This guide will walk you through the key steps of how to buy a business, from determining what kind of business is right for you to finding businesses for sale, conducting due diligence, obtaining financing, negotiating the deal and ensuring a smooth transition of ownership. With careful analysis and preparation, buying an existing business can help turn your dreams of business ownership into reality.
Key Takeaways
- Determine what type of business matches your skills, interests and financial resources. Explore both independent businesses and franchises.
- Search for businesses for sale through online listings, brokers, business networks and seller outreach. Focus on businesses in your affordability range.
- Research why the current owner is selling to uncover any underlying problems. Look for value-add opportunities.
- Work with professionals to accurately valuate the business based on its financials, assets, market value and future earning potential.
- Secure financing from banks, investors, the seller or your own funds before finalizing the sale.
- Conduct in-depth due diligence on all legal, financial and operational aspects of the business.
- Negotiate a fair purchase price and favorable deal terms and conditions. Have purchase contracts reviewed.
- Develop a transition plan to smoothly transfer ownership, manage employees, integrate operations, and market the new ownership.
- Weigh the pros and cons of buying an established business versus building one from scratch. Assess which path aligns better with your goals and risk tolerance.
What Are the Benefits of Buying a Business?
You may have always dreamed of being your own boss and calling the shots in your career. Starting a business from scratch can be rewarding but also full of risks and unknowns. Buying an existing business can help you bypass some of the challenges of entrepreneurship and let you hit the ground running.
When you buy an already established business, you take over an operation with an existing customer base, reputation, employees, systems and cash flow. This can give you a head start on success compared to forming a startup. However, you need to enter the process informed and with eyes wide open. Buying a business is complex and requires thorough research and planning.
What Are the Pros and Cons of Buying an Existing Business Vs. Starting Your Own?
Prior to embarking on the complex process of buying a business, weigh the key differences between acquiring an established business versus building one from scratch:
Pros of buying an existing business:
- Begin with an operating business, brand, products, customers and cash flows
- Leverage existing goodwill and reputation in the marketplace
- Gain insights from current owner and staff
- Begin with business systems and processes in place
- Potentially reduce overall risks and unknowns vs. a startup
Cons of buying an existing business
- Initial purchase costs and financing needs are higher
- Ongoing debt service costs need to be managed
- Less flexibility to define your own brand and offerings
- Integrating existing culture and teams can be challenging
- Danger of undisclosed problems or outdated methods
Pros of a startup
- Greater control over strategy and positioning
- Lower upfront capital requirements
- Equity and debt funding may be easier to secure
- Opportunity to build the ideal team and culture
- Chance to disrupt the market as a new entrant
Cons of a startup
- No existing brand awareness or customers
- Cash flow is delayed until revenue is built
- Higher likelihood of failure in early years
- No established systems, requiring everything to be built from scratch
- Much higher time commitment in the early years
Assess your individual skills, tendencies and risk appetite to determine if buying an established business or starting your own venture aligns better with your entrepreneurial goals.
What Type of Business Is Right for You?
The first step is to identify what kind of business is the best fit for your skills, interests, experience and financial situation. Key factors to consider:
Industry: What industry do you have experience in or are passionate about? Focus your search on businesses in sectors that play to your strengths and interests.
Size: The size of the business will impact everything from your financing needs to the day-to-day time commitment. Consider what size operation you can realistically manage.
Location: Look for businesses in locations convenient for you or in markets with growth potential in your chosen sector. Can you effectively manage remote/multi-location businesses?
Initial investment: How much capital can you devote to the purchase and early operations? Factor in purchase costs plus any repairs, upgrades or smooth ownership transition.
Financial health: Look at both current profitability as well as growth potential. Be conservative in your estimates when taking over an existing business.
Franchise vs. independent: Buying a franchise gives you an established brand, systems and support but less flexibility. An independent business offers more control but less guidance.
Lifestyle factors: How much time do you want to devote to running the business? How hands-on do you want to be with daily operations?
Assess your skills, resources and lifestyle goals against different businesses for sale to identify the most promising opportunities.
Where Can You Find Businesses for Sale?
Once you determine the characteristics of the ideal business for you, it’s time to search for potential acquisition targets that match your criteria. Some places to find businesses for sale include:
- Business brokers: Brokers can provide listings of businesses in your desired industry, location or price range. They often represent both buyers and sellers in transactions.
