Reduce Business Risks When Buying a Business in California
You might be asking: how to reduce risks in a business purchase process?
Make sure that you’ve thoroughly prepared your due diligence for a structured, competitive transaction process, and ensure that the window of vulnerability is as short as possible.
Window of Vulnerability
Throughout your interaction with a potential bidder right up until the sale is closed, there’s what is called a window of vulnerability where you and your business are exposed to inevitable risks. Because of this, you want to shorten this window as much as you can. To do so, consider these strategies to mitigate these risks and execute a sales process that exposes your business for the shortest amount of time possible.
Be Ready For Due Diligence
Regardless of whether your business has just one bidder or many, it’s crucial to prepare comprehensive due diligence information. It’s best to provide this information in a format that can be easily reviewed by your bidders’ due diligence staff. Failure to make ready complete documentation will raise numerous questions by the prospective purchasers. Information that is incomplete, incoherent, or internally inconsistent will mean additional information requests to provide clarifications—and to do so ASAP!
If this is the case, your due diligence preparation can become disorganized and reactive, which may not show your business in the most positive light. No one can predict everything that a bidder may request, but a carefully and thoroughly prepared compilation of your data will be worth the time invested beforehand. This is where a knowledgeable and experienced business broker can help you organize and collect data, as well as ensure secure and efficient dissemination of your business information to bidders. This will speed up the process of due diligence and minimize the risks during your window of vulnerability.
Competitive tension among multiple bidders is a good thing. This gives you some leverage in considering a strategic choice, while also diversifying any buyer-specific completion risk.
There often are some in a competitive process who see more value in your business than others. With a controlled, competitive process between the best potential purchasers, a sense of urgency for them to move quickly may develop and outbid the competition. In this way, you can realize a greater value for your business and also have the benefit of an accelerated transaction process that’s powered by the competitive pressure of the bidders.
Give Your Bidders Clear Deadlines and Instructions
Don’t give your bidders an exact timeline that details the sales process from start to close, as you want to have the leverage to adjust their expectations and dictate the terms of the negotiation as much as possible. But if you give your bidders clear expectations as to deadlines and any specific instructions, you will be able to maintain the pace of the process and minimize extraneous miscommunications and efforts.
Make these clear next steps for bidders several weeks out, including realistic deadlines. Make sure you hold them to these dates. Make certain that all process requirements are defined, particularly those that deal with communications. Give each bidder a memo that memorializes the comprehensive process and clearly states the requirements for a bid to be considered. These requirements can modulate the flow of information so that only the most serious parties receive your most sensitive information. This type of culling process also helps your team’s efficiency with some of the more labor-intensive aspects of the due diligence process.
Work with a Professional who does this for a Living
Just like you should never swim alone, moving through this process without a qualified agent can make this exercise stressful and drudgery, and you may start to sink. You need someone to help you.
Engaging a business broker who is experienced in the sale process will be a lifesaver. A broker who focuses on private equity transactions will prove invaluable and can help you minimize transaction risk throughout the sales process. A business broker will give you important insights about how to reach the right set of potential buyers and, at the same time, minimize execution risks and potential information leaks. They’ll be able to facilitate an efficient transaction process by pointing out and helping you address potential problems with a deal beforehand.
Avoid Business Risk With Real Estate in California
No real secrets to buying a business. Running your own company lets you lead an organization, make impactful decisions, and enjoy the flexibility that allows you to work in a way that best fits your needs. By purchasing an enduringly profitable, slowly growing firm, you can combine the opportunity for professional independence with the stability of buying an established and profitable small business.
You’ll have many questions to ask when you’re buying a business. Working with a qualified business broker in California will pay dividends. Your business valuation consultant will help you review the documents, the business climate, and the industry so that you make a wise decision that will build your business for the future.
There is simply no “one size fits all” approach whether selling or acquiring a business with real estate. Here are some other factors to consider.
- Some California business owners that also own the Real Estate, simply prefer to keep the Real Estate and offer a lease to the buyer of the business. If a decision has been made to sell the business, before a final decision is made about whether to also offer the commercial property for sale or not, the following are important items to consider.
- How critical is the Real Estate to the operation of the business? For example, if the business is a gas station or a car wash built on the Real Estate the business operates from, it may be hard to sell just the business and offer a lease to a buyer. This is because the business cannot easily and readily be moved
- Is the Real Estate just land or does it include buildings or structures on the Real Estate? If it includes buildings or structures, are they in good condition or do they need repairs and maintenance? If repairs and maintenance are required, is the seller willing to pay those costs so the buildings and structures are brought up to date and the latest building code?
- The buyer will probably want a lease for the Real Estate. If the buyer wanted a three- or five-year lease with options but only stayed for the initial lease and then left, would the Real Estate owner easily find a replacement tenant? If the buyer is getting an SBA loan, they will require a lease to match the length of the loan which is typically 10 years.
- Has the owner or seller of the business been allocating an amount for rent and is this amount a market rate or the amount the owner of the Real Estate is willing to accept as rent? If there is no rent allocation or the rent is below the market rate and the buyer has to pay a higher rent, it will lower the value of the business as expenses are higher.
- This also applies if the owner of the business has not been paying the property taxes, building insurance, or maintenance of the Real Estate and now expects the buyer of the business and Real Estate to cover these costs.
- Are there any environmental issues on, or near the real state? If so, this may lower the value of the Real Estate and the business.
- When was the last time that local zoning ordinances were checked so if the Real Estate is put on the market, it is ‘smooth sailing’ to close the sale?
- Related to local zoning ordinances are local Use requirements typically defined at the municipality level.
- Is the Real Estate part of a flood zone?
- Sample report of California Commercial Real Estate with basic property overview, environment, building, value, and more.
- Sample report of California Commercial Real Estate with climate check including flood, fire, storm, heat, and more.
- Sample report of California Commercial Real Estate property of the environment with regulatory summary and neighborhood.
- Sample report of California Commercial Real Estate flood certificate.
- Sample report of California Commercial Real Estate with property condition report, site summary, building summary, hazard risks, and more.
- Sample report of California Commercial Real Estate estimate of value.
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