How to buy a ready-made business and not make mistakes?

Imagine that you are an entrepreneur and want to buy a company. Everything is in order with the reputation, the company brings a good income. You already want to give money and get it in your property.

It's time to stop and think about how else you can test this business. Maybe something important can be found in the documents? And what are the risks of such a deal? Alexey Komarov, business broker and founder of the Kupitalist business buyers club, has collected answers to these and many more other questions in the big guide.

Step-by-step guide to buying a ready-made business

Before giving step-by-step instructions on how to buy a ready-made company, I want to talk about the preparatory stage — many people skip it, but it depends on it whether the purchase will be successful.

The preparatory stage includes:

• Analysis of your strengths and weaknesses, qualities, skills, lifestyle

Such an analysis helps to determine the criteria for finding a suitable ready-made business. For example, a buyer with strong advertising and promotion skills should look for a ready-made company with a good product but weak marketing. Then they will strengthen each other.

• Search options: what company do you need?

This includes the type of business, its profitability, price, industry, location. These options will become filters for — as in the online store — and help you quickly discard unsuitable options.

• Search organization

How and where will you look for options? The best way — combine independent search and work with a broker. This approach allows you to maximize the funnel of deals.

Next, we will focus on the steps to be taken after we manage to find a ready-made business suitable for purchase.

Step 1. Business valuation

So, you have found a suitable option. And the first thing to do, — conduct your assessment.

Even if the seller indicated the price in the ad, you still need to evaluate the business yourself — the initial price is often too high, and without their assessment, the buyer runs the risk of overpaying.

There are different ways to evaluate a finished business:

• according to book value, salvage value,
• on the cost of creating a similar business,
• by discounted cash flow.

But most often, a comparative method is used to evaluate a ready-made business — and stop there.

The method is called comparative, because the selected business is compared with similar ones and then its value is determined at the average market price.

To correctly compare different businesses, use a multiplier — it helps to derive the relationship between the prices of firms in the market and income, and then use this relationship to evaluate the selected company.

Here we again need the concept of SDS — total income of the owner.

It includes dividends from net profit, salary for the role of CEO and various compensations, for example:

• car rental payment,
• tickets.

When evaluating a ready-made business, I advise you to use the SDS, and not the proceeds, because not all proceeds eventually become the owner's income.

So, back to the comparison through multipliers. For example, we see that on the market:

• Companies with a CDS of 5 million rubles are sold for the amount of one annual CDS;
• companies with VTS of 20 million rubles — for the amount of three annual VTS.

And we compare them with the business we have chosen. Let's say he brings the current owner 21 million rubles, so we can focus on the number 3 — she will be a cartoonist.

Next, we can evaluate according to the formula: Business value = SDS * M (multiplier)

In our example, it will look like this:

21 million rubles * 3 = 63 million rubles — the price of the selected business

The main difficulty of the — determine the correct SDS and multiplier. Financial reports will help you calculate the VDS, and the multiplier is determined on the basis of transactions with comparable companies. Plus, it adjusts it taking into account the industry, growth rates, margin of safety.

For reference, here are the average multipliers for the Russian market for 2022:

Then add to the received price:

• trade balances,
• equipment cost,
• real estate, if they are also planning to buy.

We evaluated it, realized that the price suits both us and the seller — you can go further.

Step 2. Choosing how to transfer ownership of the business

Next, we need to understand how to buy a ready-made business in terms of transferring ownership. There are two ways here:

• Purchase of assets — specific things, such as two machines, one building, and a company website.
• Purchasing shares — a legal entity, that is, an LLC, together with everything that belongs to it.

Each of the options has its own pros and risks.

Method 1. Purchase of assets

Most transactions in the market for buying and selling small and medium-sized businesses — these are asset transactions:

1. The seller may not have a legal entity: for example, he is an individual entrepreneur. The way how to buy a company from an individual entrepreneur as a whole has not yet been figured out, because here a business is inseparable from a person.
2. Such transactions are safer for the buyer.

