Buying an existing business can be an exciting endeavor for aspiring entrepreneurs. Taking over an already established company allows you to hit the ground running instead of building something from scratch. However the process of buying a business is complex and requires careful planning and execution. In this comprehensive guide, I’ll walk you through the 12 key steps involved in purchasing an existing business.
Step 1: Decide What Type of Business You Want to Buy
The first step is to get very clear on the type of business you want to acquire. Think about your skills, interests, experience, and goals. Trying to buy a business in an industry you know nothing about will make the entire process much more difficult. Spend time researching different sectors and business models to find the best fit. Some key factors to consider are:
- Industry profitability and growth potential
- Your personal passion and expertise
- Desired size/revenue
- Ideal location(s)
- Number of employees
- Level of involvement required
Once you’ve narrowed your criteria, you’ll have an easier time identifying potential acquisition targets. Be flexible but try to hone in on businesses that closely match your vision.
Step 2: Search for Businesses For Sale
Now it’s time to start your search. Cast a wide net using business for sale platforms, brokers listings word-of-mouth, and other sources.
- Online marketplaces like BizBuySell and BusinessesForSale.com
- Local business brokers
- Newspapers and classifieds
- Small business owners and entrepreneurs in your network
- Franchisors
- Industry events and conferences
Vet each prospect carefully and shortlist ones that pique your interest. Avoid choosing based on price alone – dig deeper to understand all aspects of the business before deciding if it’s a good fit.
Step 3: Understand Why the Business is For Sale
It’s critical to understand exactly why the owner is selling. Retirement or lifestyle reasons are ideal. However, financial struggles, excessive debts, or other problems could be red flags.
Have an open and honest conversation with the seller about their motivations for selling. Ask questions like:
- What challenges have you faced?
- What have you done to try to address those challenges?
- Why do you feel the business would thrive under new ownership?
Pay attention to their responses to spot any warning signs early on.
Step 4: Narrow Your Options and Pick a Top Choice
Once you’ve identified several promising prospects, it’s time to narrow it down to a single top choice. Compare the businesses to your ideal criteria, growth goals, and budget.
Weigh factors like:
- Performance – revenues, profits, growth
- Staff and operations
- Suppliers and inventory
- Current customer base
- Potential risks or liabilities
Choose the business that most closely fits your acquisition strategy. You’ll dig deeper through due diligence later.
Step 5: Determine a Fair Valuation
Now that you’ve selected a business to purchase, you need to determine its fair market value. This will inform your initial offer and set the stage for negotiations.
Valuing a business is complex. As a starting point, look at:
- Revenue and profit multiples
- Discounted cash flows
- Assets and liabilities
- Industry benchmarks and comparables
Or, hire a professional business appraiser for an objective valuation. Get multiple opinions to land on a reasonable price range.
Step 6: Make an Initial Offer and Begin Negotiations
Once you’ve set your valuation expectations, submit an initial non-binding offer to the seller, either verbally or in writing. Assume your offer will be counter-offered – be prepared to negotiate to arrive at an equitable price.
Key deal terms like payment structure, contingencies, and timeline will also be negotiated. Work through these details before agreeing to move forward.
Step 7: Sign a Letter of Intent (LOI)
When the key business terms are agreed upon, document everything in a Letter of Intent (LOI). This non-binding agreement outlines the proposed deal and your intent to move forward.
Your LOI should include:
- Purchase price and payment details
- Timeline for due diligence
- Contingencies and conditions
- No shop and confidentiality clauses
While not a final contract, a signed LOI shows your commitment as a serious buyer.
Step 8: Conduct Thorough Due Diligence
Due diligence is a crucial step. This is when you’ll gain access to the business’s financial, legal, operational and other records. Analyze these details closely to confirm the valuation and uncover any deal-breakers.
Gather and inspect documents like:
- Tax returns and financial statements
- Lease agreements and contracts
- Proprietary information like customer lists
- Legal issues or pending litigation
- Equipment/asset details
Spend adequate time in this phase – don’t rush it or you may overlook critical data.
Step 9: Secure Financing
Unless you’re paying 100% in cash, you’ll need financing for your acquisition. Shop around with banks, online lenders, and other sources. Seek pre-approval so your funding is ready when needed.
Explore financing options such as:
- SBA loans
- Traditional bank loans
- 401K business financing
- Seller financing
- Rollovers
- Crowdfunding
Compare terms and conditions to find the best fit for you.
Step 10: Finalize Purchase Agreement
If due diligence checks out, start working on the purchase agreement – the official, legally binding contract to finalize the acquisition. Hire an experienced attorney to ensure your interests are protected.
The agreement will include:
- Final purchase price and payment schedule
- Precise terms and conditions
- Representations and warranties
- Allocation of liabilities
- Closing timeline and requirements
Leave nothing to chance – make sure every detail is addressed.
Step 11: Close the Deal!
This is it! presuming due diligence and the purchase agreement are finalized, closing day is here. You’ll provide necessary funds and documentation, the seller will do the same, and the business becomes yours!
On closing day:
- Final walkthrough
- Transfer of keys, assets, supplies, etc.
- Employees and vendors notified
- Licenses and permits transferred
- Bank accounts switched
- Loan funding completed
Transition plans should start immediately so operations continue smoothly.
Step 12: Begin Your Future as a Business Owner!
