You've found a profitable business, negotiated with the seller, and had your offer accepted.
Now the real work begins.
You need to assemble the money required to complete the acquisition while investigating whether the business is actually what the seller represented it to be.
These two processes—financing and due diligence—can determine whether you close the transaction, renegotiate it, or discover that walking away is the smarter decision.
The important thing is to approach both systematically rather than becoming so excited about owning the business that you stop asking whether the deal still makes sense.
How Is a Small Business Acquisition Usually Financed?
A traditional small-business acquisition can involve three sources of money:
Your own equity
Bank financing
Seller financing
The percentages can vary dramatically depending on the business, its assets and cash flow, the buyer's resources, the lender, and the structure of the transaction.
But buyers sometimes begin their search believing they can avoid putting much of their own money into the transaction by raising capital from outside investors.
That can happen.
It shouldn't automatically be your financing plan.
Can You Use Investors to Fund Your Business Acquisition?
The traditional search fund model involves an entrepreneur raising money from investors to finance the search for a business and eventually fund an acquisition.
You'll also hear the term self-funded search.
Don't let the terminology make this more complicated than necessary.
A self-funded searcher is essentially somebody looking to buy a business without having investors fund the search itself.
The important lesson for individual buyers is that outside capital isn't necessarily as readily available as online discussions can make it appear.
The 2023 Self-Funded Search Study referenced in the source found that 78% of the surveyed deals involved equity from the entrepreneur's personal savings, assets, or net worth. Other deals involved sources including friends and family, high-net-worth individuals, family offices, and private equity or institutional investors.
For most prospective buyers, that reinforces a basic lesson:
If you want to buy a business, building your own financial resources matters.
Build Investor Relationships Before You Need Their Money
If outside equity will be necessary, don't wait until you've signed an LOI to start meeting potential investors.
Start building relationships earlier.
Friends, family, business owners, professionals, and other people within your extended network may eventually become sources of capital—or introduce you to someone who could.
But somebody considering writing a significant check isn't only evaluating the business.
They're evaluating you.
Do they trust you?
Do they believe you understand the industry?
Do they think you're capable of operating the company?
As the saying goes, people do business with people they know, like, and trust.
Those relationships take time to build.
Talk to Lenders Before You Have a Deal
You probably won't receive a final financing commitment without an actual acquisition for the bank to evaluate.
That doesn't mean you should wait until your offer is accepted to meet bankers.
Identify lenders that regularly work with the type and size of business you hope to acquire.
Ask what they finance.
Do they provide acquisition loans? SBA loans in the United States? Equipment financing? Inventory financing? Working-capital lines?
More importantly, build a relationship with the banker.
“The way to approach it is to look at the banker for what they are. Someone trying to make a loan.” David C Barnett
A knowledgeable banker can sometimes identify financing problems before you submit an offer.
They may even suggest small changes to your proposed deal structure that make the acquisition more financeable without significantly changing the economics for you or the seller.
Treat the banker as part of your acquisition team—not an obstacle you're trying to outsmart.
Where Does Seller Financing Fit?
Seller financing can fill part of the gap between your equity and available bank financing.
But don't make your first conversation with the seller about how much money they're willing to lend you.
First investigate the business.
Determine whether you actually want it.
Then structure your offer.
You can even present alternative offers with different amounts of seller financing.
If you're asking the seller to finance a larger portion of the transaction, consider giving them something in return. Perhaps that version of the offer carries a higher overall purchase price or another economic benefit.
Financing terms have value.
Negotiating a business acquisition means recognizing that value on both sides.
What Are the Three Types of Due Diligence When Buying a Business?
Once your offer is accepted, due diligence can be divided into three broad areas:
Financial due diligence, business due diligence, and legal due diligence.
Each answers a different question.
You shouldn't focus exclusively on confirming the financial statements while ignoring how the company actually operates or what legal obligations you're inheriting.
1. Financial Due Diligence: Are the Numbers Real?
Financial due diligence investigates whether the financial information used to make your offer is accurate.
