Acquiring a small business can be an exciting and rewarding experience, but it’s important to carefully plan and prepare before diving in. Here are the steps you’ll need to take to acquire a small business:
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- Develop a business plan: A business plan is a document that outlines your business idea, target market, financial projections, and marketing and sales strategies. It’s essential to have a clear and well-written business plan before you start looking for a small business to acquire.
- Determine your financing needs: You’ll need to have a clear understanding of how much money you’ll need to purchase the business, as well as to fund your operations and growth. Consider your options for financing, including loans, investment, and personal savings. SBA banks will want you to put a minimum of 10% up to 20% into the transaction. SBA lenders will not finance 100% of a transaction. In addition, lenders will only lend 5x – 6x the cash flow of the business. In today’s interest rate environment, it is closer to 5x. For example, a business generating $100,000 in cash flow (sales – all expenses), would be eligible for a $500,000 loan. In amount above $500,000 would be funded from the buyer.
- Search for businesses for sale: There are many resources available to help you find small businesses for sale, including online marketplaces, business brokers, investment bankers, and classified ads. Take your time to research potential businesses and make sure you fully understand the financial and operational health of the business before making an offer. The most successful entrepreneurs buy businesses in industries in which they have experience. SBA banks will hone in your direct experience in the industry in which the target operates. If you don’t have direct experience, banks may look for “relatable experience,” ask you to put a larger down payment into the transaction (e.g. 20% versus 10%), or simply pass on the opportunity if the banker determines your experience may not translate to the new opportunity. Note that most SBA banks will not lend if the entrepreneur does not actively work in the business. There are some exceptions, e.g., car washes, but there are not many. In addition, keep in mind that passive income businesses such as rental real estate do not qualify for SBA 7(a) financing.
- Evaluate the business: Once you’ve found a business that you’re interested in, it’s important to carefully evaluate it before making a commitment. This might include reviewing financial statements, analyzing the business’s market position, and speaking with the current owner or management team. We strongly recommend first-time buyers consult with attorneys, accountants, and domain experts throughout the M&A process.
- Negotiate the purchase: Once you’ve decided to move forward with the acquisition, it’s time to negotiate the terms of the sale. This will involve setting a purchase price, determining the terms of payment, and agreeing on any contingencies or contingencies.
- Finalize the deal: After you’ve reached an agreement with the seller, you’ll need to finalize the sale by signing the appropriate documents and transferring ownership of the business. This process will vary depending on the specific terms of the sale and may involve working with attorneys, accountants, and other professionals.
- Integrate the business: Once you’ve acquired the business, it’s important to carefully integrate it into your existing operations. This might involve updating financial systems, integrating marketing and sales strategies, and introducing new products or services.