Buying an existing business is a great way to become an entrepreneur and can eliminate some of the challenges of a startup, like securing funding and establishing a brand. If you’ve decided that purchasing a business is right for you, consider these eight steps to make the transition as smooth as possible.
8 steps for buying a business
From picking the right business for you to closing the deal, here are eight key steps to help you through the process.
- Decide what type of business you want to buy
- Decide where to buy your a business
- Understand why the business is for sale
- Choose a business that fits your budget and goals
- Conduct your due diligence
- Calculate the value and cost of the business
- Finance your investment
- Close on your business deal
1. Decide what type of business you want to buy
Deciding on the type of business you want to buy should align with your personal interests, skills and long-term goals. Assess your strengths and weaknesses and consider how these will affect the day-to-day operations and overall success of the business. For instance, if you’re great with people, a customer-facing business like a retail store might be a great fit.
Different types of businesses put unique demands on your lifestyle as the business owner. Some require long hours on-site, such as restaurants, while online businesses can offer the flexibility of remote work. Understanding these demands help ensure that your choice aligns with your life.
Most importantly, market demand and future potential should factor into your decision. Research industry trends, customer needs and potential market shifts to understand which types of businesses are likely to thrive.
2. Decide where to buy your business
There are multiple places to find businesses for sale, and each has its advantages and limitations. Be sure to explore multiple avenues to find the best fit for you and understand all the available opportunities.
- Online marketplaces. Platforms like BizBuySell or BusinessesForSale.com list thousands of businesses for sale across various industries and locations.
- Business brokers. Professional brokers use their networks to help find businesses that match your criteria and can sometimes provide listings not publicly advertised.
- Local newspapers and trade publications. Some businesses list for sale in the classified sections of local newspapers or industry-specific publications.
- Networking. Attending industry conferences, joining relevant associations or even word-of-mouth can uncover businesses for sale not yet publicly listed.
- Social media and professional networks. LinkedIn and other social media platforms can be valuable resources for finding businesses for sale through posts or network connections.
The actual location of your business can significantly impact its overall success. You should consider factors such as market demands and competition, labor costs and government regulations and incentives when choosing the location.
Also, think about whether the business’s location aligns with your personal needs. Can you afford an hour-long commute, or do you need something closer? If your business operates online, do you have the space in your home to accommodate the business, or will you need office or warehouse space elsewhere?
3. Understand why the business is for sale
Understanding why a business is for sale can provide insights into potential problems outside of its finances or operations. For example, a business might be for sale for a negative reason, like new competition in the market, or a neutral one, like the owner’s retirement.
Knowing the reasons behind the sale can also impact how much the seller is willing to negotiate on price and other terms. An owner with health issues may be motivated to close quickly, while a struggling business may require more due diligence to assess its value and risks.
Ask direct questions about the reason for the sale during the initial discussions and verify the answers. When possible, speak with customers, suppliers and employees about the business’s health and the reasons for selling. And if the current owner tries to gloss over the business’s shortcomings, there could be deeper issues at play.
4. Choose a business that fits your budget and goals
Selecting a business that aligns with your financial goals doesn’t end with matching the purchase price to your budget. Consider the additional costs, such as training employees or upgrading equipment. Will you need to budget for the cost of equipment loans or other types of business loans?
The business’s time requirements should fit your lifestyle and other commitments. A business that demands more time than you can give may lead to financial stress for both you and your investment. Assess how well your skills and experience match the business’s needs. A good fit can lead to a smoother transition and greater profit.
Also, consider the scalability or potential for future growth, if expansion is part of your professional goals. Even if you’d just like a stable income, evaluate whether the business can realistically meet your needs.
Questions to ask yourself when buying a business
When purchasing a business, asking yourself the right questions can help you make the right decision and ensure the business aligns with your goals and skills. Here are some to consider:
- How much time do I have to dedicate? Assess whether you’re looking for a full-time job, a side hustle or a passive investment.
- Does this business align with my expertise and abilities? Evaluate if your experience, education and skills match the business’s needs.
- Can the business meet my financial goals? Consider whether the business has the potential to provide the profit you want or need to succeed.
- What is the business’s potential growth? Research market conditions and competition to estimate potential revenue or expansion opportunities.
