The Big Picture: 5 Steps to Buying or Selling a Small Business (Part 1 of 6)
For most entrepreneurs the ultimate exit strategy is to sell their business one day. Similarly, many business owners get started in their business by purchasing an existing business. Still, many business owners, especially those who built their business from the ground up, are not familiar with the steps and process in a business acquisition.
That’s where this blog series comes in. In this six-part series, I will cover the basics of doing deals and also share some war stories about some acquisitions in which I have participated. Specifically, in future posts, I will go into detail on:
1. Letters of Intent
3. Asset Purchase Agreement
4. Due Diligence
5. Post-Closing Transition Issues
But, first, let’s zoom out and talk about the big picture. The first step in buying or selling a business is planning! You need to think about what your goals are and document them in writing. How would the sale of your business or the acquisition of another business help you on your journey to get where you want to be?
One tool that I enthusiastically recommend for business planning is the Traction EOS System, which requires you to envision the best-case scenario for your business enterprise in 10 years. Then, backtrack to a period that is 5 years out and set a goal for what would have to be true at Year 5 to be on track for Year 10. Then, you create a 1 year goal that will get you on track for your Year 5 Goal and your Year 10 Goal.
The point is that if you want success, you have to be intentional about planning. Having a long-term plan will also allow you to make additional asks in your negotiations that you may not have considered otherwise. For example, if you are buying up small restaurants to be a part of your multi-unit franchisee portfolio, do you want to own the real estate for those units? How important is owning the real estate to you? These are questions you must ask yourself.
Okay, so you have thought about your plan. What else do you need to consider before making an offer to buy or sell?
If you are the buyer, you need to understand how much money you have to spend and where that money will come from. You should also have an approximate timeline of how long it will take for the funds to be liquid.
You need to know the market and understand what numbers mean in different contexts. Entering a deal without industry knowledge is a recipe for getting a bad deal. For restaurants and small businesses, I have found that bizbuysell.com is an excellent hub to keep up with the prices that similar businesses are selling for on the open market in your area.
In summary, make sure you know what you are trying to do in the grand scheme of things and that you have an above average understanding of the industry before starting a negotiation to buy or sell a business.