What you need to know if you want to acquire a business.

In a word, the process of purchasing a business is complex. Here are five tips to help business buyers navigate the transaction, including what to know about due diligence and financing options.

Ask why the business is for sale

Reasons for selling a business can range from retirement and a loss of interest to disagreements between partners and financial problems. Probing into the reasons early on can help buyers recognize problems that might arise later in negotiations, and—if the sale goes through—when they eventually own the business.

Conduct due diligence

Conducting due diligence is the detailed process of gathering all the material facts about the business up for sale. This a thorough review and verification of:

• Financials
• Business structure
• Customer information
• Employee information
• Any legal issues
• Physical assets
• Intellectual property

Enlisting the services of accountants, attorneys and other professionals is typically part of due diligence.

Be attuned to any inconsistencies in the information you receive. Discrepancies are a sign to dig further.

There may be one or more brokers involved

Business brokers are a party in the sale of many business sales. Their role is to connect buyers and sellers and facilitate the sale. They often have expertise in filing paperwork with the appropriate government agencies and licensing requirements.

Typically, brokers represent the seller and have a fiduciary duty to the seller. However, in some transactions both buyer and seller have broker representation.

Determining business value

Consumers recently share a blog with tips for those selling a business and the three basic methods for valuing a business are the same for buyers: 

• Assets after debt
• Multiplying a seller’s discretionary earnings by a factor between 2 and 3.5
• Market comparison

A qualified business appraiser can help determine the value of a business.

How to finance the purchase

Some people buy a business using cash. They may tap into retirement funds, pool funds with family or other investors, or simply have cash on hand.

If you’re thinking of using 401(k) money in a move called rollovers as business startups (ROBS), you must know what the IRS reports:

“Most ROBS businesses either failed or were on the road to failure with high rates of bankruptcy (business and personal), liens (business and personal), and corporate dissolutions by individual Secretaries of State.”

Another option for financing the acquisition of a business is a Small Business Administration (SBA) loan. A key advantage of SBA loans is their long, fixed rates. To find out more about SBA loans through Consumers, start a conversation with one of our Business Services experts or call 800-991-2221.

Do you have business banking questions? Contact our knowledgeable Commercial Loan Officers online or call 800-991-2221. We’re also available to help in person at your local office.

All loans subject to approval. Rates, terms, and conditions are subject to change and may vary based on credit worthiness, qualifications, and collateral conditions. Federally insured by NCUA.