How Do You Buy a Business?

The basics.

September 12, 2023

First, let me tell everyone who reads this that the process of looking for a business to buy and getting a deal across the finish line is hard.

REALLY hard.

Don’t let anyone tell you otherwise. And if they do, then assume that they are trying to sell you something.

I am not here to sell you an online course or ask you to buy my book. This is just knowledge I’ve picked up and wanted to share with you all.

To learn what I am even talking about with buying a business, check out this first post.

The Timeline

Let me break down the basic timeline of events.

Search

This is the process of just looking for a business to acquire. The easiest way to do this in 2023 is to use listing websites (think Zillow for business, although the interface is not nearly as slick). You can find a pretty comprehensive list here. I will post more on other techniques you can use, but websites like the ones listed are a great place to start.

Identify

Ok, you zeroed in on a business you think you may like. You may see a listing like this:

And want to learn more. So you fill out the contact form and wait for the broker to send you a Non-Disclosure Agreement (NDA). After that, you then will usually get a packet of information on the business, often called a Confidential Information Memorandum (CIM) or Confidential Business Review (CBR). These documents will have a lot more information than just what you see on the website.

Pre-Offer Diligence

Once you have the CIM, you then start to look at the business. I am asking myself a few questions here:

  1. Can I finance this? I will have more on this in later posts, but typically speaking in today’s interest rate environment, it is going to be tough to buy a small business for greater than 5x the cash flow. So, in the picture above where they are asking 3.98x cash flow, this business looks like I can get a bank to lend on it and still provide enough cash flow for me and investors.

  2. Can I run this? It may look like a great business, but may not be the right business for you. Or the business may be so dependent on the current owner that it will be very difficult for you to provide the same level of value as a new owner.

  3. Do I want to run this? There are just some businesses I don’t want to run. I am personally not a car guy and actively avoid car-related businesses. It’s just not of interest to me and I wouldn’t enjoy those businesses. My rule of thumb is that after reading the CIM, I sleep on the idea of that business for 2 nights before wanting to learn more.

If the business passes these questions, I then reach out to the broker and ask to schedule a meeting with the seller so I can talk to them and then learn more about the business.

After this review, it’s good to run the deal by a lender first to see if you will be able to finance this acquisition. If so, you are ready to submit a Letter of Intent (LOI).

LOI

The important thing to note on an LOI is that (most of it) is not binding. This means this isn’t the final price. But you need a signed LOI to show the seller that you are serious and can move into the next phase.

Post-LOI

Congrats! If you got to the point where you have a signed LOI, that is huge! There is still a lot of work to do but this is a big milestone.

During the period after a signed LOI, you have three big events likely going on all at the same time:

  1. Due diligence. Now you have a signed LOI, the seller should be an open book to you. You should be able to get access to all of their financial records, HR policies, and everything else about the business. Ideally, you can also talk to current customers and even some key employees.

  2. Debt raising. While conducting due diligence, you are also working with banks to raise the debt necessary to buy the business. Banks move at different speeds and will likely need a lot of paperwork, but that’s what it takes to get a deal across the finish line.

  3. Equity raising. Most likely you will need some outside investors to help fund your business acquisition. More on this in a later post, but know that investors LOVE veterans.

Closing

With everything lined up, at this point, you need to get the money from investors and line everything up to close on the deal.

Running the business

The most important step.

Searching for a business to buy is no joke, but don’t forget that at the end of it, you need to run the business. That’s the real work.

You are Buying Cashflow

People get confused about what exactly they are buying with a business, but let me be clear. You are mainly buying one thing:

Cashflow.

Does the historic level of cash flow from the business provide you enough capital to pay the bank, pay investors, pay yourself, and have some left over to reinvest in the business or distribute to owners? Great- that’s a business to buy.

There may be other reasons as well. Maybe they have unique patents or they are competition and you want to buy them out. But getting started in business ownershi[p by buying cashflow is a great way to get started.