Buying an existing small business means taking on the opportunity to have an established business without starting it from the scratch. More than 500,000 businesses are purchased every year and the number expected to increase in the next few years as baby boomers starting to sell their businesses.
Another benefit of buying an existing business is that you don’t have to bear the pain points and costs of starting a new business. However, there is a long and complicated journey from buying a business to closing new deals.
Before you jump into the quest of buying a business, there are certain things you need to understand as a business owner to avoid buyer’s penitence. Here is a detailed guide on how to buy an existing small business along with its benefits and drawbacks.
Buying an Existing Small Business Guide
Once you’ve decided to buy an existing small business, then it’s essential to ensure your selection is perfect for you. For starters, choose one you’re more passionate about and have the knowledge and little experience so you can easily manage it. Also, knowing what questions to ask while buying a business is also important when making your choice. Here is a step-by-step guide to help you get started:
Step 1: Assess What Business Type Suits You
Start with assessing the types of businesses you can choose. Concentrate on the most important elements like your desires, interests, abilities, and knowledge. Buying a business that coincide you’re your likeness and experience surely help put on the road to success.
For instance, if you’ve been an electrician at a service station for some years, and decided you’d like to start your own service station. Or maybe you’ve been working on an idea for a long time that’s now trending in the industry. In all such cases, who better to buy the business than someone who knows it as familiar as you do?
While buying a business for the sole purpose of financials alone, you should also familiarize yourself with the business’s extraneous goals as well. To conclude, the more informed and acquainted you are with the business type, products or services, clienteles, and industry trends, the more inventive and effective your new ideas will be.
Step 2: Look for Businesses on Sale
There are abundance ways to look for business on sale that fits your criteria. Here are few places to get your search started:
- Online business marketplaces
- Craigslist ads
- Classified newspaper ads
- Network of small businesses
- Meetups or industry conferences
- Business brokers
Step 3: Find Out Why an Existing Business Is on Sale
There could be many reasons why an existing small business is on sale and this includes a business owner decision of retirement or it may be a fundamental problem. The key here is to understand the business you’re about to buy is why on sale and exactly why it’s not working for their current owners.
You can ask the current owners about the challenges they’ve faced, how they overcome the problems, and how those efforts progressed. While having a conversation with the current owner, ask yourself, “Am I capable to meet these challenges with better results?”
Before making a decision, ensure you properly understand the existing business challenges, failures, and upcoming opportunities. You also ask existing customers, employees, nearby businesses, to get an honest view of how the existing small business is performing.
Step 4: Zero in Your Business Choice Based on Your Resources
The next step is to finalize a business based on your requirements. You’ve considering many different businesses, but now it’s time to zero in on the best option based on your budget and resources.
Your plan of buying an existing small business should include the calculation of your ideal business size, place, sales, workforce, and cost.
Don’t just think of money spending only. Instead, look at the big picture: your time and commitments you have planned to invest to buy the business. The resources you’ll have to utilize largely depends on your industry experience and the people and processes already engaged. For example, if you are buying a retail shop but lack technical skills, you will need to spend time learning the industry or hire experts.
Step 5: Due Diligence Matters
Perseverance is important since you need to have all the needed information before buying an existing small business; being the most important step towards becoming an entrepreneur. Working with an accountant and attorney to ensure you have all the essential information at hand while moving forward. You should know the business’s financials as well as a legal negotiator to help you understand the process.
An accountant and attorney will surely help you collect and analyze the documents, files and agreements needed to make an informed buying decision. Here is a checklist of those must-have documents while considering whether to buy an existing small business:
- Business Licenses and Permits
- Organizational Paperwork and Certificate of Good Standing
- Local Zoning Laws
- Environmental Regulations
- Letter of Intent
- Contracts and Leases
- Business Financials & Returns
- Organizational Chart
- Status of Inventory, Equipment, Furniture, and Building
- Other Important Documents
Step 6: Evaluate Business Market Value
The next step is to agree on a price for the business. At this point, many business deals disintegrate because both buyers and sellers often have different values on the business based on their pricing model, and many factors influences a business value.
This can be easily resolve by getting help from an independent business valuation professional to determine the business’ value. You can find such valuation services online as well and roughly cost around $2,500 to $5,500. You can also save some money in the long run by coming up with a good evaluation.
Use these three approaches to evaluate an existing small business while buying:
- Earnings Approach
To buy an existing small business that is making profit or have an optimistic projection of earnings.
- Assets Approach
To buy an existing small business that is not making profit or to buy venture capital businesses like manufacturing and transport.
