So, you want to own your own business, but that doesn’t mean you have to start from scratch! When you buy an existing business, you can make your dream of business ownership come true AND enjoy the following benefits:
- Reduced startup time
- Established brand
- Existing customers
- Better survival rate
- Easier to get financing
In this article, I will walk you through how to buy an existing business in just 10 steps.
10 Steps to Buy an Existing Business
Want to buy an existing business? These steps detail everything you should consider, from initial consideration to closing the deal.
1. Prepare Yourself
Before you buy a business, make sure you are prepared. Assess your strengths and weaknesses, so you go into the purchase with a realistic assessment. Ask yourself questions like:
- How much am I willing to spend to purchase and manage the business? This will help narrow down to the best businesses for your budget.
- What skills, experiences, and talents do I bring to the table? This will help you determine which industry is best for you.
- Where are the gaps in my skills and experiences? This will help you identify, in advance, the areas in which you’ll have to learn and grow or delegate to others.
2. Prepare Your Family
You will also want to consider your lifestyle and family before you buy an existing business. It’s important to have support from your immediate family, so bring them into the decision early. It doesn’t mean that they will agree with you every step of the way but considering their thoughts and concerns will make them feel heard and that they are a part of the big leap you’re taking into business ownership.
3. Prepare Your Team
When you buy an existing business, you’ll need a team of experts to advise you throughout the process. This includes business valuation, due diligence, and legal documentation. Assemble your team by finding a lawyer, accountant, and banker. Your team of experts will help you make informed decisions throughout the buying process.
4. Find Potential Existing Businesses
After laying the groundwork, it’s time to identify which businesses you might want to buy. So, where can you look if you’re going to buy an existing business?
- Online business marketplaces, such as bizbuysell.com or bizquest.com
- Classified newspaper ads (typically under “Businesses for Sale”)
- Referrals from your network
- Calling local businesses (as some businesses may not advertise that they’re for sale)
- Networking with other business professionals (at conferences, meetups, etc.)
- Working with a business broker
As you browse the options, now is the time to narrow down the list based on the questions you asked yourself in #1 and the advice of your family and team of experts. At this point in your quest to buy an existing business, your goal is to narrow your options to a short list of 3-5 possibilities.
5. Select an Existing Business to Pursue
When selecting one business from your list of possibilities, you’ll want to consider:
- Fit: Is this business a manageable size for me, given my skills and experience?
- Reputation: What are people in the community saying about this business? What do the online reviews say?
- Competition: Who are the local competitors, and how fierce is the competition?
- Customer Base: How strong is the customer base? Does the business have loyal customers?
- Employee Satisfaction: Do employees like their job? Will you be able to retain them after the sale?
One of the biggest things to evaluate when you buy an existing business is why the owner is selling it. Look out for red flags such as:
- A broken business plan (e.g., there’s not a market for the product or service)
- Business debt
- Competitors are far ahead
- Problems with the brand
- Issues with the location
- Operational difficulties (bad equipment, high cost of production, low-quality product/service)
6. Evaluate the Chosen Business
At this point in your journey to buy an existing business, you have narrowed it down to ‘the one.’ Don’t let your excitement be your enemy here! Once a buyer finds a business that meets their criteria, they tend to rush the process. They worry that the owner may sell to somebody else, or else they are just eager to own the business NOW, so they want to speed things up. However, this is a crucial stage when you buy an existing business, and it’s important to take your time.
At this point, the seller (or their broker) will likely have you sign a confidentiality agreement. Meanwhile, the buyer will likely have to provide a financial statement showing they can purchase the business. These two documents establish trust so that more information can be disclosed, and the two parties can work together to an agreement.
Here are some items you’ll want to gather to evaluate the chosen business:
- Financial Information: Balance sheets, financial statements, and tax returns for at least three years, projections for the current year, a list of business obligations and debts, proposed selling price, and what’s included.
- Industry and Market Information: List of products/services along with the pricing system and strategies, inventory included in the sale, competitive analysis of competitors, customers, and suppliers, historical market/industry data, and future trends.
- Operations Information: History of the business, required licenses to operate the business, investigation of deeds, leases, and zoning laws, list of future obligations (such as customer warranties, upgrades, etc.)
- Management Information: History of staffing and future forecast (roles, salaries, contracts, benefits packages), the likelihood that key employees will stay after the sale, and how long the owner will remain to provide direction to the new owner.
7. Determine the Value of the Business
The buyer of the business may not need to get the business valued. The seller may have already done this or set a price they want. If you are interested in doing this, it can be helpful to hire an independent business valuation professional, which could cost between $3-5K. When valuing an existing business, there are three main approaches:
- Earnings Approach: This is used for businesses that are already profitable or have a positive forecast, and it is calculated based on historical, current, and projected profits.
- Assets Approach: This is used for capital-intensive businesses (manufacturing, transportation, etc.) and businesses that aren’t profitable. It measures the value of the business’s tangible and intangible assets minus debts and liabilities.
- Market Approach: This approach accounts for local factors and measures the business’s value based on how much comparable businesses have sold for.
8. Secure the Capital
After you’ve agreed on a price, it’s time to gather the money you’ll need. Some ways to finance the purchase when you buy an existing business are:
- Personal funds
- An SBA loan
- A business acquisition term loan
- Seller financing
- Finding a business partner
9. Close the Deal
At this point in your journey to buy an existing business, the end is in sight. Now it’s just time to finalize the sales agreement. In general, there are two options for structuring the sale:
- Asset Purchase: In this type of agreement, the seller remains the legal owner. Meanwhile, you purchase all of the business’s assets (inventory, real estate, equipment, patents, customer lists, etc.).
- Stock Purchase: In this type of agreement, you acquire the assets, liabilities, contracts., etc., as well as the stock of the business.
Your lawyer will be instrumental in reviewing the sales agreement and offering advice.
10. Make the Transition
After the purchase is complete, there is often a transition period where the seller stays on board for at least 3-6 months to ensure a smooth transition. As a new owner, you’re not familiar with everything—all policies, processes, and financial models. The business’s reputation is critical in maintaining the customer base, and the seller can ease the transition for you.
Do You Want to Buy an Existing Business?
Buying an existing business is usually less risky than starting your own from scratch. When you buy an existing business, the important pieces are already in place: the customers, the business plan, and the cash flow. With these things set up and running, you can focus on improving and growing the business.
If you want to buy an existing business, I have more articles coming your way on this topic! In my next article, I’ll discuss franchise businesses specifically, so stay tuned.