Buying a business is about much more than finding a company you like and agreeing on a price. If you’re wondering how to buy a business, it’s important to understand how businesses are valued, why confidentiality matters, and what you can do to demonstrate that you are a serious and qualified buyer.
Hank Bockus shares several insights that can help prospective buyers better understand the acquisition process—and avoid some of the mistakes that can derail a deal before it ever gets off the ground.
Why Confidentiality Matters When Buying a Business
One of the first steps in a business acquisition is signing a Non-Disclosure Agreement (NDA). While it may seem like a routine part of the process, confidentiality is extremely important to the seller.
A business owner may not want employees, customers, vendors, or competitors to know that the business is for sale. If that information gets out prematurely, it can create uncertainty and potentially damage the business.
As Hank explains, a leak of confidential information can “unsettle everything and instantly kill an opportunity.”
That’s why prospective buyers should follow the communication process carefully. Inquiries and requests for information should go through the broker rather than directly to the business or its employees. Protecting confidentiality isn’t simply about following a rule—it’s about protecting the opportunity for everyone involved.
How Is a Business Valued?
Another important question for buyers is how the asking price for a business was determined.
There isn’t one universal formula for valuing a business. Hank Bockus, business broker and appraiser with Bockus Consulting, explains three common approaches to business valuation: the asset approach, the market approach, and the income approach.
1. The Asset Approach
The asset approach focuses on what the business owns.
This includes tangible assets such as equipment and inventory, less the liabilities associated with those assets. For businesses experiencing negative cash flow, the value of the underlying assets may become particularly important because the business’s earnings aren’t supporting a higher value.
2. The Market Approach
The market approach looks at comparable businesses and transactions.
This method works particularly well in industries where there are many similar businesses that have recently sold. Fast-food franchises, for example, can provide useful comparable data because there are numerous similar businesses and transactions to examine.
The goal is to understand what buyers have actually paid for comparable businesses and use that information as a guide.
3. The Income Approach
The income approach focuses on the business’s ability to generate future economic benefit.
One component of this approach is the capitalization rate, or cap rate. The cap rate is related to the return a buyer expects from the investment and can be used to determine a business’s value based on its normalized income.
For example, if a business has normalized income of $200,000 and a 22% capitalization rate, the indicated value would be approximately $909,000.
Understanding these different approaches can help buyers look beyond the asking price and understand why a business may be valued at a particular level.
If you’re interested in understanding how a business is valued, learn more about business valuation services from Bockus Consulting.
What Does the Acquisition Process Look Like?
Once a buyer finds a business that interests them, the next step isn’t simply making an offer.
The process begins with a conversation about the buyer’s background, experience, and interest in the business. From there, the buyer may be asked to complete a detailed questionnaire.
This information helps the seller and broker understand who the prospective buyer is, why they are interested in the business, and whether they have the experience and resources necessary to move forward.
For buyers, this is an important part of demonstrating that they are serious.
Hank puts it this way:
“The more clarity, the more commitment that you provide, the more access to answers that you can give, the more likely you’re going to have a chance to make an acquisition.”
In other words, being a strong buyer isn’t just about having the money to purchase a business. Sellers want to know that they are dealing with someone who is prepared, responsive, and genuinely committed to the process.
How Can Buyers Prepare for an Acquisition?
A business acquisition can be an exciting opportunity, but successful transactions require more than finding the right business.
Buyers who understand the importance of confidentiality, have a basic understanding of how businesses are valued, and are prepared to clearly communicate their experience and intentions will be in a much stronger position when the right opportunity comes along.
If you’re considering purchasing a business, taking the time to understand the process before you find the business can make the acquisition much smoother.
Thinking About Buying a Business?
Buying a business is a significant investment, and having the right information before you make an offer can make a big difference.
If you’re considering purchasing a business in Oklahoma, contact Bockus Consulting to discuss your goals and learn more about current opportunities.