How to Buy the Business Where You Work
Employees with an entrepreneurial mindset may sometimes wonder, “Can I run this business?” Occasionally, when the timing is right, their motivations can become a reality. A group of employees may even consider purchasing the business together. While a management buyout isn’t always simple, there are advantages to buying the small business you already know so well.
Approaching the Owner
If you’ve decided you want to buy the business where you work, plan to have a conversation with the current owner. It’s hard to know how they’ll react, so being prepared is the most important thing you can do. Before approaching them, do your research:
- Try to understand why they’re selling the business. An exit plan may be due to any number of reasons: to fulfill a retirement plan, to pursue other opportunities, or to navigate difficult financial situations.
- Learn about the current state of the business, including its financial performance, market position, and growth opportunities. It might be hard to get all the insights you want, but do what you can to assess its value. From there, it’s easier to make a compelling case for why you're interested in buying it.
- Outline a business plan. Demonstrating your vision for the business, outlining growth strategies, operational plans, and financial projections can convey your commitment and seriousness to a small business owner.
- Consider your own financial situation and financing options. Determine how much you can afford to invest in buying the business and what terms are most favorable to your scenario. If you are interested in pursuing seller financing or an employee stock ownership plan (ESOP), this is a great time to start the discussion.
Once you’ve done research and feel prepared, contact the owner to schedule a meeting. Saying that you need to discuss a “business matter” or “your future plans with the company” can be a great way of piquing their interest.
During the meeting, be upfront with your intentions. Make it obvious that you’re genuinely interested and be transparent about your commitment to the company. The meeting is a great time to highlight your qualifications in entrepreneurship, present any proposals, and demonstrate that you’re serious about being the new owner. The current owner will likely challenge you with questions, so anticipate what they might ask. There may be objections, but on the other hand, there may be an immediate willingness to work together and explore options that support their exit strategy.
After that initial conversation, follow up with any additional information or documentation. Don’t expect an immediate decision to be made, but maintain open communication and be patient as they consider your proposal. It may take days, weeks, or months.
Financing the Purchase
When it comes to financing the purchase of a business, several lender options are available to buyers:
SBA Loans
SBA loans have lower down payment requirements, typically ranging from 10% to 20%. These loans come with longer repayment terms and competitive interest rates, often with fixed rates for stability; however, SBA loans have strict eligibility criteria and documentation requirements. This results in a long, challenging lending process. Additionally, personal collateral or business assets may also be necessary, which adds to your risk, and processing fees can add up, increasing the overall cost of the loan.
Seller Financing
Seller financing can be an attractive option for buyers with limited access to traditional financing. It may also indicate that the seller is confident the business will be successful in the future. That said, seller financing often comes with higher interest rates than bank loans. The seller also retains a financial ownership interest in the business until the debt is repaid, impacting the buyer's autonomy as a new owner. Additionally, there are risks associated with the seller's financial stability and willingness to support the buyer.
Employee Stock Ownership Plan (ESOP)
An ESOP grants employees a stake in ownership of the company, fostering a sense of responsibility and commitment. It may also offer tax benefits for both the company and participating employees and serve as a succession planning tool for business owners. Despite the benefits, many business owners find that ESOPs are complex to implement and maintain due to the legal and financial expertise required. They also demand significant administrative oversight and ongoing communication with employees. Furthermore, liquidity for employee participants is limited, as the company’s shares are typically held in a trust until retirement or termination.
Other Financing Options
There are also non-SBA business acquisition loans to consider. Traditional bank loans, private equity, venture capital, angel investors, or crowdfunding are also ways to source financing for your venture. Each option comes with its own set of advantages and disadvantages, but can help you meet your long-term goals.
The Buying Process
If the conversations with the owner went well, that’s great! Next, you’ll have to navigate the details of the transaction and transition. From valuing the business to finalizing the deal, each step requires careful consideration and expertise. Don’t expect it to happen quickly. If you take the time to understand each step, it is possible for you and the seller to achieve your respective goals while preserving business continuity and long-term viability.
- Engage Professionals. Accountants and attorneys (and sometimes brokers) provide invaluable support throughout the buying process. Accountants assist with financial analysis and valuation, while attorneys review contracts and ensure legal compliance. Brokers offer guidance and facilitate negotiations, if needed.
- Perform a Business Valuation. Conduct a comprehensive financial analysis of the business to determine its cash flow, worth, and potential for future profits. Methods like income-based valuation and market comparison help estimate the company’s value.
- Make an Offer. Create a formal offer, including the purchase price, payment terms, and contingencies. Be prepared to negotiate the sale price based on the business's true market value.
- Prepare a Letter of Intent. Draft a Letter of Intent (LOI) outlining the key terms and conditions of the proposed transaction. This formalizes the agreement and allows you to proceed to due diligence.
Due Diligence
During the due diligence phase, all relevant information about the business is collected and analyzed. This includes financial records, contracts, employee agreements, and regulatory compliance documents. The goal is to validate the business's value, identify potential risks, and ensure a smooth transition of ownership.
- Consider key employees and how a buyout would affect their roles. Employee buyout may also be necessary as part of the deal.
- Understand the real estate’s role in the transaction, if applicable
- Evaluate how the business sale may affect shareholders
Closing the Deal
Once due diligence is complete, and all contingencies are satisfied, the deal can be finalized. Legal documents will be executed with the help of your business advisors, and the agreed-upon purchase price will be paid.
Transitioning the Business
After the deal is closed, attention shifts to transitioning the business to new ownership. Responsibilities begin to transfer from the former owner to the new owner, and employees, shareholders, and others are informed. Transparency, ongoing training, and great communication will help maintain business continuity, minimize disruption, and ensure a seamless transition.
Visit BizBuySell’s Learning Center to learn more about how to buy a business. To find a business broker to help you negotiate the acquisition, search BizBuySell’s Broker Directory.