How long does it take to buy a business?
By Mainshares
Apr 28, 2023
In Buying a Business
Buying a small business has recently become en vogue since introductory books like Buy Then Build or the HBR Guide to Buying a Business hit the market. With many entrepreneurs evaluating buying a cash flowing business over starting one from scratch, it’s important to outline the timeline considerations of a business acquisition.
In short, buying a business is normally anything but short. For a first time buyer, we recommend budgeting between 6 and 12 months for your first acquisition, assuming that you are devoting a reasonable amount of time to your search. In this post, we will step through each phase involved in buying a business: searching, negotiating an offer, and closing a deal - and give you a rough sense of timeline for buying a business.
1. The Search: Finding Businesses to Buy
The longest phase of acquiring a business is typically the search. The exact duration depends on a number of factors: how large of a business are you searching for, how picky are you about factors like recurring revenue and owner involvement, and how specialized of an industry thesis you have.
In the Search Investment Group’s 2023 Self-Funded Search Study, targeted searches took longer on average, with 29% of searchers spending 13-18 months on the search phase vs. 19% of searchers spending 13-18 months on the search phase for generalist searches.
Other factors with the duration of the search phase depend on whether the entrepreneur is focusing on listed businesses for sale or is doing proprietary outreach as well as how much time the entrepreneur is devoting to his or her search.
The same survey showed the 58% of full-time searchers (entrepreneurs spending 40 hours per week on finding a business) closed a deal within 12 months or less, whereas only 46% of part-time searchers closed a deal within 12 months or less.
2. Negotiating Offers
As entrepreneurs find businesses that meet their criteria, they will likely begin submitting Letters of Intent, or non-binding offers. In our experience, it typically takes 2-4 weeks to negotiate and determine whether or not an LOI will be accepted and countersigned by the seller.
Keep in mind that most offers will not be countersigned. Entrepreneurs will either face an unmotivated seller or lose out on the deal to a competing offer. In a recent panel at SMBash, Justin Voigt from Evermore Industries estimated that around 20% of submitted offers by buyers are ultimately countersigned by the seller.
3. Closing the Deal: Letter of Intent to Close
Lastly, the period from LOI to close can range widely.
For deals that do not include an SBA loan or equity raise, they can be closed within a matter of a few weeks from the initial offer being countersigned. Why? Well, all that needs to be done is due diligence and the drafting and negotiating of a purchase agreement.
For deals that do include an SBA loan, we often see them taking around 90 days. The SBA loan process can be quite involved. Requirements include life insurance policies (and their requisite physicals), setting up a new entity, getting business insurance, a business inspection, submitting a business plan with projections, and going through bank underwriting.
Then again, not all deals that go under contract will close. In the same conference, Eric Pacifici shared that only around 30-40% of countersigned offers ultimately result in a closed transaction. A majority of countersigned deals will fail due to due diligence findings, dispute over deal terms, issues with financing, or simply deal fatigue.
Final Thoughts
We recommend that entrepreneurs budget at least 6 months towards finding and transacting on a business. Some may be able to close quicker with the right opportunity and deal structure, while others may pull their punches for the perfect deal and take as long as 2 years.
After all, it really depends on a number of factors. Below is a summary of what goes into finding a business to buy.
| Searching | Negotiating | Closing |
|---|---|---|---|
Duration | 3 - 18 months | 2 - 4 weeks | 1-4 months |
Factors | Time devoted to searching, target business size, targeted vs. generalist search, geography. | Market competition, motivation level of the seller. | Financing structure, quality of legal counsel for both parties, due diligence plan. |
Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.
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