Businesses large and small get started, go bankrupt or get acquired all the time, that’s nothing new. But those deals aren’t as straightforward as one might think. Some businesses undergoing bankruptcy simply do so to restructure, where going bankrupt might save more money and time in the long run. There are also acquisition deals and buyouts where some companies are bought out for far more than they are worth–because that is what the market is willing to pay.
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These are complicated processes with even more complicated red tape attached to them, but they do have a few things in common.
Here, we’ll mainly be focusing on those common factors. Want to buy a small business? Are you looking to buy online businesses to expand your reach or seeking funding for small business ventures? All those questions might have complicated answers, but buyers and sellers often lack the information they need to get the best deal from that situation.
Here at Winthrop Capital Group, our focus is to give your business the best chance of financial success, whether you are running it, buying it, selling it, or raising investment capital.
Acquisitions and Mergers
The purchase and sale of businesses is a common practice, and at times, if parts of the business can be absorbed into one’s own, the owners might conduct a merger instead. In both scenarios, there is a buyer and a seller, and regardless of which end you are in, you have to do plenty of work and prepare.
Whether you are acquiring a business or selling it to be acquired by someone else, you don’t just put a desired number value on it and offer it to the buyer. Auditors have to ensure that everything is in place, there are plenty of checks you need to do, as well as the buyer to ensure all documentation is ready, in addition to plenty of other things.
As a buyer, you need to be aware if the business is well-managed or not and that when you acquire that business, you can work on turning a profit as soon as possible.
The Number of Small Businesses in USA | 2017-2022 (Source: Link)
There are plenty of SMEs to choose from, within your specific business sector or completely different from it. Understanding them takes time, effort, and, most of all, insight.
Buyer Beware – Before You Buy a Small Business
It should be noted that Small to Medium Enterprises (SMEs) can vary significantly in how they are managed, what kind of profit margins they have (if at all), and the number of employees they currently manage. While anyone buying large businesses needs to consider the same, the problem with small businesses is that they aren’t very agile or flexible in their operations. At least not always.
Some might even have too many employees or not enough. Small businesses are especially likely to have one person managing things that multiple departments do at larger companies. This can make the process of due diligence more of a challenge than it already is for both buyers and sellers.
Even if you buy online business, these considerations need to be given their proper dues. Documentation and records are necessary regardless of what kind of business you run. Even a non-profit organization that has no tax considerations–at least on non-federal tax policies–needs to document everything.
Starting a Business & Raising Capital
Just as it is with selling one, starting a business isn’t easy either. Acquiring funding for small business needs to be handled carefully by both parties. Even if you seek investment capital for expansion, new ventures, etc., the investor needs to ensure they get a good deal just as much as the owner. Mutually beneficial deals drive businesses forward, but this process can sometimes be complicated enough that many owners might not be able to handle it independently.
Hiring a broker is quite common in this process. Getting the best deal requires plenty of negotiation, research, and time spent just organizing everything to be provided to the potential buyer. You need to make sure there are Non-Disclosure Agreements (NDAs) signed and in place by both parties well before any critical information is shared, including NDAs for the deals themselves, so the information isn’t shared with any third parties. You need to ensure you aren’t strongarmed into a bad deal. Brokers and their pragmatic approach help with that, and business owners rarely have the time to do it themselves anyway.
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Raising Money for Small Businesses
Some businesses might get grants or investments to fund their inception, but most others tend to be done through loans, personal funds, or finding an investor when you have a business idea. You can even start the business and lay the groundwork before finding an investor, such as securing clients and having a set business plan to move forward.
However, different investors can handle it differently. If an investor pledges a certain amount, such as $100,000, they might release it in tranches of $25,000 per quarter or provide the entire amount to add to your annual budget outright. Instead of pledging cash, they might help you acquire equipment, commercial real estate, or other items. It depends on the investor and the deal, and how it relates to you and your business varies on a case-by-case basis.
Selling a Business
There are likely hundreds, if not thousands, of small businesses that are put up for sale every day. Not all small businesses are created equal. In fact, not all small businesses are even defined in a uniform way. Some say that a small business earns less than a million to $3-5 million in revenue. Some say that a small business typically has 500 employees or less. While others give a much looser definition of it. The US Census Bureau defines it with both, stating that a small business must have 100 to 1500 employees and must earn $1 million to $40 million in revenue.
This can even vary by region. A country like the USA might have a much different perspective of what an SME might be compared to moderately wealthy or poorer regions, so the prospect of buying or selling a business might vary significantly. However, the focus here is on the USA specifically.
Knowing whether your business classifies as a small business or not is essential. It can change how the purchase or the sale is determined. Medium-sized enterprises, for example, might use banks and brokerage firms. In contrast, smaller businesses can do handshake deals and have a single financial advisor working for them instead of availing the services of an entire firm.
The Process to Buy a Small Business
The acquisition process is lengthy and time-consuming whether you’re a buyer or seller. It can start with a call or a meeting with the buyer/owner, but not every business owner will know that before any discussion starts, there needs to be an NDA prepared, drafted, and signed beforehand.
The NDA is typically signed before any Indication of Interest (IOI) or Letter of Intent (LOI) forms are provided, which are also an optional courtesy rather than a necessary part of the process. However, the IOI is a great way to acquaint the owner with the buyer and their intentions and determine whether their interest is legitimate. These can contain certain clauses or terms that can ensure that you don’t look for other buyers while the deal is being negotiated and terms are being set so that you don’t seek valuation and look for other buyers aiming to sell for a higher market value.
All this is well before any due diligence information is shared, such as tax information, employee records, financial statements, policies, etc. The due diligence stage is where most of the time can be spent, which is why these deals can often take a few months to even more than a year.
As a buyer, you must keep your financials secure and effectively vet the business you are acquiring. As a seller, you need to ensure your business is run effectively and per the legal system, as well as vetting the buyer for their financials so you can know they actually have the funds they are offering.
Financial Wellness Always Matters
You cannot start organizing your business once you are looking for a buyer, and you cannot seek a potential seller before gathering the funds for your acquisition, whether you are a solo entrepreneur or a business owner acquiring another. In both cases, you and your business’s financial well-being are of utmost importance, and they also play a large role in the buying and selling process.
Want to know how well your business is doing? Contact us for our signature financial wellness report and get started with setting your business up for a valuation that gives you the best possible deal!