Buying or Selling a Business
Why would a business owner sell their business?
We’ve seen many reasons owners sell their business. In many cases, it’s a very tough decision, since owners tend to have a strong emotional investment into their business. Here are some common ones:
- Retirement: As a business owner gets older, they may decide to sell their business and retire.
- Burnout: Running a business can be stressful, and some business owners may decide to sell in order to take a break or pursue other interests.
- Personal circumstances and health issues: Personal circumstances, such as the need to relocate or a change in family circumstances, or a change in health may lead a business owner to sell their business.
- Financial reasons: A business owner may decide to sell their business if they are facing financial difficulties or if they see an opportunity to make a profit by selling.
- Lack of growth: If a business is not growing or is struggling, the business owner may decide to sell in order to move on to a new venture.
- To pursue other opportunities: A business owner may decide to sell their business in order to pursue other opportunities or to invest in a new business.
- The wrong skill set: Launching a business and the early growth stages are different skills than managing a business. Some people enjoy one part more than the other.
Why would someone buy a business?
Buying a ready-to-go business has a lot of appeal. Since many businesses fail in the first two years, buying an established business can be safe. Sometimes, if a business is struggling, it can also be a chance to get a good deal. Here are just a few of the many reasons:
- To be their own boss: Many people dream of owning their own business and becoming their own boss. Buying an existing business can be a way to achieve this goal.
- To take over a successful business: If someone sees an opportunity to take over a successful business, they may decide to buy it in order to capitalize on the existing customer base and revenue streams.
- To enter a new industry: Buying a business can be a way for someone to enter a new industry or market.
- To invest in a growing business: If someone sees a business that is growing and has potential for further growth, they may decide to buy it as an investment.
- To diversify their portfolio: Some people may decide to buy a business as a way to diversify their investment portfolio.
- To expand into a new market: A successful business owner in one city may buy a business in another city as a way to quickly establish a foothold in the new area.
- To acquire assets or expertise: This is sometimes called the “acqui-hire” when the goal is to gain talented individuals. However, it is also a way to buy real estate, equipment, or intellectual property.
Should I have a lawyer help me buy or sell a business?
Yes! It is a good idea to have a lawyer help you with the legal aspects of buying or selling a business. There are many legal issues that can arise when buying or selling a business, and a lawyer can help you navigate these issues and protect your interests.
Lawyers are trained to spot the different types of risks associated with buying and selling a business. The Iowa Business Lawyer team has helped many small business owners and buyers with the sales process and know many of the problems that could make a deal go bad.
For example, if you are buying a business, a lawyer can help you review and negotiate the terms of the purchase agreement, including the price, financing terms, and any contingencies. They can also help you conduct due diligence on the business, including reviewing financial records and contracts, to ensure that you are fully informed about the business before you buy it.
If you are selling a business, a lawyer can help you prepare the necessary documents, such as a sales agreement and any necessary contracts, and can advise you on any legal issues that may arise during the sale process.
Overall, having a lawyer involved in the process of buying or selling a business can help ensure that the transaction is completed smoothly and that your interests are protected.
How much will it cost to hire a lawyer to buy or sell a business?
The cost of hiring a lawyer to help you buy or sell a business will depend on a number of factors, including the complexity of the transaction, the type of the deal, how soon the closing is, and even geographic distances. The types of assets can also affect the cost, for example if real estate is included or if the transaction includes intellectual property.
In general, lawyers who handle business transactions charge an hourly rate that ranges from $300 to $500 per hour. Some lawyers may also charge a flat fee for certain services, such as reviewing and negotiating a purchase agreement.
At Iowa Business Lawyer, we do flat fees whenever possible, so for routine transactions the cost can be a flat fee as low as $1,800. Whether it’s a flat fee or hourly rate, you’ll get either an exact price or an estimate as part of the representation agreement.
What are the risks of buying a business?
There are several risks that you should consider when buying a business, including:
- Financial risk: One of the biggest risks of buying a business is the financial risk. You need to be sure that the business is financially viable and that you will be able to make a profit. You should carefully review the business’s financial records and projections before making a decision to buy.
- Legal risk: There may be legal issues that arise when buying a business, such as contracts that need to be reviewed and negotiated. Our team will help you identify and mitigate these legal risks.
- Operational risk: You should be aware of any operational risks associated with the business, such as outdated equipment, poor management, or a difficult location. These risks can be costly to fix and can impact the profitability of the business.
- Market risk: The market for the business’s products or services may change over time, which can impact the profitability of the business. You should consider the long-term prospects for the market in which the business operates.
- Reputation risk: The reputation of the business can be a major asset or a major liability. You should consider the reputation of the business and any potential risks to the brand.
- Employee risk: If you are buying a business that has employees, you should be aware that you may inherit certain risks associated with the employees, such as potential legal liabilities or labor disputes.
By being aware of these risks and taking steps to mitigate them, you can minimize the potential risks of buying a business.
How do I find out how much my business is worth?
There are several methods that you can use to determine the value of your business:
- Comparable sales method: This method involves looking at the sale prices of similar businesses in your industry to determine the value of your business. You can use public records, industry reports, and other sources to find comparable sales data.
- Earnings method: This method involves using financial metrics, such as the net income or cash flow of the business, to determine the value of the business. You can use financial ratios, such as the price-to-earnings ratio or the price-to-cash flow ratio, to compare the value of your business to other businesses in your industry.
- Asset-based method: This method involves valuing the business based on the value of its assets, such as equipment, inventory, and real estate. You can use this method if the value of the business’s assets is greater than its earnings or if the business has significant intangible assets, such as patents or trademarks.
- Market approach: This method involves looking at the market demand for businesses like yours and determining the value based on the current market conditions. You can use industry reports, economic indicators, and other data to assess the market demand for your business.
It is generally a good idea to use multiple valuation methods to get a more accurate estimate of the value of your business. For all but the smallest businesses you’ll want a professional business valuation expert to help you determine the value of your business. Our team can help with this.
What are the most important things to know about buying or selling a business?
There are several important things to consider when buying or selling a business:
- Understand the business and its financials: It is important to thoroughly understand the business that you are buying or selling, including its financial performance, products or services, customers, and market. You should carefully review the financial records of the business to get a sense of its profitability and potential for growth.
- Get legal and financial advice: You should seek the advice of a lawyer and a financial advisor when buying or selling a business. A lawyer can help you with the legal aspects of the transaction and can advise you on any potential legal issues. A financial advisor can help you understand the financial implications of the transaction and can help you develop a financial plan for the future.
- Negotiate the terms of the sale: When buying a business, you should carefully negotiate the terms of the sale, including the price, financing terms, and any contingencies. When selling a business, you should be prepared to negotiate the terms of the sale with potential buyers.
- Conduct due diligence: When buying a business, you should conduct due diligence to ensure that you are fully informed about the business before you make a decision to buy. This may involve reviewing financial records, contracts, and other documents related to the business.
- Understand the tax implications: Buying or selling a business can have significant tax implications, and you should be aware of these before completing the transaction. You should consult with a tax advisor to understand the potential tax consequences of the sale.
Overall, it is important to carefully consider all aspects of the transaction and to seek the advice of professionals when necessary in order to make informed decisions when buying or selling a business.