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BUYING A BUSINESS
Acquisitions of existing businesses in the Tucson area are at an
all-time high because of the influx of new residents. It’s
usually much less risky and more profitable to buy an existing business
than to start up a new one. When you buy an existing business, you can
expect to start making a profit from day one, rather than waiting weeks,
months, or even years to build your customer base.
Advantages to Buying an Existing Business
Some of the advantages of acquiring existing businesses include:
 | You can review a company's existing track record as reflected in
P&Ls, tax returns and other financial records. Its growth
potential can be determined based on past experience. |
| You don’t need as much working capital, because of the immediate
cash flow generated by the existing business. |
| You obtain skilled employees who are familiar with the business
operation and market. |
| Sources of capital to purchase existing businesses are more
readily available than they are for startup ventures. It’s very
common for the seller to finance part of the purchase price. Most
business owners will carry back part of the purchase price with a 30
to 50 percent down payment. |
The Order of Events
Buying a business is serious, and it should not be taken lightly.
Working with professional advisers is the key to successfully finding
and purchasing a business. Friends and well-meaning relatives are not
usually qualified to provide the specialized advice you need for a
business acquisition. An experienced business broker can assist you in
finding a business and through Close of Escrow.
Finding a Business to Buy
Although there are a great number of ways to find businesses for
sale, using the services of a business broker can greatly facilitate the
process. When selecting a company that specializes in selling
businesses, go over the following checklist to help ensure that you’re
properly investing your time and money:
| Are they full time business brokers, rather than a firm that
handles business sales as a sideline? |
| Are they a member of the Arizona Association of Business Brokers (AABB)?
As a member of this organization, brokers are obligated to adhere to
a code of ethics. |
| Do they have the experience that comes from the handling of
hundreds of businesses closings? |
| Ask for references from former clients. |
Discussing Your Background
When you meet with the Business Broker, you should be prepared to
discuss your background, work experience and financial ability to
purchase a business so that we can help you find a business that meets
your needs. You’ll need to prepare a financial statement which will be
required by sellers, landlords and others who will be a party to the
business acquisition. The business broker will be asking you questions
like these:
| What are your special skills and educational background? |
| What is your work and/or business ownership experience? |
| What are your areas of special interest? |
| What is the maximum amount of funds you want to invest as a down
payment? |
Types of Businesses
The business broker will also ask you:
| Is there a specific type of business that you are interested in
purchasing? |
| Are there any types of businesses you do not want to
purchase? |
| What is the minimum income you must receive from a business to
meet your living expenses? |
| What is your preference for the business location? |
Meeting With the Business Owner
After reviewing the information on the business profiles, a business
broker will answer any questions you may have about the businesses or
will obtain the answers from the Seller. Once you select those
businesses that most interest you, the Broker will schedule appointments
with the business owners so you can see the facilities and operations.
In most cases, the business owners will require that all meetings
with prospective buyers be during nonoperating hours. This is to ensure
that employees, customers and competitors do not discover that the
business is for sale. The Broker will attend these meetings to introduce
you to the business owner, facilitate the flow of information, and make
sure that any questions you have about the business are answered.
When meeting with a business owner, you will tour the facilities and
ask questions regarding the operations of the business, but we will not
discuss the price and terms of sale with the business owner. This will
be done later, and only in writing.
Remember to keep all information you obtain about the business
confidential. You may only discuss this information with your
professional advisers and spouse, and remind them that the information
is not to be disclosed to other parties. It’s also important to
realize that employees, suppliers, customers and competitors are usually
not aware that the business is for sale. Any disclosure could have a
negative effect on the business.
Due Diligence and Offering Process
Now that you’ve reviewed operating information and financial
summaries of the businesses that meet your acquisition criteria, and you
have met with the business owners and toured their business facilities.
You should now be ready to select the business that you feel best meets
your needs. The next step is to prepare the Deposit Receipt and
Agreement. Contingencies will be in the Agreement to provide for the
buyer to examine books, lease and lease assignment, etc.
The business owner does not want to go through a detailed and
sometimes expensive due diligence process without an accepted purchase
agreement. Therefore, before copies of tax returns and other business
documents can be obtained and before any contact can be made with
landlords, bankers, employees, or customers, a Deposit Receipt and
Agreement must be presented and accepted by the business owner.
The basic steps are:
- In Arizona, the business broker will prepare the Deposit Receipt
and Agreement. If real property is included, a separate Deposit
Receipt and Agreement will be completed along with a Deed of Trust.
This Agreement provides the terms and conditions under which you are
willing to buy the business and/or real property, and under which
the seller is willing to sell the business and/or real property.
Final closing documents, such as a bill of sale, promissory notes,
security agreement/deed of trust, closing statement, noncompetition
agreements, etc. will be completed by the Escrow officer at close of
Escrow. The lease assignment will be handled by the broker prior to
the close of Escrow.
- The amount of earnest money required to be submitted along with
the Deposit Receipt and Agreement will depend upon the size of the
business transaction. The amount will vary. For most small to
midsize businesses, earnest money of 5 to 10 percent of the total
offer is sufficient.
- The business broker will assist in the negotiations between you
and the business owner to secure an Deposit Receipt and Agreement
that is acceptable to all parties.
- The Standard Deposit Receipt and Agreement gives you five to 30
days to complete your review of the business financial documents,
operating agreements, property leases and other aspects of the
business after the agreement has been approved by you and the
business owner. The time period is dependent on the wishes of the
parties.
- During the due diligence period, the business broker will
coordinate your request for documentation and assist in arranging
meetings with related parties to the transaction including the
seller’s professional advisers, your professional advisers, the
landlord, lenders, the Escrow officer, and others as needed.
- If institutional financing is required, the business broker can
usually recommend various lending sources. In Tucson and Southern
Arizona, most business sales are financed by the sellers agreeing to
carry back a portion of the total sales price.
The Closing Process
When you have completed your due diligence and are satisfied with all
aspects of the business, the broker will prepare contingency removal
forms for your signature.
At this time the Escrow officer will conduct lien searches and
prepare the bill of sale and all other closing documents. Next, a date
for close of Escrow will be scheduled.
A cashier’s check will be required at closing for the amount of the
down payment due. The business broker will make sure that all the
necessary paperwork is completed by the closing date. |