Let me explain.

When buying assets, the buyer receives only the assets themselves, for example:

• equipment, technique;
• website, social networks, marketplace sites;
• land and real estate;
• intellectual property: trademark, unique technologies, individual software.

And here are the obligations — debts, fines, court cases — do not pass to the buyer and remain with the seller. So buying a business in the form of — this is a good answer to the question of how to buy a company without debt.

But with the purchase of only assets, there are risks: suppliers may refuse to renew contracts on the same terms, — demand a pay rise, and clients — leave.

If you are buying assets, you need to make a list of them, for example, this one:

• list of equipment and machinery;
• rights to administer the domain name;
• rights to the content of the online store, blog, website;
• rights to the source code of the site or online service;
• customer base;
• company email addresses;
• accounts in various services;
• exclusive rights to a trademark or service mark;
• rights to contracts with contractors — they should be renegotiated beforehand with the same conditions;
• phone numbers registered to the company.

This list will also be needed when drafting contracts.

Method 2. Buying shares or shares in an LLC

This is a purchase of a legal entity with all its obligations — and with employment contracts, contracts with suppliers and customers, licenses, permits and trademark.

Sometimes buying shares is better than buying assets.

• if it is critical to keep existing licenses or contracts;
• if the assets cannot be transferred in another way: for example, an online store on Wildberries can only be bought together with an LLC. You won't be able to buy product cards separately.

If you are buying a ready-made LLC, due diligence should be as thorough as possible. You definitely need to hire a lawyer who specializes in such transactions.

It is also important to understand that there is no way to 100% verify a legal entity: it can still have debts, problems, fines. Here the buyer is protected only by the mechanism of guarantees and assurances — we'll talk about it later.

If you are buying assets as a legal entity: your LLC is buying the assets of another LLC, then an accountant will need to be involved in the transaction. So that he can use his accounting magic to reduce taxes.

Step 3. Selecting the method of settlement and transfer of assets

It is necessary to define the process of transferring money and assets.

Calculation. There are several ways to calculate:

1. cash,
2. non-cash,
3. via option.
4. in installments.

Let's look at each.

Cash

Seller transfers assets, buyer — money. At the same time, there is an option with the transfer of cash through the cell:

• money is deposited in a special bank deposit box,
• the parties sign contracts at the notary,
• only after that the seller can take the money from the cell.

Sometimes a broker or intermediary plays the role of such a cell.

Cashless

Money transfer from account to account or in cryptocurrency. Then the details of the parties and the term of the transfer are prescribed in the contract. In this case, the role of the cell can be played by an escrow account or an intermediary account.

There are two questions here that will need to be discussed with the seller and consultants:

• size — the amount to be held in the escrow account;
• term — until what period the amount will be kept on the account or at what moment the seller will get access to it.

Via option

The buyer buys out part of the company immediately, for example, a 30% share, and concludes an agreement with the seller on further actions.

For example, it is prescribed that during the year the seller remains in the company and works to increase the financial result to such and such indicators. And then the buyer redeems the rest of the share.

In installments

You can agree with the seller to pay in installments, for example, pay 40% immediately, in the next six months — 10% every month. Then you need to attach a payment schedule to the contract.

Asset Transfer

Different types of assets are transferred differently and you will need to prepare contracts for each:

• for machinery and equipment — contract of sale,
• for — domain transfer agreement.

And the main contract should specify what access and at what point the seller should provide.

At the same time, certain types of transactions need to be executed by a notary, for example, a contract for the sale of a share in an LLC. If you decide to buy an LLC, after the transaction you will need to notify the tax office about the change of the founder.

The next two steps — about it. If you are buying assets, for example, from an individual entrepreneur, skip it.

Step 4. Re-registration in the tax office

The purchase of an LLC or its shares and the change of founders is regulated by law (FZ "On Limited Liability Companies"). Any member of an LLC can sell his share (having previously offered it to partners, if any), but such transactions must be properly executed.

