Everything You Need to Know About Buying a Business

Being a business owner is an extremely rewarding career. Whether looking to build your investment portfolio, acquire an up-and-coming competitor or simply, looking to own a company without building one from the ground up, buying a business is a big decision. Perhaps you are eager to move into new geographic markets or expand your service offerings. Maybe you are a residential alarm dealer who wants to expand into the commercial sector by acquiring an experienced commercial integrator, or vice versa. Egan Security Group has compiled a list of everything you need to know about buying a business.

Buying a preexisting business is more common than you might think. In fact, according to the U.S. Bureau of Labor Statistics, more than 500,000 businesses change hands per year. This is expected to increase rapidly over the next several years as baby boomers look to retire. Before you consider buying a business, it is important to educate yourself on the process.

Figure out what type of business you want to own:

Consider your passions but also skills and experience. Although you might be looking to buy a business based on their financial achievement alone, acquiring a business that offers services you are familiar with and enthusiastic about will lead to greater success.

Obtain financing:

Most businesses purchased use a combination of debt and equity. This means, you will pay for part of the purchase with cash (equity) and the rest through obtaining a loan (debt). There are plenty of options for financing including traditional bank loans, Small Business Administration loans, or through private equity firms. Similar to purchasing a home, you should find out what you are qualified to borrow before searching for a business to purchase. It is also important to confirm your lender can timely fund what is required at the close of the transaction.

Find a business you want to purchase:

look for the best option that aligns with your goals, budget, and resources. You can find businesses for sale online through brokers, local attorneys and CPAs, franchisors, or word of mouth. No matter how you find the business, make sure it checks off all your requirements, is primed for profitability, and does not have any major red flags.

Value the business:

Once you have found a business you want to purchase, its time to see how much it is worth. While there are several factors that affect a business’s value, the security alarm business valuation process is typically calculated by recurring monthly revenue (RMR); earnings before interest, taxes, depreciation, and amortization (EBITDA); or a combination of the two. Keep in mind every type of business is managed differently. It is recommended to hire a professional to assist with this process and provide you with an objective assessment.

Negotiate a purchase price:

After your valuation is complete, it is time to decide what you believe the business is worth. More importantly, decide what you are willing to pay. With most transactions, there will be negotiation between parties before you come to a tentative agreement.

Submit a Letter of Intent (LOI):

When you are ready, a letter of intent needs to be issued for the sellers to review and agree upon. The LOI should include a price proposal, as well as the terms and conditions of the sale. If it is your first time completing an LOI, look to your attorney or an experienced broker to assist you with preparing the document. The fully executed LOI is a clear indication that the seller is serious about completing the deal and willing to cooperate when gathering due diligence.

Complete due diligence:

After both parties sign the LOI, you will be able to access additional information on the business you are looking to purchase. This is where you will review financial and legal information at length. You should be reviewing organizational documents, tax returns, income statements and other financials, customer information, existing contracts, rent rolls, employee information, and more.

Close the transaction:

Once you have completed your due diligence, agreed on the price, and gathered your capital you are ready to close the deal. It is important to hire a lawyer or broker to help you negotiate this part of the process and create a sales agreement. Make sure the broker involved has all the appropriate documents: bill of sale; lease and vehicle documentation; patents, trademarks, and copyright forms; and an Asset Acquisition Statement, IRS Form 8594, to name a few.  Once the closing is finalized, you will need to transfer or apply for any necessary business licenses to ensure a smooth transition period.

Are you ready to grow your security integration business through mergers and acquisitions? Contact us for a confidential consultation. We look forward to hearing from you and helping you realize maximum value for your business.