Buyers sometimes hear about getting a Quality of Earnings (QoE) report.
That can be appropriate for larger transactions, but it can also be a significant expense. A buyer purchasing a relatively small Main Street business needs to consider whether the level of financial investigation is proportionate to the transaction.
You may not always need an elaborate report.
You do need competent financial investigation.
An experienced CPA familiar with small-business acquisitions can help you understand what needs to be tested and identify bookkeeping practices that deserve closer examination.
For some businesses, confirming revenue may involve comparing invoices, bank deposits, accounting records, tax returns, and individual jobs.
“It's not hard. It's just work.”
When discrepancies appear, investigate them.
Sometimes there's a perfectly reasonable explanation.
Other times, the discovery gives you grounds to renegotiate—or a reason to walk away.
2. Business Due Diligence: How Does the Company Actually Work?
Financial statements tell you what happened financially.
They don't necessarily explain why it happened.
Business due diligence is about understanding the actual mechanics of the company.
Where do customers come from?
Which relationships matter?
Who generates the sales?
Which employees are critical?
How does work move through the company?
What happens if the owner leaves?
Consider a paint store.
Someone unfamiliar with the industry might see a straightforward retail business serving homeowners. But perhaps 75% of its sales come from professional contractors buying supplies early in the morning.
Suddenly, contractor relationships become an important part of what you're actually buying.
If those relationships are personally connected to the seller, you need to understand what happens when ownership changes.
3. Legal Due Diligence: What Legal Risks Come With the Business?
Legal due diligence is different from having an attorney draft the final purchase agreement.
Your lawyer should also investigate legal matters that could affect the business after acquisition.
That can include:
Customer and supplier contracts
Employment matters
Existing agreements
Licensing and regulatory requirements
Litigation or potential disputes
Privacy documentation
Assignability of contracts
Change-of-control provisions
Contract assignability can be particularly important.
Imagine acquiring a janitorial company with a valuable government contract.
If the contract says an asset sale gives the government the right to put the work back out to tender, buying the assets could jeopardize the recurring revenue you're trying to acquire.
A share purchase might produce a different result because the operating entity remains intact.
That's exactly the type of issue legal due diligence should uncover before closing.
Don't Spend All Your Due Diligence Money at Once
The order in which you perform due diligence matters.
If you're going to discover a fatal problem with the business two weeks into your investigation, you'd rather discover it before spending heavily on final legal agreements and other professional work.
Think about the acquisition using the concept of a critical path.
Several workstreams may happen simultaneously, but certain steps depend on others being completed successfully.
Arrange the process so major deal killers can be investigated before unnecessarily expensive closing work begins.
Due diligence isn't simply about discovering information.
It's also about controlling the cost of discovering it.
Keep Asking Whether Buying Still Makes Sense
There is another question buyers should keep in mind throughout due diligence:
Would I be better off starting this business instead?
Maybe the answer is clearly no.
An existing company may have valuable customers, employees, contracts, systems, equipment, reputation, and cash flow that would be difficult or expensive to recreate.
But don't stop asking the question merely because your offer has been accepted.
You may discover outdated processes, expensive legacy systems, weak customer relationships, or other issues that reduce the advantages of acquisition.
Be careful about buyer fever.
Don't become so emotionally attached to completing the deal that you stop objectively evaluating it.
“Does it make sense for me to do this deal?”
That question should remain in the back of your mind until closing.
Having your money safely in the bank while working a job you don't particularly enjoy can still be better than overpaying for a risky business that turns out to be very different from what you expected.
Learn How to Buy a Business the Right Way
If you're serious about buying an existing business, Business Buyer Advantage provides online training, group coaching, and buyer-side analysis services designed to help you understand the acquisition process.
The training includes dedicated due diligence material, while David and the ALP team also offer Buyer Insight Analysis services to help examine specific businesses and formulate potential offers.
Learn more about Business Buyer Advantage:
https://businessbuyeradvantage.com/