LLC purchase and sale transaction. It is drawn up by a notary, and he himself notifies the tax office. The notary will tell you the exact list of documents for such a transaction, but most likely you will need:

• contract for the sale and purchase of an LLC share;
• data of the buyer and seller, their passports;
• charter of LLC, its TIN, OGRN;
• extract from the Unified State Register of Legal Entities;
• certificate on the composition of LLC participants;
• certificate of payment by the participants in the sale and purchase of their shares;
• refusals to purchase shares from other LLC participants, if any.

The notary checks the documents, certifies the transaction and notifies the tax office himself. After that, the transaction is registered.

Step 5: Get Documents

Approximately five working days after the transaction is completed or the founders are changed, you can receive documents on your own or through a notary.

The package is the same in both cases:

• Unified State Register of Legal Entities;
• a copy of the charter with a mark of the registering authority.

Next, you should notify the bank, executives and managers of the purchased company, counterparties about the changes:

1. suppliers
2. partners
3. buyers.

What to check before buying a ready-made company

Before buying, it is important to check: reports, documents of the owner and founders, the contract itself for the purchase.

Reports

Three basic management reports need to be checked to make sure that the seller's data on revenue, profit, VCF and company assets are reliable.

• OP&L — income statement

Shows how much revenue, gross, operating and net income a business is making. Looks like this:

In the OP&I we check:

1. Does the company have a positive financial result? Does it grow from month to month or fall?
2. What is the net profit margin? Does it meet industry averages?
3. Are the company's variable, overhead, and indirect costs adequate? Can they be optimized?
4. Amounts of expenses for the owner: salary for the role of CEO, various compensations.

• CCFS report — company cash flow statement

It reflects the receipts and write-offs of money by type of activity. Looks like this:

In CCFS report look:

1. Where does the money come from to the company? Is it customer payments or loans?
2. Is there enough income from the main activity for all the necessary write-offs?
3. Is the balance at the end of the month positive?

• Balance — a report on everything the company has

Here — assets and liabilities, receivables and creditors. I'm talking about the balance sheet from management reporting, not accounting. They differ both in the rules of maintenance and reliability: we are not very interested in what the company's accountant shows to the tax office.

In the balance we check:

1. Do assets and liabilities converge?
2. What is a company's assets?
3. Where is the company's money? In accounts and inventories, or in low-liquid assets like land and buildings?
4. Does the owner's dividend match the seller's?

If the numbers are satisfactory, you can proceed to the next step of the test.

Seller and company documents

To make sure that the seller has the right to offer us to buy a ready-made company, and its activities are generally legal, you need to request and check:

• certificate of registration of a company or individual entrepreneur;
• statutory documents, if we are talking about an LLC;
• licenses, if they are necessary for the operation of the company;
• certificate of trademark registration, if it is also sold;
• Agreements with partners or investors, if any.

If you buy an LLC, you need to study the charter. Is there a ban on selling LLC shares to third parties? Do I need to obtain the consent of other founders for the transaction? Does anyone have priority in buying a share?

And check with services, for example:

Next, we ask the seller for all contracts with suppliers, lessors, customers in order to carefully review them and evaluate the conditions, validity period and the possibility of transferring these contracts.

It is important to check separately in contracts with employees:

• Do they work according to the Labor Code of the Russian Federation?
• or self-employed?
• or each of them is a PI?

This is necessary to estimate how much it will cost the new owner to maintain the team.

And you also need to check how the seller is doing with the state:

• request a tax return to check if there are tax debts;
• check for fines, licenses.

It is important to understand that if you, for example, buy a ready-made bar in the form of assets: premises, equipment, Bloody Mary recipes, then the license to sell alcohol does not transfer to you. You will need to spend your time and money to arrange it.

This is a basic hygiene check of a ready-made business before purchase.

