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Buying a Small Business

Buying a Small Business

If you visit SKripts Pharmacy in the West Fargo Costco store, chances are you’ll find Trisha Oss busy answering customer questions, filling a prescription or helping a coworker. A graduate of the NDSU School of Pharmacy, Trisha has worked at SKripts since 2013 and is one of 3 licensed pharmacists and 11 employees at the independently-owned pharmacy.

When she learned in late 2020 of the owner’s plans to sell, Trisha began to explore the possibility of buying the business. In May, 2021, after obtaining assistance from the ND Small Business Development Centers in Fargo (ND SBDC), her accountant and attorney, and securing a commercial loan through her bank (Alerus), her dream of becoming a business owner became a reality.

Every year, more than a half-million businesses like SKripts change hands, and that number is expected to skyrocket as millions of baby boomers retire and sell their businesses. It has been estimated that up to seven of ten small businesses in ND will turn over in the next decade.

One advantage of buying an existing business (or a franchise) is you have the opportunity to become a business owner while avoiding some of the pain points and costs of starting a new business. But the journey can be long and complex. If you’re looking at buying a business, here are some things to consider:

Step 1: Determine what type of business you want to buy

Take into account your interests, skills, and experience. Look for a small business that dovetails with what you are already doing. For example, if you’ve been a manager at a restaurant for a number of years, it could make sense to own your own restaurant.

Step 2: Search for businesses that are for sale

There are many ways to find businesses for sale that fit your criteria. These include:

  • Online business marketplaces such as BizBuySell.com
  • Craigslist ads
  • Classified newspaper ads under “Businesses for Sale”
  • Asking people in your network
  • Consulting a business broker

Step 3: Understand why an existing business is up for sale

There are many reasons why a business owner might put their business up for sale such as retirement. If you’re considering buying a business, you’ll want to know exactly why the current owner is looking at selling. Find out as much as you can
about the existing business’s history, strengths, challenges, and opportunities. If possible, speak with existing customers and employees.

Step 4: Narrow the field

Determine the best option among several different businesses. Typically, the best choice is the business that aligns closest with your area of interest, goals, budget and resources.

Step 5: Do your due diligence

Due diligence is the process of gathering as much information as you can before buying a business. At this point, it’s often helpful to have an accountant and/or business advisor with a background in finance to help analyze the financial information.

Before you can begin, the seller will most likely ask for a signed confidentiality agreement or nondisclosure agreement (NDA), which protects the seller in case you decide not to pursue the purchase.

  • Commonly requested document include:

Organizational paperwork

  • Historical financial statements
  • Three-year cash flow projections
  • Business tax returns
  • Brief history of the business
  • Complete list of business assets
  • Business licenses and permits
  • Contracts and leases
  • Any environmental regulations
  • Organizational chart
  • Inventory status
  • Intellectual property assets
  • Customer lists
  • Key employee contracts

As you move forward, the seller typically issues a letter of intent (LOI) to the buyer, which states the agreed upon purchase price and lists the business assets and liabilities included in the transaction. Eventually, a sales agreement is drawn up. An attorney should be involved in drafting and/or reviewing this legally binding document.

Step 6: Evaluate the price of the business

The next step is to agree on a price. This is where many deals fall apart because buyers and sellers often place very different values on the same business.

The ND SBDC often can provide interested buyers with ‘rules of thumb’ to help determine a ‘fair range of value’ for a specific type of business. Sometimes, buyers or sellers will pay for an independent business valuation based on one of several recognized methods.

While these approaches can be useful, keep in mind the final price will always be the one that both the buyer and the seller agree on.

Step 7: Secure the capital needed to make the purchase

Once you and seller have agreed on a number, the next step is to secure the capital needed. Below are some common ways to finance a business purchase:

  • Personal or family money
  • Seller financing
  • Partner with somebody else
  • Lease to own
  • Bank debt financing (term loan)

It has become common for a buyer to use multiple financing sources to purchase a business. For example, the purchase of SKripts was financed through a business bank loan and SBA 7(a) loan guaranty, seller financing and a cash injection from the buyer. In this case, the seller also stayed on as an employee to help ensure a smooth transition with customers and suppliers.

As with any business loan, lenders will look at what are commonly referred to as
‘the 5 C’s’ in making their credit decision – character, capital, capacity, collateral and conditions. You’ll also have to provide an updated business plan, and show financial projections for the business. The SBDC specializes in assisting buyers in preparing to secure financing.

Paul Smith is Fargo Center Director of the ND Small Business Development Centers (ND SBDC). The ND SBDC helps North Dakota small business owners to start, manage and grow their companies through providing free, professional business advising services, technical assistance and training in a range of areas such as business planning, market research and financial analysis. Last year, the program assisted nearly 1,400 clients through nine service centers located across the State. The Fargo Center is located in the NDSU Research and Technology Park. For more information, please visit ndsbdc.org.

Step 8: Close the deal

Finally, when you’ve found the right business, done your due diligence, agreed on a fair price, and gathered the capital required, you’ll need to have a number of documents, notes and agreements in place at the time of closing. Common documents include the bill of sale, lease agreement, franchise documents, asset acquisition statement and employment/ consultation agreement (if the seller is staying on).

Summary:

Buying a business is a big decision. If you’re considering a purchase, find a business that you will enjoy and can manage and grow.

Do your homework – find out all you can about the business – and get help.

“The process of purchasing the pharmacy and securing the financing required was long with many steps and some unforeseen bumps along the way, but in the end it was all worth it” said Trisha. “One piece of advice would be to reach out to trusted advisors for help in navigating the process.”

Here are some additional resources, which you might find helpful:

The BizBuySell Guide to Buying a Small Business: A road map to the successful purchase of a business, Second Edition. Ed Pendarvis. 2015.

The BizBuySell Guide to Selling Your Small Business: A roadmap to
the successful sale of your business, Third Edition. Barbara Findlay
Schenck
. 2012.

HBR Guide to Buying a Small Business: Think Big, Buy Small, Own Your Own Company, Richard S. Ruback, Royce Yudkoff. 2017.

Sunbelt Business Brokers
https://www.sunbeltnetwork.com/fargo-nd/

Murphy Business Sales
https://murphybusiness.com/fargo/

(Note: Business brokers legally represent the seller, and earn a
commission when a sale goes through which is typically paid by
the seller.)

What do you think?

Written by Paul Smith

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