How to Buy a Business

The timeline for buying a business varies widely depending on the complexity of the deal, but you should expect the process to take anywhere from 3 to 9 months from initial search to closing. Simple acquisitions of small businesses might be completed in as little as 60-90 days, while larger or more complex deals can take a year or more. The due diligence phase alone typically takes 30-60 days.

While the total purchase price varies greatly by industry, size, and profitability, most business acquisitions require a down payment of 10-30% of the purchase price. For SBA loans, you'll typically need to invest at least 10% of your own money. Additionally, you should budget for closing costs (5-10% of the purchase price), working capital needs, and potential renovations or improvements after acquisition.

While not required, working with a business broker or acquisition advisor can be valuable, especially if you're a first-time buyer. A buyer's broker can help you find businesses that aren't publicly listed, evaluate opportunities objectively, negotiate better terms, and navigate the complex acquisition process. Remember that most listing brokers represent the seller's interests, so having your own representation can be beneficial.

In an asset sale, you purchase specific assets and liabilities of the business, but not the legal entity itself. This is common for small businesses and provides more protection from unknown liabilities. In a stock sale, you purchase the ownership shares of the company, acquiring all assets and liabilities, known and unknown. Stock sales are more common with larger businesses and can be more tax-advantageous for sellers but riskier for buyers.

Always conduct thorough financial due diligence. Request at least 3 years of financial statements and tax returns, and have your accountant review them. Consider getting a Quality of Earnings (QoE) report for larger acquisitions. Verify revenue by examining sales records, contracts, and customer data. Look for consistency between tax returns and financial statements. Also, analyze cash flow trends, customer concentration, and recurring vs. one-time revenue to get a complete picture of the business's financial health.

Negotiate for the seller to stay on for a transition period (typically 30-90 days) to transfer knowledge and relationships. Create a detailed transition plan covering customer introductions, employee communications, vendor relationships, operational procedures, and technology systems. Document key processes and passwords. Focus on retaining key employees and customers during this critical period. Consider performance incentives for the seller to ensure a smooth transition and achievement of business milestones.

Business acquisitions most commonly fail due to inadequate due diligence, unrealistic expectations about post-acquisition performance, poor cultural integration, overestimating synergies, underestimating the complexity of integration, losing key employees or customers during transition, insufficient working capital post-closing, and disagreements between buyer and seller during the transition period. Working with experienced advisors and creating detailed integration plans can help mitigate these risks.