The Advantages of Purchasing Companies for Sale by Owner

Truforte Business Group - Brokers Blog

Purchasing a company can be an exciting endeavor for entrepreneurs and investors looking to acquire an existing business. While many companies are listed by business brokers or investment banks, some business owners opt to sell their companies themselves without hiring a broker or advisor. This route is known as a “sale by owner”. Let’s look at some of the benefits you can experience by purchasing companies for sale by owner. 

Cost Savings

The biggest advantage of purchasing companies for sale by owner is the potential cost savings. Business brokers typically charge a commission of 4-10% of the sale price. By negotiating directly with the seller without an intermediary, buyers may be able to purchase the business at a lower overall cost without paying broker fees and commissions.

Increased Responsibility

However, buyers also take on more risk and responsibility in these transactions. Conducting due diligence without the guidance of an experienced broker requires the buyer to undertake reviews of all legal documents, financial statements, operations details, and property conditions on their own. The buyer also takes on the responsibility of drafting purchase agreements rather than using a broker’s template.

Tips for Buying Companies for Sale by Owner

If you are planning to buy a company that is sold directly by the owner, there are few important things to keep in mind. Let’s take a look at them in detail. 

  • Conduct Thorough Due Diligence

Here are some key tips for buyers looking at companies for sale by owner: Conduct thorough due diligence – Don’t rely solely on information the seller provides you. Hire an experienced lawyer and accountant to review the company’s corporate records, tax returns, lease agreements, employee policies, supplier and customer contracts, and intellectual property documentation. Also assess the company’s financial health, looking for trends and potential red flags.

  • Interview Management and Employees

Interview management & employees – Meet with key managers and employees to understand the company’s operations, culture, client relationships, and growth potential from their perspective. 

Other Key Considerations

Negotiate confidently – Do your homework ahead of negotiations. Benchmark the company’s performance and valuation against competitors so you negotiate from a position of knowledge. Be sure to leave room to go back and forth with the seller on price and deal terms.

  • Create contingency plans 

Build contingencies into your offer for events like loss of major customers or suppliers, departure of key employees, declines in revenue, or findings from due diligence that materially impact valuation. This protects you in case issues arise later between signing and closing.

  • Understand your risks 

Recognize that you take on more risk in a sale by owner since information hasn’t been validated by a broker. Consider worst-case scenarios and whether you could turn the business around if vital customers, contracts or key staff don’t transition post-acquisition.

  • Have an integration plan 

Develop a 100-day transition and integration plan so you can hit the ground running post closure. Appoint transition teams and plan communications to retain employees, key customers and vendors. The more uncertainty you can reduce, the less disruption the change in ownership will create.

Final Words 

While sales by owner require more work on the buyer’s end, they can be an attractive opportunity for buyers willing to roll up their sleeves. By following these suggestions, you can position yourself for the best chance of successfully purchasing a solid business without overpaying or taking on excessive risk. Do your homework and enlist help from professionals, and you may be rewarded by finding a great company at a great price.

Interested in more information about buying and selling businesses?

Find the pros and cons of owning various businesses on the Truforte Brokers Blog.

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