Buying a small business is easier said than done as most people are willing to buy, but they are unsure where to start. To help such people, here is a process breakdown for small businesses so that you can know what to expect.
1. Offer and acceptance
Making an offer to purchase the business is the first stage for buying a small business. These offers can take the form of a drafted letter or just be a simple oral offer. However, it is highly recommended to make formal offers through writing. Legal requests in that form ensure that terms are set out to eliminate the issue of confusion. Moreover, written bids reduce the amount of time and money used for further negotiations. Once your offer is accepted, you should get the acceptance in writing as well.
There are items that you should agree to this point; they include
The price; comprises the assets that the trade will consist of, considering not only the tools but also the intangible assets like business name, client list, and goodwill
- Whether the exchange will involve the transfer of employees
- Whether the deal is to be liable to any conditions like financing or diligence.
- Whether you plan to restrain the seller from competing against you after they sell the business
- Whether the owner will offer any training with the exchange
It is vital to note that you don’t need to deposit at this stage of business sale. But it is common for the seller to insist on one. If the seller does so, it is advisable to give the deposit to a third party like the lawyer or business agent instead of directly giving the seller.
2. Contract review
After the buyer and seller have agreed to the standard terms of purchase, the next step for the seller’s lawyer or a seller is to prepare a contract. Here a written offer plus acceptance will expedite the process as a written agreement will ensure that the sale’s most details are available. While the seller or their lawyer is drafting the contract, the buyer should engage an eligible attorney. Having your lawyer as a buyer will help in renegotiating the agreement because it might include many favorable things for the seller.
For example, the contract might include an “entire clause” or “no warranties,” which can effectively prevent the buyer from relying on any representations or warranties about the business unless the deal includes them. For instance, it might consist of assurances about the state of any equipment or promises about the amount of revenue or number of customers.
The two contracts pass out comments made by the parties during the first negotiations and, in most cases, don’t make it into the agreement. Additionally, the review will help the buyer ensure that the agreement appropriately reflects the agreed terms. And the formal offer and acceptance become handy at this stage.
3. Negotiating and Exchanging
After conducting and finalizing the contract review, what follows is the negotiation and exchange. Buying a small business may not go through if you and your seller will not negotiate. Therefore, formal negotiation should be contacted where lawyers from both parties signing for small business exchange come together to finalize the contract. Completing the contract will prepare for the execution.
For the negotiation to succeed, there are essential points each party should need from the other. You and your lawyer need to consider the contract review that you have already completed, as it will help identify essential clauses and required points in negotiation. After you agree with each other, you and the seller need to finalize by signing the business contract.
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Signing should be formal, where both parties must swap copies of the contract. As the seller commences the transfer and due diligence of business assets, you will have to deposit according to the contract terms.
4. Settlement
Settlement is the last part of the buying a small business process. It is a part where you must complete the due diligence as you promised and confirm the accuracy of the seller’s promises. During settlement, ensure the following are readily available for transfer according to the contract agreement.
- Telecommunication service
- Assets
- Business name
- Lease
- Employees
- Client lists
There are things needed during the settlement that can help in calculating and adjusting the business prices. They include:
- Monthly paid rent
- Any paid stock and not yet delivered
- Wages accrued by the employed
Conclusion
After confirming everything is ready for business transfer, both parties should organize for the final settlement. During the last part, the lists of attendance should be kept as well as confirming cheques. Having gone through the above process successfully, the seller should now hand over the business keys to you, then operate your business. For more information around buying a business, consult a local business broker in your area.
