How to Buy a Business

How to Buy a Business

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If you want to enter the world of entrepreneurship without starting from scratch, you may consider buying a business. However, some prospective business buyers aren’t sure where to start.

Luckily, there are business brokers, marketplace sites, and tons of other resources to help you navigate the process. Each business purchase is likely to look a bit different. But understanding the basics can help you at least get started.

To learn more, download the BizBuySell Guide to Buying a Small Business. (Or if you’re selling a business, download the BizBuySell Guide to Selling Your Small Business.)

Why Buying an Existing Business Can Be Better

If you’re interested in business ownership, your two main options are starting from scratch or buying an existing business. Purchasing often provides a head start with things like brand recognition, operational processes, and cash flow.

Depending on your industry, location, and business history, there may already be a healthy customer base of regular buyers. That brand recognition and existing cash flow can essentially give you a head start in your business journey. You don’t have to spend time building that initial foundation.

Existing businesses tend to be a bit more stable than startups. Since they’ve already gone through that initial growth period, there are often fewer startup costs involved. This can eliminate some of the risk that comes from starting a brand new business. Your startup cost when purchasing businesses for sale usually just involve the sales price and minimal other expenses like paying a broker.

Buying an existing business can also be easier logistically. You can eliminate a lot of the trial and error that comes with running a startup. And you don’t have to complete all the paperwork needed to get your business legally in place. Of course, there is still plenty of paperwork involved in buying businesses for sale. But a broker can often help you with this part of the process.

How To Decide on the Type of Business to Buy

There are many factors to consider when buying a small business. You have to look at the finances, potential of the business, and how well it fits with your lifestyle and skills.

On a personal level, start by evaluating your goals for the business. If your goal is to buy a business so you can enjoy more time with family, look into lifestyle businesses that don’t take much time to run. For example, a vending machine business may be more in line with your goals than a full-service restaurant. You can even find some businesses for sale that would allow you to work from home, like online business consulting or dropshipping businesses.

You should also consider your personal skill set when looking into various industries. If you have experience in auto repairs, then a body shop may be a better fit than a plumbing business. There are also many business models that simply require things like strong communication and leadership skills. Make a list of your skills and the industries you’ve worked in (and enjoyed) to narrow down your marketplace search.

From there, you need to look at your budget and how much the business you’re interested in is likely to cost. Businesses with physical locations and lots of equipment tend to be more expensive than those that can be run remotely. So a large manufacturing operation is probably not a great fit for someone on a tight budget. But a carpet cleaning business with just a few pieces of equipment and a truck is likely to be more affordable. Go over your personal budget carefully and review your financial goals to compare listings that you can afford.

How to Search Listings when Buying a Business

Looking for a small business to purchase usually starts with a search on an online business marketplace. Some of these sites are specific to businesses in a particular industry or location. But many offer a huge range of opportunities. Try multiple marketplace sites to widen your search and get the most relevant results. You can even buy a business on eBay, just Google, eBay companies for sale and you will find many listings. You can search by location, keyword, industry, and price to find the listings that are most relevant to your goals. You might even use these tools for initial research to see the basic price range for certain types of businesses in your area.

Before browsing these marketplace sites, narrow down your goals for buying an existing business. Then enter the keyword or industry in the search bar to bring up relevant small business listings. If advanced search features are offered, make sure you set your budget and location as well. From there, you can browse options for the opportunities that most closely suit your interests, budget, and skills.

To begin looking for a business to buy, use the Business for Sale feature on BizBuySell.

How a Business Owner Chooses the Right Candidate

Small business owners who are selling a business want to make sure they choose the right buyer. They likely built the business from scratch and poured tons of work hours into it. So they want to see it continue to thrive under new ownership as well.

Of course, money is one of the largest determining factors in the sale of a business. Owners are only going to consider candidates who are able to meet their asking price or at least get close to it. Aside from the initial purchase price, they may also want to make sure you have some working capital. Even if the business has healthy cash flow, there may be an adjustment period during the owner transition. So having access to a bit extra can help you stay afloat. The exact amount is likely to vary depending on the type of business you buy. Using a net worth calculator will let the owner know exactly what your assets are.

However, business owners are also likely to consider your personal skills and qualifications. Many won’t even consider someone who doesn’t have experience in their specific industry. This is especially relevant for businesses that provide services, like electricians or HVAC companies. But those in industries like marketing, retail, and even food service may also want potential buyers to have specific experience. These qualifications are usually included in business listings on marketplace sites.

