Nailing the Deal: A Casual Guide to Buying a Business

Thinking about buying a business but not sure how to tackle the deal part? No worries, we've got you covered with a laid-back walkthrough on how to figure out what a business is worth and how to pay for it without breaking the bank. Let's break it down.

Valuation: What's This Business Really Worth?

Before anything else, you gotta know what you're willing to shell out for a business. Here's how to get that magic number:

  1. Know the Goods and the Bads: Check out the business's assets (what it owns) and liabilities (what it owes), where it stands in the market, and its future money-making potential.
  2. Peek at the Neighbours: Look at similar businesses that have been sold recently. How much did they go for? This can give you a ballpark figure. Bizbuysell’s reports and chatting with folks who’ve bought businesses can be super helpful.
  3. Check Your Wallet: Think about what you can actually afford. If you're thinking of taking out a loan, lenders have this thing called a debt service coverage ratio (DSCR) they're really keen on. It's all about whether the business makes enough to cover the debt you're taking on.

Remember, the price tag you first see is just the starting point for negotiations.

Paying Up: How to Do It Smart

You probably don't want to empty your pockets upfront, right? Here’s how to spread out those payments and keep some cash in your pocket.

  • Seller Notes: This is where you agree to pay back the seller over time (think 3-7 years) with a bit of interest. It's a cool way to lower how much cash you have to put down at the start. Plus, it keeps the seller invested in making sure the business does well after they hand over the keys.
  • Earnouts: These are payments you make based on how well the business does after you buy it. Can't do this with an SBA loan, but it's a neat trick for bridging any price gaps without upfront cash.

I'm all for using seller notes or earnouts. Paying everything upfront? Not so much.

Other Stuff to Think About:

  • Transition Plans: You'll want the seller to stick around to show you the ropes. Free help is great, but sometimes you gotta pay for their time.
  • Non-Compete Agreements: Don’t let the seller start up a rival shop. A non-compete helps prevent this.
  • The Extras: Figure out what assets and inventory you’re getting, if real estate's included, and how much working capital you'll have from day one.
  • Asset vs. Stock Purchases: Generally, buying assets is safer since you can leave some liabilities behind. Stock purchases can be trickier unless you really need certain contracts or licenses that can’t be easily transferred.

Just scratching the surface here, but these pointers should give you a solid start. And hey, don't go at it alone – grabbing some legal advice from someone who knows the ins and outs of M&A can save you a headache later. Happy buying!