- What are the major challenges of the industry? Understanding the hurdles of specific businesses can help you assess if you’re equipped to handle them.
- How will I finance the purchase, and what are the financial risks? Ensure that business financing is available for the type of business you want and its associated risks.
- What types of business insurance will I need to carry? Which type of business you buy will determine what types of business insurance policies you’ll need or want to carry to protect your assets.
5. Conduct your due diligence
Conducting due diligence allows you to properly evaluate the operational, financial and legal aspects of the business. It helps you identify any potential risks that could affect the business’s value.
Due Diligence Checklist
- Business financials. Review at least three years of financial statements, tax returns and cash flow forecasts to assess the financial health of the business.
- Legal compliance. Verify that the business has all necessary licenses and permits and is in compliance with government regulations.
- Zoning laws. Ensure the business’s location is zoned appropriately for its current and intended operations.
- Contracts and leases. Examine all existing contracts and leases (including supplier, customer, and lease agreements) for terms, conditions, and any potential liabilities.
- Employment agreements. Review employment contracts, benefit plans, and any pending labor issues.
- Intellectual property rights. Confirm the ownership and status of any intellectual property, including patents, trademarks and copyrights.
- Environmental issues. Check for any environmental assessments or potential liabilities.
- Market and competition analysis. Understand the market position of the business, including an analysis of competitors, market trends and customer base.
- Debts and liabilities. Identify all debts, liens and liabilities, including contingent liabilities.
- Physical assets and equipment. Inspect the condition and value of physical assets, including real estate, equipment and inventory.
This checklist is only a starting point. Your due diligence will change based on the specific business and industry. Working with business professionals, such as accountants or lawyers, can provide you with additional insights.
6. Calculate the value and cost of the business
Calculating the value and cost of a business helps you understand whether a business’s sale price matches its worth. A good assessment can provide insights into the business’s current financial health and its future earnings potential.
A thorough valuation can also assist in negotiating the sale price and can identify the strengths, and weaknesses associated with the business. It is also important when securing financing, as lenders often require a detailed analysis of the business to assess the risk.
How to calculate the value of a business for sale
You can estimate a business’s value through a variety of factors, including its assets, liabilities, current earnings and projected earnings. Here are five ways to determine the value of your potential business.
- Book value of the business (asset value). Subtract its total liabilities from its total assets to get the book value of the business. However, this only represents the current value and doesn’t consider future revenue or earnings.
- Cash value analysis. Cash flow analysis compares incoming and outgoing cash, while discounted cash flow adjusts future earnings to their present value considering economic conditions. It’s best to employ a CPA or financial software to help with these calculations.
- Revenue multiplier. Multiply the current revenue of the business by a multiple “score” that represents its future potential. For example, a business with $100K in annual sales and a multiple of 4 would be worth $400K. The more potential you believe a business has, the higher the multiple.
- Earnings multiplier. This method, also known as a price-to-earnings ratio, is used if the business has shareholders. Take the current Price Per Share (PPS) and divide it by the Earnings Per Share (EPS). This gives you the net profits earned by the business per share in the market.
- Professional appraisal. A professional appraiser brings their industry expertise to assess a business’s value, and they can often provide a more reliable figure than your own calculations. Some lenders require a professional appraisal for financing.
7. Finance your investment
Choosing the right financing option to fund your investment depends on various factors, including your credit score, financial history and the perceived risk of the investment. Here are some main ways to finance buying a business:
- Personal finances. This method involves using your own funds to finance the business purchase, whether a nest egg or borrowing from your 401(k).
- Family contributions. Sometimes, family members will assist with the acquisition costs, often under an agreement to repay the amount or for a share of the business.
- Bank loans. Securing a loan from a bank or financial institution often requires a detailed business plan and collateral.
- SBA Loans. Loans backed by the Small Business Administration typically offer favorable terms and lower interest rates.
- Seller Financing. The seller may agree to finance part or all of the purchase price, which you repay over time.
- Venture Capital. Also known as angel investing, this method seeks funds from investors in exchange for equity in the business.
- Crowdfunding. Raise capital through small contributions from a large number of people, usually via online platforms. Often, the organizer will offer an incentive, like receiving an early release of a product.
