Frequently asked questions about buying a business
Should I start my own business or buy an existing one?
Official statistics show that about 80% of new businesses that are installed in the US fail within the first 5 years of operation. However, a going concern can be evaluated on the basis of its historical performance. The potential Buyer will be able to find out about the financial and accounting situation of the firm, the penetration and acceptance it has in the Market and the existence of operating permits granted by the different public bodies. It is usual for the Seller to assist the Buyer during the familiarization period so that the Buyer receives the necessary training to operate the business and also commits not to compete with him during a determined period and geographic area. Similarly, the Seller often provides the Buyer with direct financing on a portion of the price.
If I buy a running business, what are the essential aspects to consider?
The Buyer must evaluate its own financial capacity to invest and the time it will have to dedicate to the business. Likewise, it must evaluate the cash generation capacity of the business to cover costs and expenses and generate a surplus that allows it to regularly cover its living expenses and amortize the Seller's credit. Another important aspect that the Buyer must consider is the identification of operational processes that can be improved, and improve them once he is in possession of the business.
Is confidentiality important to the seller and the buyer?
Confidentiality is especially important because any infidelity in relation to the sale could alert competitors to take advantage of the situation; employees may become distraught and quit and customers may move to the competition.
How is the offer price of a business determined?
In general, the Business Broker evaluates the financial statements of the company for sale and makes recommendations to the Seller regarding the price at which the business should go to market. In some cases, the Seller orders a professional appraisal of the business to obtain figures that best approximate the fair market price. In other cases, the structuring of the operation is more important than the financial condition of the company at the time of determining the offer price; In general, the more the Seller's financing, the higher the sale price.
Should you hire an attorney?
Yes, the lawyer is necessary to review, draft and process the legal documents relevant to the closing of the purchase-sale transaction. It is important that the lawyer has experience in mergers and acquisitions. The fees caused by these procedures are, in general, shared between the Buyer and the Seller. Hiring a good business attorney is vital for companies and individuals wishing to invest in the US. To achieve an adequate choice, the potential client must analyze the attorney's credentials and hold an exploratory interview with him before formalizing the client-attorney relationship. The Business Lawyer is in charge of managing the legal affairs of companies and investors. In the exercise of their usual functions, the business lawyer advises on the following matters:
- Companies Registry.
- Purchase-Sale of Properties and Businesses.
- Registration of Trademarks and Patents.
- Taxes and Financial Planning.
- Commercial Contracts.
- Labor Contracting.
- Judicial litigation.
Should I hire an accountant?
Yes, the certified public accountant (CPA) is necessary to review the accounts and determine their adequacy with the offer of sale made by the Seller. It is important that the CPA has experience in evaluating accounting processes in the area of small and medium businesses. The fees caused by these procedures are, in general, paid by the Buyer.
What is "Due Diligence"?
The literal translation into Spanish would be “due diligence”. This is the process by which the potential Buyer reviews the core aspects of the business that he intends to acquire. For the success of this stage, it is necessary to have the Seller's willingness to show his accounting books and files so that the CPA can carry out his management smoothly. The Seller's decision to buy or not will depend on the management of the information provided by the Seller and by third parties. The "due diligence" must consider qualitative aspects such as the information contained in the financial statements and qualitative aspects such as the evaluation of the control systems, the quality of the personnel, the validity of the operating licenses and the lease contract, among others.
During the "Due Diligence", what are the warning signs that the buyer must attend to?
That the Seller has imposed a term to close the operation that does not meet the analysis needs of the Buyer; that the Seller has withheld relevant information; has limited access to information; you have hidden the real reasons why you are selling the business; present distorted or false information; show little interest in cooperating in Buyer training. If any of these elements arise, the Buyer must understand that the acquisition risk has increased, so it will be at the appropriate time to deepen the analysis or withdraw from the operation.
How much cash do I need to acquire a going business?
Frequently, a portion of the price is financed directly by the Seller through the acceptance of a promissory note ("Promissory Note") with the guarantee of the business itself. This financing evidences the confidence that the Seller has in the strength of its business. Likewise, the business can be financed by going to various financial institutions specialized in granting loans to small and medium-sized companies. The availability of these credits will depend on the size of the company's assets, its historical evolution, available collateral guarantees and the volume of projected cash flow. An excellent financial alternative is the "Small Business Administration" (SBA), which is a government institution responsible for granting guarantees to qualified companies. These credits are restricted to businesses owned by US residents or citizens. On average, a cash investment in the range of 30% to 50% of the purchase price could be enough to complete the transaction.