Before searching for businesses available to purchase, buyers must determine the three Basic Buyer Parameters below.
An attempt to identify the type of business that would be of most interest to the buyer may also be performed at the beginning of the business search, but most prospective business buyers wind up buying a business different from the type for which they initially start searching.
- The amount of savings available to risk on a business investment. Typical down payment requirements are 10% – 20% when using lender financing; 25% – 50% for seller financing.
- The minimum amount of Cash Flow after Debt Service a business must produce to be of interest.
- The geographic area(s) desired or acceptable.
Next, the VR intermediary arranges for a time to meet with the sellers and tour the businesses that are of interest to the buyer. For out of town buyers a conference call with the seller can be arranged.
When a business is found that fits the buyer’s requirements, the VR intermediary will work with the buyer to craft an offer using the price and terms the buyer specifies, including the appropriate contingencies such as for financing and obtaining an acceptable lease; and conditions of sale, such as a non-compete agreement, and the seller must agree to the type of training that will be provided after the closing.
Seller will respond by accepting the original offer, rejecting it, or by presenting a counter offer.
Once price and terms are agreed to by buyer and seller, the VR intermediary will begin helping both parties address the contingencies in the offer in order to begin removing each one.
Usually, the first contingency to be addressed is obtaining financing. As an accommodation to the buyer, VR will prepare a loan package appropriate for the business being purchased, and provide the package to all lenders that might be interested, including any lenders requested by the buyer. It will include the following information from the buyer: resume, a credit report obtained by the buyer, last 3 years of personal tax returns, personal financial statement, information about the business being purchased, and the required SBA forms. VR does not accept payments of any kind from lenders for helping the buyer obtain the best possible loan.
The buyer will receive a proposal letter from each lender interested in providing financing.The proposal letter will have an outline of the proposed loan amount and the terms but will be subject to obtaining additional information about the business and about the buyer. To start the lending process, the buyer signs the proposal letter and returns it to the lender. Some lenders may require a deposit of $1,500 to $3,000 at this time, depending on the lender. The deposit is counted towards the buyer’s down payment for the business.
After reviewing the additional information provided, the lender may provide a commitment letter to the buyer. This letter will state the exact amount it is willing to lend, and the specific terms under which it will make the loan. This commitment letter will be contingent upon the lender receiving additional documentation, and upon its underwriting department approving the loan, usually within ten days of the issuance of the commitment letter. The probability that the loan will be made is very high at this point.
The process of obtaining financing usually takes six to eight weeks, if the loan is to be guaranteed by the Small Business Administration, but can take as long as 90 days or more. Most business acquisition loans are SBA loans because if a business is successful, the value of its cash flow is usually much more than the value of its assets. SBA-backed loans usually require the buyer to give the lender a second mortgage on their personal residence and to obtain a life insurance policy on the life of the borrower in the amount of the loan.
While financing is being obtained any other contingencies in the offer are being addressed and removed, and the buyer is exploring the details of the business’ operations and financials, to determine that the business is as represented by the seller. This is called performing ‘due diligence’.
If any contingency contained in the offer related to due diligence or otherwise cannot be satisfied, the buyer may withdraw the offer and receive a refund of their deposit.
As soon as it appears that financing will be forthcoming, VR will arrange for buyer and seller to meet with the landlord to start lease negotiations. We will also assist the buyer as needed in setting up their LLC or corporation, obtaining their federal Employer Identification Number, state withholding number and unemployment number, sales tax ID and any city or county licenses required, and filing their fictitious name registration. There is no charge to buyers for these services.
When the commitment letter is issued by the lender, VR will have the definitive Purchase Agreement produced. The Purchase Agreement should then be reviewed by the buyer’s and seller’s attorneys and accountants. Any changes they request will be presented to the other party and his or her advisors.
Once the final language of the Purchase Agreement has been agreed to by both sides, and the lender has indicated they are ready to fund the loan, the final closing date and time is set.
Arrangements should be made between buyer and seller for transfer of the credit card machine, equipment leases, utilities, etc. at this time.
Inventory is usually taken just prior to closing by buyer and seller, with the VR intermediary’s assistance. Buyer has the right to make sure all equipment is in proper working order before closing.
Closing typically consists of the buyer signing the loan documents first, then signing the Purchase Agreement and other documents pertaining to the closing of the business. Evidence that all business debts have been satisfied and a Tax Clearance or Statement of No Tax Due from the state indicating all state taxes have been paid is presented by the seller to the buyer. The closing is usually held at the VR office.
Typically the seller informs the employees of the sale of the business immediately after the closing, and the buyer meets the employees at this time.
The buyer will take over the operation of the business at the time agreed upon with seller, usually later on, on the day of closing or the next business day.
Training to be provided by seller begins at the time and on the days agreed to in the Purchase Agreement.