How to get a loan to buy a business
There are several steps involved in getting a loan to buy a business. To increase your chances of approval, learn about the loan application process and what lenders look for.
- Assess your finances. Review your personal credit score, outstanding debt and financial history, as lenders will use these to determine your eligibility.
- Develop a business plan. Prepare a detailed business plan that outlines the potential for growth, revenue projections and how you plan to manage the business.
- Determine the type of loan. Decide whether you qualify for a conventional bank loan, an SBA loan or another type of financing based on your financial standing.
- Shop around for lenders. Compare loan terms, interest rates and requirements from multiple lenders, including banks, credit unions and online lenders.
- Gather all required documentation. Collect all necessary documents, including financial statements, the business plan, personal financial information and any business valuation reports.
- Apply for the loan. Submit your loan application along with all required documentation to your chosen lender.
- Review the terms. Once approved, review the loan offer carefully and negotiate terms if possible to get the best deal.
- Close the loan. Complete any remaining requirements from the lender, sign the loan agreement and proceed with the business purchase.
8. Close on your business deal
Closing your business deal involves finalizing the agreement terms, making necessary payments and officially transferring the business into your name. This process involves the seller, the buyer and often legal and financial advisors. As the buyer, it’s important to be thorough during this stage to ensure everything is transferred correctly and as agreed upon.
During the closing process, there are several key documents you may be required to complete and sign, including:
- Bill of sale. Confirms the sale of the business’s assets and transfers ownership to the buyer from the seller.
- Purchase agreement. Outlines the terms and conditions of the sale, including the assets to be purchased, the purchase price and the closing date.
- Lease agreements. If the business leases a location or equipment, these agreements transfer the lease to the new owner.
- Patents and trademarks. This documentation transfers ownership of any intellectual property, including patents, trademarks, and copyrights.
- Vehicle documentation. If the business sale includes vehicles, the ownership documents are transferred to the new owner.
- Non-compete agreement. Sometimes called an exclusivity agreement, this prevents the seller from starting a new, competing business for a specified period.
- Employment agreements. These are contracts for key employees who will remain with the business post-sale.
- Closing statement. An itemized list of all the transactions and fees paid by both buyer and seller during the closing process.
Pros and cons of buying an existing small business
When considering an existing business, weigh the benefits of an established operation against the potential drawbacks and constraints.
- Already established brand. Buying a business comes with an existing customer base and eliminates the high marketing costs of starting from scratch.
- Easier financing. You may secure better financing terms due to an existing business’s revenue, reputation and assets.
- Established supply chain. Seasoned businesses benefit from pre-existing vendor relationships and supply chains that offer critical support.
- Pre-trained employees. The presence of experienced employees during the transition can save on training costs and help maintain customer trust.
- Lack of freedom. Buying an existing business means taking on someone else’s vision. On the other hand, starting your own business may offer a stronger sense of ownership.
- Higher upfront costs. The sale price usually includes the cost of acquiring the customer base, brand and intellectual property, often making it more expensive upfront.
- Steep learning curve. It may take substantial time to understand the business’s existing operations, unlike the more gradual curve of starting a new enterprise.
- Unknown problems. Purchasing a business carries the risk of inheriting hidden problems, and even with due diligence, you may face unforeseen challenges, like competition issues or damaged equipment.
How to buy businesses by industry
Learn about the expected costs, average cash flow, and steps needed to buy businesses in specific industries.
By following these steps carefully and preparing for each phase of the process, you’re setting the stage for your future as an entrepreneur. If you’re ready to purchase your business, learn more about the top business acquisition loans to fund your venture.
Frequently asked questions
Can you buy a business with no money?
Buying a business with no money is possible through strategies like seller financing, alternative financing, crowdfunding or bringing on partners. You’ll usually need to find motivated sellers or underperforming businesses with turnaround potential.
When is the right time to buy a business?
The best time to buy a business depends on various circumstances, including finances, market opportunities and the nature of the business. Possibly the strongest time is when the business is growing but not yet peaked, so there is an equal balance between future profit and acquisition costs. However, how long a business will grow or when it will peak is difficult to predict.
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