If you dream of owning your own business but do not want to start a new one, buying an existing business may be the way to go. This is a guide to purchasing an existing business including:
- What to consider
- Why people sell businesses
- Determining the right business for you
- How to find and purchase an existing business
While you are looking for your potential purchase, begin building your acquisition team by identifying a reputable CPA, banker, and business attorney.
Considerations for Buying an Existing Business
There are pros and cons to building a new business and in buying an established one. As far as the downside of buying a business, a higher up-front purchase cost may be your biggest concern, but there are other considerations on that side as well.
An existing business may come with existing debts that cannot be collected or, alternatively, come saddled with debt through poor management. You may inherit employees you did not select and who are resistant to change.
You can also spend quite a bit on evaluating businesses if you comparison shop. For each business, you need to look at the health and building inspections plus a financial analysis for each.
On the other hand, an existing business represents less risk. You have more information to help you determine the health of the business.
- Profit and loss statements instead of estimates
- Sales history
- Demonstrated market and pricing
You may also acquire valuable copyrights, patents, or other intellectual property. If you are dealing with tangible assets, you may even have existing inventory to work with.
Why Do Owners Sell Businesses?
It’s tempting to believe it’s because the business is failing. More often than not, though, it is simply a decision of the owner to move on for a variety of reasons:
- Desire for a new lifestyle
- Bored with running a business instead of creating one
- Excited about a new idea
- Ready to retire
In other words, innocuous issues that everyone deals with throughout their working lives.
Determining Type of Business to Purchase
Think about the following:
- Lifestyle (yours)
Do you want to move somewhere else for the business or stay where you are? What size business do you want to operate - small family business or a large enterprise?
Consider the industry experience you have or whether you want to expand an interest from a hobby to a business.
Finally, do you want to travel, work odd hours, or have a typical Monday through Friday workaday schedule?
All of these are major decisions you should make before looking into businesses for sale.
Researching Available Businesses
Do not start with Google. The internet is rife with scams, illegitimate business offerings, and TMI (Too Much Information).
Let friends and associates know what you are doing. One may be ready to sell a business or know someone who is. Work your way outward to business contacts. Speak with customers, owners, and vendors of the type of business you want to operate.
Now you may approach the computer to do careful research if you have not found anything available. As you create a short list of available businesses, take a look at the Better Business Bureau website for ratings and complaints against the business. Get a feel for the general perception of the industry in the area.
Also, consider the future outlook for the business and find out why it is for sale. Your business must control enough market to be profitable; speaking to vendors can help you determine the regional need.
A business broker may be able to help by:
- Prescreening businesses
- Helping you determine the type of business you want
- Negotiating the terms of sale
Understand that a business broker works on commission (5% to 10%), just like a realtor. Do not be pushed into making a fast decision.
Do Due Diligence
You have found a potential property. Now you can say, “Acquisitions Team, Assemble.”
You need an independent valuation of the company you want to purchase. How financially healthy is it? How much is it worth? Does the owner have relationships that will not transfer their business to a new owner?
Your accountant can evaluate the business financials for legitimacy and legality. You are also taking on a large liability; run a credit check on the owner to make sure you are inheriting massive debt or other problems.
Check for all the licenses and permits as well as zoning requirements to see if all is in order.
Unless you have a large nest-egg, you need a way to pay for the business.
The best method of financing is seller financing. The seller agrees to allow you to make regular payments plus interest over time. Another traditional approach is to obtain a business loan from a bank.
Banks actually like existing businesses better than new ones. They come with a track record. However, your personal finances are still a major part of their decision to make the loan.
You could go with an angel investor or venture capital. You would be partnering with someone in your business, which means you lose some profit. On the other hand, if the business fails, you are not stuck with the debt.
Making the Purchase
All major purchases come with piles of paperwork. For a business sale you are looking at:
- Letter of Intent with the proposed price, terms of purchase, and conditions of sale
- Confidentiality and non-compete agreements
- Contracts and leases
- Financial statements and tax return from the past three to five years
- Important property documents and customer lists
- Sales agreement defining the business assets and property you are purchasing
You are well on your way to purchasing an existing business. You are selecting the right business for you, and you have done your due diligence; all the paperwork is in order. You have funding and contract.
All that is left is to close the deal, make all the necessary transfers, and go to work in your new business.