Full includes:

1. Communicate with employees, customers and suppliers;
2. Intellectual property rights check;
3. Technical check of equipment.

Perfect — check all this with the help of experts, for example, a lawyer, financier, technical specialist, in order to definitely buy a working company.

Checking the contract for the purchase

The process of preparing documents for the purchase of a ready-made business usually looks like this:

1. The buyer's lawyer prepares draft contracts for different types of assets or the purchase of an entire LLC;
2. The seller's lawyer makes his changes and returns the project;
3. The buyer and seller discuss the details and outline the deal.

As a rule, this will not be one contract, but many different documents, for example:

• an agreement on the purchase of a share in an LLC;
• land purchase agreement;
• real estate purchase agreement;
• trademark purchase agreement;
• Contract for the purchase of inventory.

It is better to prepare an exact list of contracts with a lawyer, not yourself. But there are some conditions and points that you should pay attention to anyway.

Representations and warranties

This mechanism is needed for two purposes:

1. Get information. For example, the seller of a company may claim that the company does not pursue litigation other than those specified in an annex to the contract. And in this application indicates current court cases. This is how you get some of the information you need.
2. Protect the buyer of a ready-made business. The representations and warranties in the contract allow the buyer to take legal action if they prove to be false. For example, the seller assures that there are no court cases, but they are, — you can file a claim.

The exact wording of the representations and warranties — question of negotiations. The seller will likely insist on more streamlined wording, such as:

"According to the seller, the company has all the necessary permits to operate."

The buyer will want to get a clearer assurance, for example:

"The seller claims that the company has all the necessary permits to operate."

Most likely, you will meet somewhere in the middle.

Inventories, receivables and payables of the business

It is also necessary to specify in the contract the condition under which the buyer will conduct an inventory:

• company stocks;
• receivables;
• accounts payable.

This is necessary to clarify the cost of the above at the time of the transaction. After all, verification, preparation of documents, negotiations take time. And during this time, a lot can change in a working business.

Non-Competition Agreement

The seller of a ready-made business must have excellent relationships with key customers, suppliers and an employee. It costs nothing for him to leave and found exactly the same company, and at the same time poach customers and employees.

To prevent this from happening, you will need to sign a non-compete agreement. It usually includes three provisions:

1. Non-compete. The seller of a ready-made business undertakes not to compete with the sold company for a certain period of time. At the same time, it is important to carefully spell out what exactly is meant by the word “competition”: the production or sale of certain products, work in the same city or country, refusal to invest in a competitor company?
2. Confidentiality. The Seller undertakes to maintain the confidentiality of all private information of the company.
3. Hiring. The Seller undertakes not to lure or hire current employees of the company.

A non-competition agreement is usually concluded for a period of 3 to 5 years — but you can agree on another period.

Transition of employees. If the acquired business has employees who are difficult to replace, or whose departure may harm the company, it is worth renewing employment contracts or GPC agreements with them. And in the main contract with the seller, specify when the buyer does this.

Such a re-closing will protect the buyer of a ready-made business and reassure employees.

And in the end, you should end up with something like this set of documents:

• Agreement for the sale of assets or shares of the company with the assurances and guarantees of the seller;
• contract for the sale of goods leftovers or stocks;
• non-competition agreement with the seller;
• Renewed employment contracts.

What to do immediately after buying a ready-made business: by months

So, you've checked everything: reports, documents, contract. We received guarantees and assurances from the seller, agreed on how you would transfer assets and money. They shook hands, signed the documents, re-registered what was needed in the tax office. Congratulations! You have bought a ready-made business.

Let's figure out what to do next.

First day after buying a ready-made business: get to know the team

On the first day, hold a general meeting with the — this is your opportunity to earn the respect and trust of the new team.

People don't like change, they worry when things change and that can affect their productivity. Therefore, at the first meeting, it is important to calm them down and tell them:

• whether there will be layoffs;
• whether salaries or benefits will change.

