The Buying Process
Buying a business on your own can be overwhelming; let Stony Hill Advisors provide you with the guidance and expertise you need. Our Advisors will find the business you have been searching for, help you understand the importance of having all the right paperwork, records, and information you need to proceed with your purchase, and more. Let us do the leg work to give you a unique, stress-free search.
Learn our steps and process of how Stony Hill Advisors will provide you with a purchase of a lifetime.
- Before buying a business, what do I need to know?
Knowing what industry or type of business you want to buy is extremely important. You need to have a clear vision of how you will manage and grow the business. You also need to understand the funds available for a down payment and the price you are willing to pay. Don't forget, the location is important! You can find the right business for you to buy, but you will need to relocate. Before searching for a business, narrow down the search to location.
- A confidentiality agreement or non-disclosure agreement is necessary to begin the search for a business to purchase. All prospective buyers will be required to sign forms stating that they will not disclose any of the confidential or proprietary information that they receive. This confidentiality is paramount in the search process. However, the sharing of information with advisors such as accountants and lawyers is an acceptable practice and does not breach the confidentiality agreement.
- After signing a confidentiality agreement, you will be informed with the reason the owner is selling. The more valid the reason for sale is, the more realistic the seller will be in considering your offer.
- As well as, how long the present owner owned the business. The longer the present owner has been in business, the more likely he or she has been successful. People don't stay in business if they are not making money.
- A business with a long track record means there are good reasons for that business to be operating.
It will be well known in the area or industry, and people will be used to patronizing the business or using its services or buying its products. The longer it has been in operation, generally, the better the business.
- Importance of Books and Records
The financial records of the business are a good indication of how well the business has been doing over the years. Keep in mind that tax records are not designed to show the business in the best light: no one likes to pay more taxes than they must, and owners of businesses are no different.
Generally, tax returns are a worst-case scenario. You need to be able to look at the expenses and discover which ones are non-cash items, such as depreciation, and business use of home and vehicles.
- Previous owner reporting all income?
The simple answer is you can't tell if the seller reported all income or not. Not reporting income is against the law. You should consider only the income that the seller can show you. We all know, especially in cash type businesses, there is the possibility that the seller is not reporting all his or her income for tax purposes.
- Is the personal auto necessary for the business?
A professional business advisor can point these items out to you. When in doubt, however, seek outside assistance. Keep in mind that financial records are only history. There are no guarantees that they will or can be duplicated or repeated. All your profits are future. In the final analysis, the financial records of the business are an indicator of what the business has done; what you do with its future is up to you.
- Am I prepared financially?
In order to purchase any business, you will need a down payment. A down payment can range from $100,000 to $1,000,000 or more depending on the price of the business.
A good rule of thumb is to have at least 25% of the purchase price for a down payment. If only seller financing is available, 50% may be more realistic. You will also need an initial working capital. Either way, it will be necessary to have funds ready and available when you make an offer to purchase a business.
- 3 years of tax returns for financing?
Banks and private/seller financing will always require your personal financial documents to be examined before determining your ability to borrow funds for your business purchase.
It is very important that you keep a file containing your tax returns, including all schedules, readily available upon request. Your tax returns will be the key tool when assessing your ability to borrow.
- Credit score?
Just like your tax returns, a bank or private financing source will want to check your credit to make sure you have the necessary credit history to repay the loan in a timely fashion. If your credit score is below 650 from any of the three (3) major credit bureaus, you might try to raise your score prior to applying for a business loan.
Your credit score can be checked by going to www.experian.com.
- What you need to have prepared
A financial statement is a great tool to use when beginning the purchase process. It will be the one form that can be sent to your business advisor, your banker, and to the seller when making an offer to purchase. Sellers like to consider things like net worth and liquidity when deciding which offer to accept.
- Advisory Team
Virtually every buyer is represented by an accountant to assist in the due diligence process, and an attorney to draw up and review the legal documents. Many buyers have business relationships with these types of professionals, but many times the advisors are not transaction-based. If your accountant or attorney is not transaction-based, Stony Hill Advisors can refer several professionals from which you can choose.
