As with any major purchase, the worst thing a person can do when looking to buy a business is to be in a rush to make a deal. It is important to move quickly once you find a suitable target, but don’t buy just anything or settle for something less that what you really want.
In addition to finding a business that meets your financial needs and that is priced reasonably, consider whether you can see yourself having fun in the business. When it is fun and it won’t be work, that will be reflected in the success of the business.
It is advisable to get pre-qualified with an SBA loan packager or broker before starting your search. As with buying a home, showing you are financially qualified to do business can make the difference as to which offer is accepted by a seller – and how quickly you can close a deal. Your business broker or intermediary can help you connect with a SBA loan broker who has a proven track record.
With it currently being a seller’s market with limited inventory, be prepared to move quickly when you find a suitable target. Rather than miss the opportunity, a useful tactic is to make a non-binding offer outlining what you are thinking as to the price, terms and what is included, based on the representations made, subject to a formal Letter of Intent, due diligence, acceptable financing and a definitive Purchase Agreement prepared by a transaction attorney. The objective is to see if you and the seller are in range of a meeting of the minds.
It is smart to know whether others are at an advanced stage of looking at the targeted business. This can be established by asking the listing agent.
It is advisable to ask your broker or intermediary to give you an estimate of the total cost to buy the business and the cash you will need, including what will be needed for working capital, SBA and bank fees, and professional fees. Then estimate the loan payment and that confirm there is at least a 1.25 debt coverage ratio after the buyer’s salary and debt service. This is one of the important tests to make sure the business will be a fit for you and that it will qualify for bank financing.
Buyers will find that about 80% of the businesses on the market are grossly over-priced. Don’t be discouraged – that is just the way it is. This situation occurs as a result of agents telling sellers what they want to hear, as compared to the real world, just to get the listing.
As a seller or a buyer, if you would like a confidential conversation about how to prepare, please contact me on my cell, 954-579-4687, or by e-mail to bobd@dolansales.com. My LinkedIn profile is: http://www.linkedin.com/in/dolansales.
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