How to Buy a Business: Everything You Need to Know
Although the process of buying an existing business can take time, it often provides more financing opportunities than starting a business from scratch.
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Buying an existing business can be a long and complicated journey, but it gives you the opportunity to become an entrepreneur without starting from square one.
To set yourself up for success, choose a business you’re passionate about improving and equipped to manage. But passion alone isn’t enough — experience and knowing which questions to ask before you buy are also important.
These eight steps will guide you through the process of buying an existing business.
1. Figure out what type of business you want to buy
Narrow down your interests, skills and experience. You’ll be more likely to succeed if you buy a small business that dovetails with what you already know and like.
For example, if you’ve worked as a line cook for several years, you might decide to run your own restaurant. Or maybe you’re a long-time employee at a company that’s now on the market. In that case, who better to buy the business than someone who knows it as intimately as you?
“Long-term key employees of small businesses are often the ones best positioned to successfully succeed the founder,” says Tim Stolz, a certified financial planner and certified public accountant at Bestgate Wealth Advisors in Maryland.
He adds that small businesses are often well positioned to buy their competitors, especially if they serve similar groups of customers.
2. Search for businesses that are for sale
There are several ways to find a business that fits your criteria:
Browsing business-for-sale websites. Sites like BizBuySell.com, BizQuest.com, and FranchiseGator.com are online aggregators for small businesses and franchises for sale. You can filter listings by industry, location and price.
Looking for advertisements (or placing your own). Check local newspapers, industry publications or sites like Craigslist for business sale listings. You can also post an ad expressing interest in buying.
Asking your network. Reach out to the business people you're connected to. They might know of opportunities that are a perfect fit for you.
Going to meetups or industry conferences. While there, you can ask around for references or professionals who can help you find the right business to buy.
Working with a business broker. Just as a small-business loan broker can find you a loan, a business broker can find you a small business for sale.
More about business brokers
Most business brokers are hired by sellers to find qualified buyers and manage negotiations. Individual business brokers or brokerage firms may also have a list of small businesses for sale, so they can connect you with multiple options.
What business brokers can do for you:
Help identify your interests. A good broker will help you pinpoint your skills and interests and connect you with businesses that might be a good fit. They may even introduce you to an industry that you might not have thought to pursue.
Tell you which businesses to avoid. Experienced brokers can help you steer clear of bad deals and failing businesses.
Guide you through negotiations. Buying a business can involve a complicated negotiation process. A broker can advise you on what to ask for, what to avoid and how to structure your deal.
A business broker can be a valuable resource for finding an established business for sale, but it’s important to choose the right one. Choose a broker who understands and represents your interests, not just the seller’s.
3. Understand why an existing business is up for sale
Business owners sell for many reasons. It could be something as simple as retirement, or there might be a more worrisome reason, like a fundamental problem with the business. You’ll want to understand why the owner is selling before you buy.
Ask the owner what challenges they've encountered, what they’ve done to try solving those problems and how those attempts fared. Throughout the process, ask yourself, “Do I have what it takes to meet these challenges with different or better solutions?”
Be on the lookout for:
A weak business plan (no market for the product or service).
Stronger competitors already in place.
Existing business debts.
A bad location.
A brand reputation issue.
Inventory problems (high production costs, quality issues, storage difficulties or supply-and-demand imbalance, etc.).
Outdated equipment.
In addition to speaking with the owner, talk to existing customers and employees, neighboring businesses and locals. They can give you an honest view of how the business is doing, without the seller’s bias.
4. Narrow in on a business that aligns with your budget, goals and resources
At this stage, focus on the business that aligns with your budget, goals and resources.
Calculating the ideal size, location, sales, staff and so on of your prospective business is an important step in your plan of buying a business, since it will give you a scale to keep in mind when you’re shopping around. Figure out how much you’d ideally want to change a business, and assess how much that will cost you.
Also look at the time and energy commitments you’re planning to invest to make the business your own. Some managers prefer to be in the weeds with their employees, while others prefer to delegate and, one day, own multiple businesses.
The amount of resources you’ll have to invest depends on the people and processes already in place and on the experience you have in the industry. For example, if you’re buying a tech company but lack technical expertise, you’ll need to invest time learning the ropes or hiring people who have the experience.
5. Do your due diligence
Due diligence is the process of thoroughly viewing a business before you buy. Working with an attorney and CPA with experience in business acquisitions can help you stay on top of the complicated legal and tax considerations involved in a business purchase. Talk to a personal financial planner, too — business ownership is still a risk, and it’s essential to prepare your personal finances as well.
