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 documents 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.