Closing the Deal on Buying a Business

What really happens when you have a purchase price in mind for a business you have thoroughly studied?

Well, the question to ask first is, did you actually prepare yourself to be a business buyer, a business owner and to make an offer? If you have not read my articles entitled Choosing to Buy a Business, Buying a Business- Prepare Yourself and Finding a Business to Buy and Determining an Offer Price, please do so first or you will be missing a few large pieces to the puzzle.

Once you have a business in your crosshairs and you have determined an optimal purchase price for that business, the excitement really begins. The following steps will take you through the buying process from making an offer to taking over the business.

Step 1: Offer to purchase- This is often called submitting a Letter of Intent (LOI). When dealing with a FSBO situation, this initial offer to purchase is often very informal and verbal. I don’t recommend anything verbal. Although an LOI is a non-binding agreement, it is good to have something on paper for good faith.

Basically the LOI says you are looking to purchase the specific business assets or stock at the specified price and payment stipulations (down payments, Seller note, etc.). It also lists your purchase contingencies, which are really the most important part of the document. They are the part that turns the non-binding into binding. What you are telling the Seller is “if all my stipulations are met (i.e. business actually makes as much as you claim, equipment is in good or better shape, key employees will stay on, landlord will give a reasonable lease, etc.) I will purchase the business at the offer price”. If the stipulations are not met, you can back out completely or change your offer price. Of course, the Seller can make you change your LOI if he/she does not like your offer or you have too many/unreasonable stipulations to abide by.

Often times, especially with a Broker, an LOI is accompanied by a “good faith deposit” from the Buyer. This could be a set amount such as $5000 or a small percentage such as 5% of the offer price. This is held by the Broker or Seller’s Attorney and is fully refundable if the Buyer does not make it past the due diligence of the LOI.

Step 2: Due diligence- The signed LOI starts a process called due diligence. The length of time is usually stipulated in the LOI but it is typically 2 to 3 weeks long. During this time the Seller hands over the information the Buyer has requested in the LOI to further review the business (tax docs, equipment lists, employment contracts, etc.) on their own and with Advisors. In most cases of retail businesses, the Buyer will actually work at the establishment with the Seller to see how things operate and to have the Seller prove his claims of a typical weekly income. Sometimes this is not possible because it alerts employees and customers of the sale but it is all business dependent.

The ultimate purpose of the due diligence is to remove all of the contingency stipulations that were addresses in the LOI. Once the LOI is signed, the Seller is obligated to go through this process. If a stipulation is not taken care of, the Buyer can remove his offer or make a new offer. If all stipulations are cleared, the Buyer must continue into the next step of the purchase process or forfeit the deposit. Again, this deposit is only made so that you, the Buyer, are serious about the potential purchase. The odds of you losing the deposit are very slim, but if it happens, it will be completely of your own doing and not any fault of the Seller.

Step 3: Contract preparation- Once the due diligence period is over, the Seller’s attorney will shortly thereafter present a Purchase of Sale Agreement to the Buyer’s attorney. Now is the time to fully get your attorney involved. Any time sooner, they tend to hold up a lot of the buying process for no reason. At this point things are becoming binding and an attorney is absolutely necessary. I should also point out that your attorney should be charging you a set fee for handling this transaction. The complexity of the business will determine that fee, but at the time of this article, most small business purchases should be in the range of a $1200-$1800 flat fee. For businesses requiring extensive research for things such as environmental concerns (like a gas station or car wash), a flat fee will most likely not be possible, but you can always ask.

If a pre-contract deposit was stipulated on the LOI, this is when it will be due. This deposit is often in the range of 10%-20% of the purchase price but can really be anything, especially if the Seller will be holding a note on the purchase.

During this time, your attorney will be doing his/her part by performing a lien search to see if there are monies outstanding that the Seller must take care of to vendors or the government. These issues will be dealt with between the attorneys.

In addition, it is customary and recommended for your attorney to set up a non-compete agreement for the Seller to sign. In basic terms, it will keep the Seller from becoming a direct competitor of your business for a set period of time. This item should be mentioned as a contingency in the LOI but does not need to be there.

Step 4: Property arrangements- While the contract is being prepared between the attorneys, the preparation of a lease should also be initiated by the attorneys and the Seller with the landlord, assuming the property is not part of the purchase. Sometimes the lease is assigned to the new Buyer as a continuation of the Seller’s lease and other times they will negotiate a brand new lease. If for some reason this lease becomes outrageous compared to what the Seller led you to believe, there are still ways to get out of the deal. Unfortunately, it is difficult to deal with many landlords until you reach the contract stage so you don’t always know what they are thinking. Most don’t want to know what is going on until they are sure the Seller actually has a Buyer.

Step 5: Inventory arrangements- While the attorneys are working on the contract and lease, the Seller and Buyer should arrange to count and price inventory, if it is part of the sale. Often times, the inventory will be higher than was stipulated in the LOI and can be purchased by the Buyer from the Seller at an additional cost should they want/need it. In some instances, if it is not an extreme difference, the Seller will agree to just include the extra inventory, but don’t count on it.

Step 6: The closing table- Assuming everything in steps 4 & 5 are squared away and the attorneys have finalized the contract, you will meet at the office of one of the attorneys along with the Seller and often with the Broker. 95% of all issues should be resolved at this point. The contract will be looked over by all parties one more time to verify everything has been satisfied. All that is left for this meeting would be signing the documents, the Buyer handing over the final payment and the Seller handing over the keys.

Step 7: Business transition- A stipulation of the sale often consists of the Seller staying on for the agreed upon period of time to ensure a smooth transition. This time frame is usually between 1 and 4 weeks. Sometimes, an agreement is also made for the Seller to stay on as an employee or as a consultant for a fixed amount of time with a well laid out contract stating their responsibilities to the new owner during that time.

Step 8: You are in business- This is it! You are a proud owner of a working business.

Once you are on your own, make use of your Advisors and key employees. The key to your success is to do what you do best for this business and surround yourself with others who can permanently (employees, vendors) or temporarily (Business Advisor, Accountant) help you round out the business needs.

A word of advice: don’t change anything in the business just yet! I always recommend to my clients that they hold back on their grand plans for a few months to truly get a taste of how the business flows. You need to know what was working before you bought the business and why prior to jumping in and changing things. This is a subject for another article but trust me on this.

Good luck in the pursuit of your business and personal goals with you new company!

Closing the Deal on Buying a Business - To learn more about this author, visit George J Sierchio's Website.

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