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Building a business from scratch isn’t easy. It involves a lot of careful planning and startup costs to get off the ground. For this reason, buying an existing business is a popular choice. In fact, in the next decade or so, it is estimated that 12 million businesses will change hands, with that projection increasing over time as baby boomers reach retirement age.
Before pursuing the purchase of a business, learn important steps to help ensure the process goes smoothly and to avoid potential pitfalls along the way.
Key Points
• Purchasing an existing business offers a variety of advantages, from a proven operation model and trained employees to a pre-existing customer base and supply chain.
• Buying a business may be less risky and costly than launching a startup.
• Establish business goals and ensure they align with the business you choose to buy.
• Research businesses that meet your objectives, and perform a valuation and due diligence to help you when negotiating a price.
• Lenders offer a variety of loan options designed to help individuals purchase small businesses.
Benefits of Buying a Small Business
Buying an existing business may be appealing for the several advantages it has to offer, including:
• Shorter lead time: When you buy a business, you skip the startup process, which can be lengthy in terms of securing financing, finding the right space, developing systems and processes, hiring employees, and building a customer base.
• Historical data: You’ll have access to past data, reflecting the financial history of the business. You can easily see historical trends instead of trying to predict what the costs and revenues of an entirely new business might be.
• Name recognition: An existing business already has customers who know and understand the company and may provide a steady stream of income from day one.
• Supplier relationships: A steady supply chain is critical to the success of a business. An existing business may already have long-term relationships with vendors.
• Trained staff: You may also be able to retain relationships with trained employees who understand how to run the business. Otherwise, hiring and training new employees can be a huge time commitment and a costly part of starting a new business.
• Low risk: The potential benefits mean that buying a business may be less risky than starting one from scratch. That can be a big advantage if you need to seek financing.
Recommended: Small Business Startup Loan
6 Steps to Buy a Business
The basic process for buying a business is the same for many enterprises you may be considering.
1. Identify Your Business Goals
Before you even begin looking for a business to buy, identify what you’re hoping to get out of it. Consider your own interests, skills, and past experience. For example, if you’re highly knowledgeable about landscaping and plant care, maybe you’d like to own a nursery or landscape design business. If you’ve worked at a company for many years and enjoy the business, you might consider buying it if it comes up for sale.
You’ll also want to consider factors, such as how much revenue you’ll need to make to meet your financial needs and goals. Understanding your material and immaterial goals will help you narrow your search.
2. Research and Identify Potential Businesses
Once you’ve decided on your goals and other criteria, you can begin your hunt for businesses that match your needs. Cast your net as wide as possible and search online marketplaces, classified ads online and in print, and local business brokers.
You may also want to build a network of local business owners, business accountants, and business attorneys who may have an ear to the ground when it comes to knowing what companies are for sale or may soon be.
It may also be worth considering becoming a franchise owner. Franchisees buy the right to open a branch of a larger, established business.
Recommended: How to Buy a Franchise
3. Conduct a Business Valuation
Once you find a business you’re interested in, determine how much it’s worth. The seller will likely have a valuation they can share with you, but you may want to get a third-party valuation of your own and see how it aligns. You can hire a professional to value the business, which could cost between $5,000 and $20,000+ depending on how complicated the valuation is.
4. Negotiate the Purchase Price and Terms
Once you have a good idea of how much the business is worth and are sure that you want to buy it, it’s time to negotiate the price. To do so, you’ll usually make a nonbinding written or verbal offer. The seller may accept the offer, or they may counter with an offer of their own.
At this time, you’ll also negotiate the terms of the sale. For example, sellers often prefer a “stock sale” in which business operations continue as they are with a new owner, and you agree to take on any outstanding legal liability. As a buyer, on the other hand, you might pursue an “asset sale” that helps limit your liability.
You’ll also negotiate other terms, such as how much working capital is left in the business to fund daily operations, whether you want the seller to provide any training, and the sale of any other assets.
5. Secure Financing
You may need to secure financing to purchase the business. In some cases, the seller may offer financing, where you make monthly payments to them, including an agreed-upon interest rate. Alternatively, you may seek small business loans from banks and other lenders to help you buy the business, including business acquisition loans designed to help you acquire an existing company or franchise, a large business loan to cover the cost of acquisition, and unsecured business loans that don’t require collateral.
Many small businesses commingle personal assets and business assets, such as a piece of equipment like a truck or a tractor. Equipment financing or a business line of credit can help you purchase the equipment you need to operate and grow the business.
6. Close the Deal and Transition Ownership
Before closing the deal on a business, do the due diligence to find out as much about it as you can. This includes looking at the company’s documents, tax returns, account statements, revenue, employee information, customer information, and existing liabilities.
If nothing troubling comes up in this process, you can close the transaction with a final purchase agreement. When both parties sign, you can set a date to close the deal and have your lender transfer money for the purchase. Funding may go into escrow in which a bank or law firm holds the money until all documentation is finalized.
As the deal is finalized, be sure you have the correct business permits in place so you can continue operating through the transition and beyond.
Recommended: How to Get a Loan to Buy a Business
The Takeaway
Buying an existing business can offer a real advantage to launching a startup. This can include access to historical data, an established customer base, existing supplier relationships, and a trained workforce. The key is identifying your business goals and doing rigorous research. There are also various types of small business loans you can apply for to finance the purchase of your desired business.
Ready to grow your business? SoFi Small Business Loans can give you fast access to the capital you need. Check your eligibility in minutes.
FAQ
What should I look for when buying a business?
Look for the business that meets your personal business goals. Gather as much information as you can about the business, such as its accounts, revenue, taxes, employees, supply chains, and liabilities, to help ensure that the business is the right fit.
How can I finance a business purchase?
Lenders offer a variety of loan options designed to help you purchase a business. These include business acquisition loans, small and large business loans, and unsecured business loans.
What is due diligence when buying a business?
Due diligence is the act of gathering as much information about a business as possible before you buy it. Doing so can help you identify the potential advantages and risks of buying it.
Are there risks to buying an existing business?
There are risks associated with buying a business. For example, if you finance the purchase, there could be the risk that you will have trouble making loan payments in the future. You could also lose existing customers or vendors after the transition or encounter unforeseen problems that you missed during the due diligence process, such as aging infrastructure or technology that needs to be replaced.
How long does it take to buy a business?
Finding the right business to buy can sometimes take years. But once you’ve got one in your sights, the process of completing a sale may take about three to six months.
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