It’s official – you now own an established business! This is an exciting milestone, but your real work is just beginning. Immerse yourself in the business to learn its nuances inside and out. Assess strengths to leverage and weaknesses to improve.
In your first months as owner:
- Meet staff and build relationships
- Analyze financials and operations
- Set goals and strategy
- Review branding, marketing, and messaging
- Observe day-to-day processes
Stay agile – you may need to pivot as you learn more. Be patient, persistent, and passionate!
Buying an existing business is complex but rewarding for driven entrepreneurs. Follow these 12 steps to set your acquisition up for success. With careful planning, tenacity, and a bit of luck, your newly purchased business will be on the path to continued prosperity and growth!
How To Buy An Existing Business
One key aspect of preparation is to establish the target location.
The business acquisition process begins with adequate preparation. This is where you identify the most appropriate type of business to pursue based on your specific needs, interests, and skills.
The first consideration is usually the business industry, and this is determined by your work experience, passions, competence, and expertise. You ought to look into an industry that is not only familiar, but also matches your skills, interests, and capabilities.
Someone with a background in catering, for instance, might consider venturing into the hotel industry. That means they’ll need to narrow down their business options to food and hospitality-related establishments like restaurants, cafes, and coffee shops.
Don’t stop there, though. For additional specificity, it’s always a good idea to factor in even the physical and financial attributes.
You could, for example, take into account your preferred business size, type of entity, number of employees, business structure, and location. This is how many solopreneurs end up prioritizing small businesses with well-established outlets in densely-populated areas.
Please keep in mind, however, that while high-traffic locations tend to have the strictest zoning laws, they typically attract the highest selling prices. So, you’ll need a fairly sizable budget to pursue businesses in prime commercial areas.
Once you’ve selected your preferred industry, type of business, location, and business size, you can begin to actively search for businesses in the area that meet your preferences. The goal here is to pick out the best prospects from a variety of listed businesses.
One of the places where you could easily source for that is online business marketplaces. This is a special category of digital platforms that act as bazaars for connecting business buyers with sellers.
Bizbuysell.com and other business-for-sale sites, for instance, offer thousands of businesses for sale, with listings across all the popular business categories. You just need to specify the location plus the type of business you have in mind, and the system will pull all the available options from their extensive databases.
Here’s a word of caution, though. While such marketplaces make it easy for small business owners to connect with buyers, they don’t exhaustively screen their listings. They leave all the due diligence to buyers, which only complicates the business acquisition process.
To minimize the risks, you could appoint a business broker to do the sourcing on your behalf. They’ll keenly evaluate all the available options to identify the right business options, after which they’ll even proceed to negotiate the sale agreement with the current owner.
And that’s not all. Here at Beacon, we’ve managed to take it up a notch by supplementing our business brokerage services with an extensively-screened online business marketplace. This holistic approach has streamlined the business selection and purchase process, allowing buyers to navigate the transactions as efficiently as possible.
Other than that, you could try sourcing for potential businesses from local CPAs, attorneys, franchisors, Craigslist ads, small business owners, plus friends and family.
Step 3: Initial Diligence
Review the company’s performance from its financial documents.
When you finally pick out the businesses that meet your criteria, you ought to investigate them further before more seriously considering a purchase. The technical term for this is “initial diligence”, and it’s intended to act as some form of preliminary business screening.
By the time you’re done, you should have discovered more about each business’s successes, failures, strengths, weaknesses, opportunities, and challenges.
One particularly critical parameter that you should prioritize is the profitability and overall value of a business. It’s possible to work out the selling price of a business from its financials – but you’ll need the help of an accountant, M&A advisor, or business broker.
The information itself can be retrieved from the company’s audited cash flow statements or Profit and Loss (PnL) statements. You should, in particular, pay close attention to its revenues, cash flow, working capital, add-backs, Sellers Discretionary Earnings (SDE), accounts receivable, plus the corresponding accounts payable.
But, don’t restrict yourself to the financial statements. It’s always advisable to review even the possible liabilities, inventory levels, customer lists, incorporation information, employee policies and contracts, insurance coverage, business plan, real estate leases, etc.
For increased accuracy, you can turn to Beacon to crunch the numbers for you. Our business valuation process takes into account over 150 relevant data points in providing you a comprehensive valuation report.
Buying a Business (For Beginners) | Jonathan Jay | 2023
How do I buy an existing business?
Here is your buying an existing business checklist: 1. Figure out what type of business you want to buy Narrow down your passions, interests, skills and experience. You’ll be happier if you buy a small business that dovetails with what you already like and have some experience in.
How do you buy a company?
Although there are various creative ways to buy a company, there are three basic business structures that are the most common: asset purchase (you buy a company’s assets only). If you’re buying a business, you’re likely looking at an asset or stock purchase. With a stock acquisition, you’re purchasing the company’s assets and liabilities.
How do I choose a business to buy?
Therefore, before you begin searching for an existing business to buy, you have to start by thinking about the kind of business that you want to buy, one that would be suitable for your unique needs, characteristics and financial goals. Some of the things you need to look at when deciding what type of business you should buy include… 1. Location
How do I buy a small business?
Whatever your reason, the process of buying a small business follows the same pattern. From finding and evaluating the right business, to closing the transaction, we’ll walk you through the whole process so you know what’s coming. The first step is not just finding an available business, but finding one that’s worth buying.
