other information that can help them understand the day-to-day operation of the business.
- Job descriptions and pay rates of all employees. The new owner usually has the opportunity to re-hire existing employees and review their current and future responsibilities, wages and benefits.
- Buyer and seller financing. Buyer financing is the ability of a new buyer to raise sufficient money to buy the business. Seller financing is the seller’s willingness to finance part of the business. The discussion on financing must include liabilities. Usually all debts are paid by the seller unless there is a mutual written agreement stating the amount of debt the new owner will take on.
All the items above are important considerations to reduce the dependency on the current owner and simplify business transition. If the owner of the business agrees to assist with transition after the sale, the decision should be included in the purchase and sale agreement. The agreement must include specific tasks that the owner will perform during the transition period and the length of time for which he will perform the tasks.