- Online marketplaces: Websites like BizBuySell.com and BusinessesForSale.com let you browse thousands of businesses for sale based on detailed search criteria.
- Networking events: Attend local chamber of commerce and industry events to connect with business owners looking to sell their companies.
- Word of mouth: Let your friends, colleagues and advisors know you are seeking a business to purchase – they may know of owners looking to sell.
- Direct approaches: Research businesses you admire in your sector and reach out to the owners to see if they are open to selling. Many successful deals start through direct buyer-seller conversations.
- Auctions: Keep an eye out for business liquidations and auction listings which sometimes include full turnkey businesses.
Pursue multiple avenues to increase your chances of finding the right business at the right price. Sign up for alerts and newsletters related to buying businesses. With persistence and a focused search process, you can uncover promising acquisition targets.
Why Is the Business Owner Selling?
When evaluating potential businesses to purchase, it’s critical to understand the owner’s motivations for selling. This can uncover any problems or opportunities for you as the buyer.
Some common reasons owners sell include:
- Retirement: Many owners look to sell when they are ready to retire and want to transfer the business to new ownership. This can present a smooth transition.
- Burnout: Running a business can be grueling. Some owners sell due to fatigue and a desire for change. Ask about their experience to date.
- Financial problems: Poor financial performance could motivate an urgent sale. Look carefully for signs of struggles.
- Partnership issues: Disputes between partners sometimes necessitate a sale. Make sure problems are resolved.
- Health issues: Health setbacks result in some owners needing to sell their business. See if operations can continue smoothly.
- Relocation: A move or immigration can lead owners to part with their businesses. Often the businesses are functional and profitable.
- Other ventures: Sellers may be ready to move on to new projects and opportunities. See what they plan to pursue next.
Understand if the sale is opportunistic or distress-driven, and what support the current owner can provide during the transition process. This context will inform valuation, due diligence, negotiations and integration planning.
How Much Can You Afford to Spend?
Before you get too far in the search process, determine your budget and spending capacity for a business acquisition. Key costs to factor include:
Purchase price: This will be determined through financial analysis and negotiations with the seller. Be conservative in what you can afford.
Down payment: Many lenders will require a 20-30% down payment. Have this amount ready from your own funds.
Working capital: Estimate 3-6 months of operating expenses to keep the business running post-acquisition.
Upgrades/repairs: Old equipment, systems or facilities may need replacement or repairs for the business to thrive.
Due diligence: You will incur costs for valuations, legal review, inspections and accounting. Budget at least $10,000.
Inventory: Provide for new inventory and supplies to keep the business operating after you take over.
Transition costs: Marketing, branding, integration expenses will help the transition go smoothly.
Account for all one-time and recurring expenses, and be realistic about how much you can invest from savings or external financing. This will define your acquisition budget and help focus your search.
What Is the Process for Valuating the Business?
Determining an accurate and supportable valuation of the business will be key to both negotiations and obtaining financing. Business valuation is complex. Work with experienced professionals to value the business based on:
Discounted cash flows: Project future revenue and profitability based on historical financials and reasonable growth assumptions. Discount these cash flows to determine a net present value.
Comparable transactions: Look at the sale price of recent transactions for similar businesses to get valuation benchmarks. Adjust for differences.
Asset valuation: Add up the market value of all the tangible assets including equipment, real estate, inventory and accounts receivable.
Earnings multiples: Apply an earnings multiple typical for that industry against the verified annual profits of the business. Multiples usually range from 2-10x.
Owner compensation add-back: Add back any excess owner compensation expenses to normalize the true earnings power of the business.
Be sure to account for one-time add-backs like inventory accumulations or losses. Have an accountant review key assumptions. The right valuation will give you confidence during high-stakes negotiations with the seller.
What Financing Options Are Available?
With a business acquisition, the purchase price is just one aspect of financing required. You also need funding for operations, improvements and the transition. Explore financing from these sources:
Banks: Banks can provide traditional small business loans or SBA-backed financing. Rates and terms vary greatly. Strong business fundamentals are key.
Owner financing: Many sellers provide owner financing because they believe in the business and want to support the transition. This can get deals done.
Partners: Bringing on an investment partner can provide the capital needed to purchase and operate the business. Make sure you see eye-to-eye.