There are a few red flags to be especially on the lookout for in this process. Mark Zweig, instructor and entrepreneur-in-residence at the University of Arkansas Walton College of Business, cautions against businesses that face pending litigation, businesses with reputations that feel impossible to improve and family businesses that employ several relatives.
He also watches out for “single-person management” — situations in which “if the owner leaves, all of the institutional knowledge leaves with them.” And any unethical or illegal activity is a no-go.
There are many business documents, files, agreements and statements that you’ll want to collect and analyze, ideally with the help of a lawyer and accountant, including:
6. Evaluate the business with the income, assets or market approach
Buyers and sellers often place very different values on the same business. During this process, it can be very helpful to call in an independent business valuation professional to make an objective determination of value.
Valuation services, which can be found online or through word of mouth, cost anywhere between $2,000 and $20,000, depending on the complexity of the scenario, but they can save you thousands more in the long run by coming up with a good estimate.Whether you do this yourself or hire someone, it’s helpful to have some knowledge of the three main business valuation methods:
7. Secure capital to make the purchase
Once you and the seller agree on a number, the next step in buying a business is to come up with the money to make the purchase. Here are some of the ways to finance a business acquisition:
Debt financing
It can be very difficult to find startup funding for a new venture. Many business owners rely on their own savings or friends and family to get their business up and running.
“The main advantage of buying a business over starting a business is that there’s capital and loans available from banks for buying businesses,” says Stolz.
Buying a business gives you tons of documents to approach a bank or alternative lender with for financing: financial histories, tax returns, employee records, cash flow analyses, inventory and equipment valuations, and much more. This wealth of data makes business acquisitions a good candidate for loans because lenders aren’t working with a risky blank slate.
If you’re looking for a small-business loan, here are a few potential financing options that may help in buying a business:
How much do you need?
We’ll start with a brief questionnaire to better understand the unique needs of your business.
Once we uncover your personalized matches, our team will consult you on the process moving forward.
Lease the business
It might be possible for you to lease the business instead of buying it outright — with the option to make the big purchase down the road once you’re able to afford it.
Partner up
Taking on a partner when buying a business isn’t only useful to cut costs. You can also bring someone on board with more specific experience or a different skill set. Just don’t forget to draw up a partnership agreement, so co-ownership doesn’t cause any problems down the line.
Personal or family money
Consult your accountant before ponying up a large lump sum of your own cash. Also, make sure that you’re not using all your money buying a business because running a business takes capital, too.
Many businesses are also funded with money borrowed from family. If you go this route, you should understand the tax implications for gifts and family loans. Make sure that you and your family member put the exchange of money in writing and follow IRS rules for family loans.
Seller financing
Some sellers will agree to holding a note, or accepting staggered payments — sort of like a lender. This way, they get guaranteed income for the coming months (or years, depending on your plan).
There are rules around seller financing, particularly if you plan to use another form of debt financing as well. For example, sellers have to be on “standby” if you’re also getting an SBA loan, meaning they have to agree that they won’t be paid back until you pay off the SBA loan.
Some sellers might also be willing to trade in some assets, like some furniture they really loved or the company car, for a lower price.
Sell stock to employees
By selling company stock to your employees, you can get a big discount — making up 50% or even 90% of the business price by some measures. You’ll probably want to sell non-voting stock, if possible, to retain ownership over the business. In order to issue stock, you’ll have to organize the business (or re-organize it) as an S corporation or C corporation.
8. Close the deal with the appropriate documents
When you’ve finally found the right business, done your due diligence, agreed on a fair price and gathered the capital you need, make sure you (or a broker) have all of these documents, notes and agreements in place before you officially buy a business:
Pros and Cons of buying a business
Proven business concept with structure already in place.
Lower operating costs since many parts of the business are already in place.
Easier to obtain financing because lenders and investors see it as lower-risk than launching a new company.
Intellectual property, like a copyrighted slogan or trademarked logo, may transfer over to you in the acquisition.
Higher upfront purchasing costs since you’re buying ownership over many existing assets.
Unfamiliarity with the inner workings and details of the business.
Risk of a hidden problem, for example, damaged equipment or bad brand reputation.
Next Steps
Read more about how to finance a business purchase.
Compare the best business acquisition loan options and learn how to apply.
Priyanka Prakash, a former Fundera.com staff writer, contributed to this article.
A version of this article originally appeared on Fundera, a subsidiary of NerdWallet.
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