How to Approach a Business Owner About Selling His Company
Offering to buy another person’s business can be a sensitive proposition because of the hard work and dedication that goes into creating a company and the often-personal attachment an owner has to it. If you seem unprepared, disrespectful or cavalier, you likely won’t even get past the inquiry stage. Do your research before you contact another business owner about selling, as it will improve your chances of a successful transaction.
Start your inquiry with a visit to the establishment. Notice if the physical property seems well maintained or if the owner has not kept it up. A lack of pride in a building could signal a lack of attention to other aspects of a business, such as the finances, employees and marketing. Leave with any available paperwork, including price lists, menus, brochures or other marketing materials. Do not introduce yourself as a potential buyer; that way, you can see how the business treats its customers.
Conduct preliminary research on the business, looking at its pricing, product or service features,unique selling differential, brand, competition, reputation and any news or information you can find from an Internet search. Look for any legal problems the business might have had. Perform a SWOT analysis -- examining the strengths, weaknesses, opportunities and threats facing the business -- as if you were starting a new, similar business in the same area. Consider contacting a business broker to help you conduct your research, make contact and conduct your due diligence.
Contact the owner in writing, asking if he would be interested in discussing selling his business. Show him you're serious by asking what information he needs from you. Tell him you're prepared to sign a confidentiality agreement before conducting your due diligence, the process by which you look at proprietary documents to determine an offer price. Let the owner know you will work through his attorney or meet with him personally. If you are working with a business broker, have the broker make the contact.
During the first meeting, ask the owner specific, but not proprietary, questions you developed during your SWOT analysis. Discuss what you'll need for due diligence, including he last three years' tax returns, copies of recent bank statements, budgets, a list of hard and intangible assets, key employees, clients, outstanding debts, liens or other legal obligations. Ask about any grandfathered exceptions to zoning, taxes or safety laws that might transfer in a sale. You may be asked to put down earnest money before getting access to these documents to show the owner you are serious. Negotiate the earnest money and offer to have a neutral accounting firm conduct the due diligence.
If you are allowed to conduct a due diligence, use your research to determine a realistic annual profit after you start running it. Some business sale prices are based on a multiple of recent earnings. For example, if a business made an average profit of $100,000 per year the last three years, the owner might ask for three to five years’ worth of profits. The rationale is that if you are willing to buy the business, you believe you'll be able to improve its performance and operate it for many years.
Determine what the business is worth and make a preliminary offer. Include requirements such as the inclusion of all physical assets, trademarks, contracts, no-compete clauses and customer lists. Ask the owner to sign a no-compete clause, preventing him from opening a similar business nearby. Add contingencies such as the owner providing consulting for a specific period, providing financing or taking payments over time. State that your first offer is exploratory only and not binding.