- Market Approach
Settling on a price based on the above two approaches.
Step 7: Get Business Funding to Purchase a Business
Once you finalize the price for business, it’s time to get funding to make the purchase. There are many ways to secure capital to purchase a business. Here are six best options to finance your exiting business purchase:
- Savings & Help from Loved Ones
Buying a business initially out of your pocket is always an option if you can afford. Certainly, getting help from your accountant before exhausting all your savings is a sensible approach. Keep in mind that don’t use all the money to make the purchase since running a business requires capital, too. You can also borrow money from your loved ones to make the purchase. While choosing help from your family members, you should understand the tax implications for family loans. Before taking cash in hand, make sure you have the family loan terms in writing and follow the IRS rules.
- Seller Financing
It’s a real estate agreement in which the seller (as a lender) manages the mortgage process. This way, you will get guaranteed income forthcoming based on your plan. Seller financing has its rules, specifically if you plan to use a different debt financing type. For instance, if you’re planning to get an SBA loan and put sellers on hold, meaning they agree to wait until you repay the SBA loan. Some sellers might be willing to trade in assets like equipment, furniture or a vehicle for a lower price.
- Get into Partnership
Buying business with a partnership instead of buying it solo will help you divide the payments for the business while you own that business. This not only help to cut costs, but can also benefit from the experience and skills of the person you bring on board. Just make sure you have a proper partnership agreement in place, so it won’t create any issues afterward.
- Sell Company Shares
Selling company shares can get you a big discount that comprises 50% or 90% of the business price by some measures. If possible, selling non-voting stock is best in order to retain business ownership. Before selling company shares, make sure you have organized the business as an S-corp or C-corp.
- Lease the Business
Leasing an existing small business instead of buying it outright is another option to make the big purchase once you’re able to afford it. Explicably, not all sellers will agree to this option however, if you’re comfortable with leasing—even it may cost more eventually—you might as well ask.
- Debt Financing
While buying a business, you will have many documents to approach a lender for financing. Most lenders usually require detail documentation to review your application including financial statements, tax returns, cash flow analyses, property valuations, and much more. This detail documentation will make your business acquisitions an ideal contestant for funding because lenders aren’t willing to work with risky startups.
In addition, if you’re looking for small business loans, here are some potential options to help you buy a business:
- Bank Term Loans
With a traditional bank term loan, you can borrow upfront a fixed amount ranging from $25,000 to $500,000 over a predetermined period of one to five years then repay it with interest ranging from 7% to 30%. Getting a term loan is an ideal borrowing option for buying an existing small business: You make an instant purchase with the cash and repay it back over time once the business start generating money.
- Small Business Administration (SBA) Loans
An SBA loan is the most affordable and low cost funding option for small businesses. SBA doesn’t lend directly instead, it guarantees up to 85% of the loan amount that you can avail from a bank or an alternative lender. They offer cash up to $5 million, with terms up to a decade or more, and interest rates in the single digits. SBA 7(a) loan program is the best option to buy an existing small business. This loan program works similar to a term loan, with cash upfront at a set repayment schedule.
- Asset-Based Financing
In asset-based financing, you borrow cash against an asset, which serves as collateral for the loan in case you default. While buying an existing small business, you’ll have a lot of potential assets to use as collateral to finance your purchase. The cost of these loans will be smaller than the cost of a business purchase. You can use equipment, Inventory and unpaid invoices as collateral for your business acquisition.
Get Your Small Business Loan Options
Step 8: Close the Deal
Now you have find the right business, done your due diligence, finalize a fair price, and secure the funding, make sure you have all the essential documents and agreements ready before you make a purchase. Here is list of documents you should have in place:
- Bill of Sale
- Adjusted Purchase Price
- Patents, Trademarks, and Copyrights
- Non-Compete Agreement
- Consultation/Employment Agreement
- Asset Acquisition Statement
- Bulk Sale Laws
Benefits of Buying an Existing Small Business
Here are some of the benefits of buying an existing small business:
- Proven business concept
- Low operating costs
- Easier to secure funding
- Intellectual property Is negotiable
Drawbacks of Buying an Existing Small Business
Here are some of the drawbacks of buying an existing small business:
- Higher upfront purchasing costs
- Unfamiliarity with the details
- Risk of a hidden problem
We hope after reading this guide, you will have a proper understanding of buying a business carefully, vigorously, and successfully. However, there’s so much involved in the process of buying a business, and you’ll be compensated when you’re finally running it. Good luck with your business endeavors!