Buyer search: from criteria to letter of intent

Most people who set out to buy a business never buy one. The usual truth is that the search ran as a hobby: no written criteria, no budget, and no way to tell a bad month from a bad plan.

A buyer search is a project, and this page is about running it well, from written criteria to a signed letter of intent.

What to take away

Write the criteria first

Before you read a single advert, put on one page what you are looking for. Not aspirations. Constraints you would enforce against a business you liked.

A worked example, for a buyer of commercial HVAC service companies near Charlotte, North Carolina:

Those figures illustrate the format, not market data. The test is whether you would walk away from a business you liked because it failed one line.

Then keep the page beside you while you read listings. Its only job is to be uncomfortable at the moment you find something attractive that fails one of its lines.

Budget the search

Searching costs money before anything is bought. Travel. Advisers, if you take advice early, which is usually cheaper than taking it late. Time you are not spending earning. Occasionally a deposit or a fee to look at something properly.

Typical search costs over a year, for a business priced in the low seven figures:

The figures are format illustrations, not sourced market estimates or quotes. Distance, how many deals you take past the first call, and whether property is included can affect actual spending.

Decide in advance how much of each you are willing to spend, and over what period. Write it down once, at the start.

That does two things. You stop treating spending as evidence of progress, and you get an honest answer on when to stop.

A long search mostly costs the year you did not spend doing something else. A search with no end date does not end. It fades, which is a worse outcome than a decision.

When the period you set ends, decide deliberately whether to fund another one. That leaves you able to start again.

Where deals come from

The distribution matters. Public listings are where beginners look and where competition is highest. Direct approaches have the worst hit rate and the best terms when they land. A serious search usually runs several channels at once and accepts that most of them will produce nothing.

Examples of U.S. listing and deal channels include BizBuySell, BizQuest, and DealStream; Axial is used for privately marketed lower-middle-market deals. The International Business Brokers Association (IBBA) has a broker directory, while Stanford Graduate School of Business's Search Fund Study provides background on the search-fund model, not a source of live deals; verify any broker's licensing requirements with the relevant state regulator.

The selection problem nobody warns you about

Businesses that are quick and easy to buy are not a random sample. They are the ones that other buyers, often better informed than you, decided against. This is adverse selection, and in a private market where the seller knows everything and you know an advert, it is the background condition of the whole exercise.

The right response is not suspicion. It is a question: what did the people who looked before me see? Sometimes the answer is nothing, because they wanted a different size or a different region or they ran out of money. Sometimes the answer is a reason, and the reason is knowable if you ask directly.

Ask how long it has been available, how many buyers have been through it, and what stopped each one. A seller who answers plainly is telling you something valuable. A seller who will not answer has answered.

Being a buyer people take seriously

Intermediaries and owners screen buyers, because most enquiries go nowhere and their time is finite. Being taken seriously gets you shown things earlier and told more.

In the United States, possible acquisition funding routes include buyer or investor equity, seller financing, and Small Business Administration-backed lending, subject to lender and program eligibility. When you send proof of funds, distinguish cash available now from financing that still requires approval; a seller note or lender indication is not the same as committed funds.

From interest to a written position

At some point interest has to become a document. A letter of intent or heads of terms sets out what you propose, on what basis, and what you need to see before it becomes binding.

An LOI is not automatically binding or nonbinding as a whole. Identify the provisions intended to bind—often confidentiality, exclusivity, expenses, and governing law—and have transaction counsel check them under the relevant state's law; noncompete rules also vary by state.

Before setting price and terms, state whether the proposed deal is an asset purchase or a stock or equity purchase; each can transfer different liabilities and have different tax consequences. Have transaction and tax counsel evaluate any tax election before the LOI commits the parties to a structure.

A short sample of what heads of terms should contain, for a business priced at about $1.4m:

Those figures illustrate the format. What sets the real numbers is size, trade, whether property is in the deal, and which side has more alternatives.

Write it earlier than feels comfortable. Its real function is to surface disagreement while it is still cheap.

Two parties can talk warmly for months, then discover at the document stage they never agreed on what was included, who stays, or what happens to the premises. Better to learn that on one page than after paying for a detailed review.

Ask for exclusivity only when you are ready to spend on verification, and expect to give something for it. Exclusivity that runs while you do nothing burns the goodwill you will need later.

Set out the verification workstreams the LOI's access and exclusivity provisions are meant to support: a quality-of-earnings review, tax and financial records, contract and license review, customer and supplier concentration, and landlord consent where needed. A Uniform Commercial Code (UCC) lien search in the relevant Secretary of State filing office, a Phase I Environmental Site Assessment when property or operations warrant it, and an escrow agent for closing funds are also common items; engage a CPA or quality-of-earnings provider, transaction attorney, and environmental consultant as applicable.

Knowing when to stop

Stop a specific deal when a constraint on your page is breached and the seller will not move, when the answers change between conversations, or when you find yourself building a case for something rather than testing it.

Common questions

How long should a search take?

No single number holds. It depends on how narrow your criteria are, how many channels you work, and how many other buyers want the same business.

Should I use an adviser during the search, or only once I find something?

Advice early is usually cheaper than advice late, because the expensive mistakes are made in what you agree to look for and what you sign at the start. You do not need a full team to read a confidentiality agreement or to sanity-check your criteria.

Is it better to buy in an industry I know?

Knowing the trade removes a large category of surprise and lets you judge what you are told. It also narrows the field, and it can make you overconfident about a business whose problems are commercial rather than technical. Knowing the trade helps most when you also know how it makes money, which is not the same knowledge.

What if I only ever find businesses that are too expensive?

That is information about your funding, your criteria, or your channels, and it is worth working out which. Consistently being outbid points at funding. Consistently finding nothing at your size points at criteria. Never seeing anything before it is advertised points at channels.