What if you could own a business without going through the pain of startup costs, finding a brand, and all of the other hassles and headaches of a new business? Many people choose to buy an existing business for just these reasons.
Entrepreneurs should be aware that buying a business comes with its own set of challenges. In this guide, we’ll talk about how to create your plan to buy an existing business. You’ll find tips for how to determine whether a business is a good fit for you and essential process steps for purchasing a business.
We’ll answer some important questions like “What is a surety bond?” and “How can I get the money to buy a business?” We’ll do our best to help you make good decisions as an entrepreneur.
1. Consider why you want to buy a business
Spend some time thinking about why you want to buy a business in the first place. Is it so you can do a specific thing you love? Or are you more interested in opportunities for financial growth? What kinds of businesses would you not buy? The kind of businesses you should look at will be decided by these questions.
Take your personal experience and skills into account. No rule says an accountant with no farm experience can’t buy a poultry farm, but it’s usually a good idea to buy a business that’s at least adjacent to your current career and skills. If you purchase a business far outside your skillset, realize that it will take even more effort to make it work.
2. Find businesses for sale
The internet has made it incredibly easy to find businesses for sale. Numerous online marketplaces exist for selling businesses, so spend some time exploring the various platforms and highlighting prospects that intrigue you. It’s OK to cast a wide net at first—you’ll narrow it down later.
3. Get to know a business and evaluate whether it’s a good fit
The first question you should ask is “Why is this business for sale?” There are plenty of legitimate reasons to sell a business: It might be that the owner is retiring, is starting a different business, or has passed away. On the other hand, the business might have serious problems from which the owner wants to walk away.
- High levels of debt
- Back taxes
- Unsustainable business models
- PR problems
- Outdated assets
- Strong competition
None of these necessarily has to be a dealbreaker, but you must be aware of all these major factors. That leads to the next stage. You’ll need to perform a little detective work on the history and condition of the business.
4. Perform all required due diligence
There’s a long checklist of things you need to know about a business before buying it. The list we provide below isn’t comprehensive, but it covers the most common due diligence elements:
- Licensing and Permits: Check with all relevant licensing agencies to ensure that the business you’re buying has all the licenses and permits it needs. Find out whether you’ll be able to transfer them or will have to apply again. Remember, to get a license you might have to get a surety bond—a legal instrument that guarantees your obligation to your customers and the government.
- Ownership and Organization: Learn exactly how the business’s ownership is structured and its leadership is organized. Get a copy of its articles of organization and understand what kind of legal structure it has.
- Regulatory Compliance: Read up on the zoning and environmental laws that apply to the business and determine whether it complies. Study the costs of bringing it into compliance if it’s not currently.
- Contracts: Does the business rent its building(s) from a landlord? What are its supplier contracts like? You need to know what obligations you might be entering into when you purchase a business.
- Assets and Debts: What does the business own? What does it owe? Assets can include tangible property like real estate and equipment, as well as intangibles like intellectual property. Debts come in many forms, including loans, unpaid invoices, and the dreaded back taxes.
5. Negotiate a price and issue a letter of intent
Next, you need to evaluate the owner’s asking price for the business and decide how to negotiate. Several methods exist to arrive at a valuation for a business, and each model is appropriate for different circumstances and different businesses. Don’t be afraid to compare multiple models and how they differ to get a more holistic picture.
Once the buyer and seller have reached a price they can agree on, the seller issues a letter of intent. This letter outlines the deal’s final terms, including how much the buyer will pay and exactly which assets and liabilities the business buyer will assume.
6. Secure financing
Few people outside the ranks of the ultra-wealthy have the liquid assets to buy a business in cash, so most entrepreneurs will need to secure financing first. These are the most common methods of financing the purchase of an existing business:
- Business Loans: Many people get a loan from a bank when they want to buy a business. Even if you can’t afford a traditional business loan, look into options like SBA loans and asset-based financing.
- Seller Financing: Sometimes, a buyer can finance the purchase of the business directly from the seller. Some sellers may also be open to a leasing arrangement.
- Selling Stock: A company organized as a corporation may finance acquisitions by selling stock in the company.
- Personal Loans: If you have friends or relatives with the means, you may borrow money from them.
7. Close the deal to purchase the business
Once you’ve negotiated a price and a financing structure, it’s time to close the deal. Make sure you’ve got a business lawyer helping you and that you have at least these documents ready to sign when the big moment comes:
- Bill of sale
- Intellectual property agreements
- Non-compete agreement from the current owner
- Lease if the business is in a rented building
- IRS Form 8594 Asset Acquisition Statement