Through experience entrepreneurs know when to close a deal and when to walk away, but for those with less experience at buying a business it is a bit more daunting, but getting it right can be critical to the future success of your acquired business. So how does the sale of a business work? And how do you know when it’s smarter to walk away? Once you and the seller of the business have a general agreement on the sale of the business the hard work starts.
The stages of closing the sale of a business:-
- Letter of intent. The buyer will draft and sign a non-binding purchase agreement called a letter of intent. This letter outlines the terms of the sale, including the price agreed to.
- Due diligence. Both the buyer and the seller will then investigate the other party. This is possibly the most important part of the sale particularly for the buyer, because it can turn up signs that the deal isn’t right for them.
Things to look out for are:
- Inconsistencies – if when reviewing the financial, legal, and business records there are inconsistencies that the seller does not respond to satisfactorily , walk away from a deal.
- Neglect – if the business has been on the market a long time and the seller has neglected the business during this time, by not maintaining the building or encouraging new business, this will need to be reflected in the cost of the business. If the new price cannot be agreed, walk away from the deal.
- Undisclosed problems – if the current owner fails to mention key problems you should be entitled to know, question what other information has this person withheld. May be a sign to walk away from the deal.
- Poor credit rating –if your due diligence turns up a poor credit rating or problematic borrowing history for the company, then despite appearances the business’s finances may not be in good order. Walk away if you have any doubts.
- The industry is in decline – during due diligence check with other industry experts to make sure the outlook is still positive. If that outlook is negative, walk away.
- Financing – the buyer will need to obtain financing from a bank, unless it is a cash sale.
- Purchase agreement. Once the buyer obtains financing and the due diligence process has been completed satisfactorily for both parties, a purchase agreement can be drawn up outlining price of the sale, any financing details, and ancillary agreements like confidentiality agreements.
- Closing the deal. The final step in the process requires all participants to sign the purchase agreement and any other contracts of sale.
Most people considering buying a business will use a business broker or a solicitor to guide them through the buying process.
If you are considering buying a business, seek expert advice from Peter Robinson & co.
Get in touch on 0161 678 7996.