Crowdfunding: Funding from a large pool of investors is gaining popularity. Offer perks and keep backers excited.
401(k) funds: Some owner retirement funds can be directed into a business purchase through a ROBS plan. Proceed with caution.
Grants: State/local programs occasionally provide grants for business transfers and jobs creation. Terms are usually favorable.
Venture capital: Equity financing from VCs may work for tech/growth plays. Expect to surrender control and payback multiples.
Pursue multiple options to develop a funding plan that works for your deal. A mix of debt and equity with reasonable terms will position you for success.
What Legal, Financial, and Operational Due Diligence Is Required?
Before completing a purchase, you must conduct detailed due diligence on all aspects of the business. This will validate the valuation and uncover any issues. Key areas to analyze in depth include:
Financial records: Review historical financial statements, tax returns, sales figures, profit margins, debts, liabilities, contracts, and projections. Look for inconsistencies.
Legal compliance: Ensure compliance with all laws and regulations for the industry. Check permits, licensing, safety inspections, union agreements and trademarks.
Employee records: Review employee files, organizational charts, job descriptions, payroll, retirement plans and personnel policies. Outline any changes.
Customer data: Verify customer lists, contact info, service/sales records, contracts, retention rates and referral sources. Understand the client base.
Physical assets: Inspect facilities, production lines, equipment, furniture, company vehicles and inventory first-hand. Evaluate condition and usefulness.
Digital assets: Audit company websites, social media, online reviews, analytics, IT systems and data security protocols. Identify needs.
Suppliers and vendors: Meet with key suppliers and service providers. Validate terms and conditions. Assess other options.
Insurances: Review insurance policies for coverage gaps or overpayment. Seek quotes for bundled policies offering optimal coverage.
Use experienced professionals like lawyers and accountants to assist with due diligence. The goal is to minimize surprises and feel confident about your planned investment.
How Do You Negotiate and Finalize the Sale?
You are now ready to begin purchase negotiations:
- Make an offer: Based on due diligence and valuation, present your offer and terms sheet to the seller. Be ready to discuss details.
- Negotiate patiently: There is usually a round of counter-offers and information exchanges. Stay calm, listen and respond.
- Get seller financing: Request favorable seller financing if possible. This builds goodwill and trust during the transition.
- Review contracts thoroughly: Have an attorney carefully review all purchase contracts before signing. Ensure language protects your interests.
- Agree on transition plan: Discuss timelines, transition responsibilities, training schedules and introductions to staff, vendors and clients.
- Close the deal: Finalize transaction documents, make down payments, secure financing and transfer assets/licenses. Celebrate and get to work!
The negotiation process can be complex and emotional on both sides. Stay focused on objective valuations and legal/financial protections. With good prep work, you can negotiate effectively.
What Is the Process for Transitioning Ownership and Integrating Operations?
The work does not stop once you sign the papers and become the new owner. A thoughtful transition plan is key to getting off to a strong start. Key aspects to consider:
- Announce the change: Formally announce the ownership change and your future plans to employees, customers and vendors. Emphasize continuity.
- Meet staff: Hold office hours or informal events to meet the team. Provide reassurance on job security and hear out concerns.
- Review systems: Dive into current systems, processes, policies, reporting structures and workflows. Look for needed improvements.
- Analyze financials: Review books regularly to understand cash flows, profit centers and cost drivers. Tweak budgets if needed.
- Upgrade critical elements: Invest in improvements that will provide the best ROI like new equipment, a refreshed brand, or better inventory management.
- Learn from the prior owner: Schedule meetings with the previous owner to understand insider knowledge that will help you succeed and avoid pitfalls.
- Stay customer-focused: Reach out to key accounts to reinforce the commitment to quality product/service. Monitor satisfaction closely.
The more aligned your leadership and direction, the faster employees and customers will embrace the new ownership. Use the momentum of change to strengthen all aspects of the business.
Conclusion
Buying an existing small business can be an attractive entry point into entrepreneurship for many professionals. Take the time to identify a promising, well-aligned business opportunity and proceed through the proper steps of valuation, due diligence, financing and transition planning. Leverage experienced advisors and legal counsel to guide you through the process. With patience, persistence and care, you can turn the dream of business ownership into reality and look forward to being your own boss.
