How to buy a business.

The first step is identifying the right kind of business, which means examining your needs, interests and experience honestly. Buying into an area you know little about and have never run is almost always a mistake.

• •What are your financial needs, short-term and long-term? Do you need an immediate paycheck, or can you go lean while the business grows?
• •What time and effort are you prepared to put in? You are leaving the 40-hour week behind, and very few businesses run themselves.
• •What financial resources can you reach? Plan on 20% down to get a loan, plus working capital to get started.
• •What skills and experience do you bring? Favour industries that match them.
• •What size, location and headcount actually suits your life: travel, hobbies, family, the things you enjoy?

Ask around the industry you already work in. Ask business associates, friends and family. If there's a business you frequent and admire, ask the owner whether they'd sell. Business-for-sale sites and the classifieds are worth watching, and they are where most buyers start.

They are also where every other buyer is looking. The businesses that never reach those sites, the ones an owner will only discuss confidentially, sit with brokers, which is why it's worth getting to know one and registering what you're after.

Once you find a few businesses that meet your criteria:

• •Talk to the broker or seller, sign an NDA if required, and get a confidential business review or summary.
• •If it still looks interesting, request certified financial records (cash flow statements, balance sheets, payables and receivables) plus a list of assets with valuations, including inventory and intellectual property.
• •Arrange to meet the seller and tour the business, usually off-site or after hours to protect confidentiality. Learn why it's for sale; the answer is often telling. Ask about challenges, employee turnover, lawsuits and history.
• •Do your own investigation: reviews, competition, cleanliness, how the place actually runs.

Valuing a business is not an exact science. Small businesses, where the owner works in the business, are usually valued on Sellers Discretionary Earnings, a measure of the income and benefits an owner can expect to receive. A good broker should have that figure and be able to explain how it was derived, across at least three years so you can see the trend.

Value is typically a multiple of SDE, and the multiple varies by industry, business type and size. It's also moved by the cost of money (interest rates drive your debt service coverage ratio) and by how much seller financing is on offer. Then there are the less tangible factors: brand recognition, intellectual property, competition, customer concentration, growth potential, risk, and whether there's management in place.

Ask whoever set the price to show their work. Ours is written down — how we value a business before it is listed, and what the report behind the number contains.

If the business looks like a solid investment that meets your criteria, make an offer sooner rather than later by submitting a letter of intent.

An LOI is a short, non-binding agreement covering the basic price, structure, timing, contingencies and terms. Non-binding though it is, it aligns both sides' expectations enough to move forward, arrange financing and negotiate a formal purchase agreement. And most lenders require a signed LOI before they will process a loan application at all.

With a signed LOI, it's time to shop for financing. The most common route for a small business purchase is an SBA loan (government-backed, which is why many banks prefer them). You will use some of your own funds, the seller may finance part of the deal (common, and sometimes required by the lender), and the balance is likely the SBA loan.

• •Most banks are approved SBA lenders, but they are not equal: each has its own niches, preferred geographies and rates.
• •Some are designated preferred SBA lenders, meaning they decide internally rather than waiting on the SBA. That usually streamlines approval considerably.
• •An experienced broker can refer you to a proven preferred-lender list.
• •Apply to more than one lender at once; it improves both the terms and the timeline.
• •The seller's broker can be invaluable in getting your lender the documentation it needs, especially where there's an existing relationship.

Because an LOI is non-binding, move to a binding purchase agreement as soon as possible after signing one. Buyers often hesitate, not wanting to commit earnest money before finishing due diligence or securing financing. That is a big mistake: the purchase agreement is the only thing that contractually obligates the seller and puts you in first position. Good businesses commonly draw multiple LOIs, and without a binding agreement it remains the seller's prerogative to take a better one.

Signed early, a properly structured agreement will:

• •Bind both parties so everyone can move forward with confidence
• •Carry ironclad provisions protecting you from liabilities found during due diligence and loan approval
• •Be contingent on obtaining acceptable financing
• •Be contingent on the business appraising at the asking price
• •Include earnest money, necessary for the agreement to bind and tied to the contingencies that protect you
• •Include a detailed non-compete for the seller, and an NDA where there are trade secrets
• •List the tangible and intangible assets and how they're allocated against the purchase price

The agreement is generally drafted by the seller, their attorney or their broker once terms are agreed. That is logical: the buyer is putting up the cash and carries the greatest risk of loss.

Initial due diligence gave you enough of an overview to make an offer. Final due diligence, once the purchase agreement is signed, is a much deeper analysis. And what you learn should decide whether you go ahead.

• •A detailed and sometimes professional review of financial documents, property documents and leases, business loans and debt, current cash flow statements, balance sheets, income statements, intellectual property, licences and permits.
• •Your lender helps here: they perform their own in-depth financial analysis of the deal.
• •The lender will likely order an independent appraisal of the business, which is useful in its own right when you're deciding whether to proceed.

The deal closes when the closing documents are signed and money changes hands (in person or remotely), usually orchestrated by the lenders, who bring a great many documents. For larger deals involving attorneys, they'll be there too.

The transition is exciting and overwhelming at once. Everyone is nervous — employees, customers, vendors, the previous owner, and you.

• •A smooth transition almost always involves the seller staying available for a gradually decreasing amount of time over several weeks or months.
• •Hold company meetings to reassure employees that they're valued and their jobs are secure.
• •Get introduced to customers and suppliers, and take the new-owner coaching the seller can give you.
• •Avoid radical changes while everyone gets used to the new ownership.