If possible, do not make personnel decisions or change salaries during the first 90 days. If you can't do that, let us know about your plans on the first day — be honest.

First month: focus on employees, customers and suppliers

Employees. Hire missing employees, hold one-on-one meetings with all team members to find out:

• What do employees do in the company?
• What is their experience?
• Who do they interact with inside and outside the team?
• How would they improve processes?
• What would they focus on if they were you?

During these meetings, you can discover hidden talents or identify employees with skills that you can use later. And also — get to know the team and the overall culture of the company.

Next — clients. Meeting with them — the best way to get feedback quickly is to ask:

• How long have customers been with the company?
• Why did you choose it?
• What are the strengths and weaknesses of the company?
• What can be improved?
• What is critical to them that the company doesn't do?
• Who do they interact with in the company?
• What will make them leave?

Say that you would like to have a short review meeting with them once a quarter to evaluate your work and see how you can do more.

Then — meeting times with suppliers. In personal meetings, you will be able to more clearly explain what you need and how you will evaluate their work.

Good idea — bypass the sales representative and meet directly with the owner or CEO. So you will understand who to contact in case of problems. It is important to find out what changes the supplier can expect in the future.

Second month

Next 30 days — time to deal with finances, business processes and plans.

• Finance

Financials will be a little confusing for the first few months. Profitability will not match 100%, checks and invoices will be lost, and part of the money — act on the wrong account.

You need to build the system correctly: change the details in the contracts and invoices to your own if you use a new current account.

Make a 30 week cash flow forecast to see how much money you will need in the next quarter. Such a forecast will allow you to better understand how money circulates in the company.

• Processes

Typically, in a business, there are one or two people who are completely immersed in certain areas. A sort of process keepers — you will quickly determine who these people are.

And you will need to describe their workflows in detail in a separate — this will allow you to dive deeper into the acquired business, on the one hand, and on the other — not depend on specific employees in the future.

• Plans

Write down what you want to do from the third month:

• goals and objectives;
• metrics;
• steps;
• resources;
• team responsibilities.

It is important to keep goals and objectives in front of your eyes. You can do this in a regular Word document, Excel, or start a board in Trello and add team members there. Main — see everything and track progress.

Third month: implementation of plans

After 60–90 days, start making changes: significant or not so much.

During this time you will be able to:

• to study in detail the people, processes that make up the business;
• get the right knowledge.

And you will more clearly understand how your actions will affect the business. So, you can more accurately assess the consequences.

Act gradually, step by step. Too drastic changes or a huge number of innovations will make employees feel uncomfortable. In addition, people usually resist the new, even if it eventually leads to the best. Give them time to adapt.

What is important not to miss when buying a ready-made business in order to reduce risks

So, in order to buy a ready-made company and not go bankrupt, you need:

1. Do the preparatory work: analyze yourself and find the right type of business for you. Determine the parameters by which you will search for a ready-made business in order to do it faster and more efficiently.
2. Organize your search: on your own and with a business broker. Find a suitable option.
3. Conduct a self-assessment of the business so as not to overpay for the company. The comparative method of evaluating a finished business will help here.
4. Do a thorough due diligence. Examine the financial statements to buy a company that actually works and makes a profit, not a one-night stand. Take care of due diligence in order to buy a company without debts and lawsuits. At this stage, I advise you to involve experts: a financier, a lawyer, technical specialists.
5. Select a purchase method: business assets or shares, LLC shares. The package of documents for the transaction and the process of transferring rights will depend on the method of purchase.
6. Prepare documents for the deal — It's best to do this with a lawyer. A transaction with an LLC must be registered with a notary.
7. Make settlements and transfer assets. Here you should think about a protective mechanism: a safe deposit box, an escrow account, an intermediary.
8. Engage acquired business: get to know the team, customers, suppliers; immerse yourself in business processes. But it is better to start implementing development plans no earlier than the third month of work in order to do this as consciously as possible.