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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. Itís 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 donít 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. Itís 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 youíre 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. Youíll 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. Itís 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 youíve 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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 sellerís professional advisers, your professional advisers, the landlord, lenders, the Escrow officer, and others as needed.
  6. 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 cashierís 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.

 

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