How to buy a business like a total pro
Many small business owners started with the dream of founding their own company. But this isn't the only way to become a business owner. Finding existing businesses for sale and purchasing one that interests you is a perfectly valid approach. But first, you need to know how to buy a business.
The process of business acquisition allows anyone to become an owner without starting a new business from scratch. But that doesn’t mean it’s easy. Buying an existing business is complex, and there are several steps to take before making the giant leap into business ownership.
To make sure you're ready for this big, liberating leap, let's take a look at the difference between purchasing a business vs. a franchise, who should buy a business, and how you can buy one yourself.
Buying a business vs. buying a franchise
On the surface, buying a business is similar to buying a franchise. Both give you the chance to be a business owner, and each provides the freedom to grow and operate a company. But the similarities end there.
When you're buying a business, you may be purchasing a number of things depending on the sales agreement. In some cases, a business sale involves the business location, intellectual property, website, existing customer base, and even the employees.
Other business sales can involve a single location, limited use rights, and other considerations. Furthermore, if you’re acquiring an online business such as an ecommerce brand or website, the sale might include software subscriptions, grandfathered plans, subdomains, and more.
Franchise agreements vary, but they typically involve acquiring a single location that operates underneath a larger brand. Franchises will usually supply branding and marketing guidelines, offer training support and assistance with running the business, and limit what you can and can't do as a business owner.
Unlike buying a standalone company, buying a franchise is an individual location of a pre-established business with corporate-mandated restrictions.
How to buy a business in 7 steps
Buying a business is an involved process that can go a number of ways. While you can't control every aspect of a business purchase, you can control how prepared you are. With these tips, you can go into a business sale prepared, aware, and able to avoid any potentially bad deals.
1. Establish the basics
Before you start shopping around, establish a few basics:
- The type of business you want: Think about the kind of business model you'd like to run, or the industry you want to be in. Are you looking to sell to customers or other businesses? Do you want to run a restaurant? Are you wanting to take over an online shop? These questions will help narrow your search.
- Location limitations: If you're buying an online business, location isn't a big concern. But if you want to buy a physical operation, think about whether you're willing to move or you want something local.
- Budgetary concerns: Business purchases aren't cheap, and neither is real estate, equipment, employees, or anything else you need to run a company. Set a hard budget early on so you can temper your expectations and narrow your search.
- Relevant experience: Think about your own professional experience and how this might help you run a business. For example, if you have extensive sales experience, perhaps buying a small retail store is the right move for you.
Once you've thought about the above details, you can focus your search and have a better idea of what you want to purchase. Then, you can think about financing.
2. Explore your financing options
Budgetary constraints and general financing are major hurdles to purchasing a business. Reviewing your financing options as early as possible will help you get the most accurate budget possible before you begin your business hunt.
There are a few starting points when it comes to financing. The Small Business Administration (SBA) is a great resource for small business owners and can even help you find an SBA loan. An SBA loan isn't offered by the SBA itself, but through partnerships with other financial institutions.
Next, you can reach out to local banks and credit unions to look into small business loans. Knowing what term loans you qualify for and what kind of interest rates you can expect will give you a concrete idea of your purchase price range.
3. Find a business for sale
With your basics ironed out and a price in mind, it's time to find a business for sale.
Many sites, like bizbuysell and bizquest, allow you to browse businesses for sale from around the world. These marketplaces are especially great for those who are willing to move or run a business from another location.
You can also find businesses for sale on local social media groups. For example, many startup groups and small business groups on Facebook are excellent resources. Even if nobody has posted a business for sale, you can go into these groups and ask around — you never know what you'll find.
Lastly, don't neglect your local network. Ask your friends and family if they know anyone selling a business, and tap into your LinkedIn network. You might be surprised to learn you have an immediate connection to someone trying to sell their business.
4. Speak to the current owner
Once you identify a business that interests you, reach out to the current owner. Have an informal discussion and get to know them. Ask about their established customer base and what kinds of people like to do business with them. Doing so will give you a better idea about whether you'll be able to understand and sell to this audience.
You should also ask the owner about their experience with their market, industry, or niche. Be sure to take note if they seem stressed or unsure when talking about their business performance and the industry as a whole.
5. Perform due diligence
After identifying a business and showing genuine interest, it's time to perform your due diligence. This involves acquiring financial statements, business plans, tax returns, and cash flow statements from the business owner to determine the business’s value.
You should also do some digging on the business and see if they have any kind of negative press or questionable history. Has the owner been involved in anything that's given the company a bad reputation? What are customers saying about the business online? While reputation management can help negate bad press, buying a business with a negative history will put you at a huge disadvantage.
Even if you plan on doing due diligence yourself, it's a good idea to hire a certified public accountant (CPA) for this step. A CPA will be well-versed in business purchases, and help you acquire all of the above documents to ensure everything is sound.
6. Run a business valuation
Before you sign anything, you must understand the value of the business. This is where a total business valuation comes into play.
A business valuation examines the value of intangible assets, intellectual property, real estate, and equipment to determine a fair price for the business. If you run a business valuation and find the asking price is too high, it's time to try talking the seller down or look elsewhere.
7. Consider a business broker
While you can make a business purchase on your own, a business broker can make your life a lot easier. A business broker can handle the acquiring and processing of legal documents, draft a letter of intent, help you perform a business valuation, and ultimately ensure the purchase agreement is sound. A business broker can also assist in negotiations, which is especially useful if you run a valuation and find the owner is asking for too much.
All of this saves you time and keeps you from paying well beyond the market value. Even if you have a significant budget, the last thing you want to do is waste money on a bad business purchase. Keep in mind a business broker will generally charge you a percentage-based fee after the closing of the sale. Still, the cost is often justified by the peace of mind they bring.
Finding the right business
Business buyers aren't just buying a business — they're buying the freedom to run their own company and blaze their own trail. Purchasing a business is a momentous decision, but through research and due diligence, you can find the right business for you, your budget, and your lifestyle.
Take plenty of time and lots of notes as you explore all of your financial options — and don’t write off the idea of a business broker over fear of fees. You want to ensure everything goes smoothly during the process, and proper preparations can ensure this happens. When you set foot or log into your business for the first time, you’ll know it was all worth it.