Finally, they may also want to make sure that your lifestyle aligns with the business you intend to run. They know better than anyone how much work it takes to run their company. So if you’re a retiree who wants to travel regularly, a restaurant owner who has put in 60+ hour weeks may be hesitant to sell. But if your lifestyle goals seem realistic based on their experience, it can give them confidence that you’re well suited to run the business.

How to Evaluate a Business for Sale

You’ve finally decided on the business you want to buy. Now here are some details you may wish to review before moving forward.

1. Cash Flow

Look at the money going in and the money going out each month. This should include revenue like client contracts and ongoing sales. But it should also include expenses like rent, utilities, inventory, and supplies. Setting up healthy cash flow during the startup phase can be tough and time consuming. So gaining access to these systems that are already in place is one of the main benefits of buying an existing business. You just want to make sure the business isn’t spending money faster than it makes money. So ideally, the business should have more revenue each month than it spends in expenses. And timing those incoming payments to easily cover any bills can help your operations stay afloat. This also may allow the business to turn a profit, or at least have room to do so.

2. Financial Statements

From there, dig into the company’s finances even more. Looking at financial statements should give you an idea of specific expenses, earnings, and assets. This may help you evaluate areas where the business could improve. For example, there may be expenses that can be cut or revenue opportunities that aren’t being maximized. And it can also give you a better idea of why the business is valued the way it is. If the finances paint a positive picture, it may be worth paying a bit more. However, if there are outstanding issues, you might want to walk away from the opportunity or try to negotiate a lower price.

3. Reputation in the Marketplace

An existing business comes with an existing reputation. Even once it’s under new ownership, previous negative experiences may hinder your growth. But positive ones could help you grow faster or at least stay afloat. Look at things like online reviews, BBB ratings, and feedback from people in your community. If customers have had negative experiences, you might want to think twice about purchasing or at least make sure the price isn’t too high. You might even consider rebranding a business like this to disassociate it from those negative experiences. But this process takes money and eliminates some of the benefits of buying an existing business. On the other hand, if there are tons of happy, existing customers, they’re likely to continue purchasing even once you take over. And those who haven’t purchased from the business may also be more likely to do so if they’ve heard positive things.

4. Brand Recognition

The brand name can also make a major difference in a business’s value and viability going forward. If lots of customers have at least heard of the company already, you may be able to spend less on marketing. It may also make it easier for you to get press and benefit from word of mouth marketing as you take over. Again, make sure that brand recognition is mostly positive. If not, you may be better off starting with a little-known brand than doing damage control. But if the company has invested in ads, PR, or community engagement through the years, that can be a major asset to you.

5. Detailed List of Employees

Building a team is one of the most important and potentially difficult parts of creating a new business. So when you buy a business, adopting the existing team may help. This can be a major benefit if the team is skilled, experienced, and willing to stay on under a new business owner. However, employees also represent a major expense. So it’s important to make sure they’re bringing in money and performing their duties efficiently. A full evaluation is likely not possible until the due diligence phase. But early on, you can at least get an idea of the number and types of employees in a business. And you may be able to find out the general cost of the team.

6. Location

Location is one of the main factors that determines business success, especially for public-facing businesses. On the most basic level, make sure the business is located in a convenient location for you. Or in select cases, you may want to buy a business that is location independent, like one that can be run completely online. If you need to welcome customers and/or team members, you also want easy access to things like freeways, parking, or public transit. And for businesses like restaurants or shops, proximity to downtown areas or business districts can dramatically increase foot traffic. Then, of course, you must consider the cost of maintaining the location. These convenient and popular locations can be more costly. But they also tend to come with higher revenues. So weigh this factor along with the business expenses detailed above.

7. Inventory

Some businesses come with a physical inventory of products or supplies. You’ll want to find out how many of these items come with the purchase, where they’re stored, and what condition they’re in. For example, when buying a retail store you should find out the amount of items that have already been purchased to keep shelves stocked. But you should also consider the costs of maintaining that inventory over time. Include purchasing prices and storage. If there are existing vendor contracts in place, that should also play a role. You can’t necessarily lower expenses if there’s a legal agreement in place. Or it may be difficult to do so if all the company’s processes revolve around stocking a specific type of item.

8. Real Estate

Some businesses also come with buildings or property. This is especially relevant when you buy an existing business with a physical office, warehouse, or retail space. Adding real estate to the business transaction likely increases the value. So it can be beneficial as an investment. Even if the actual business isn’t as successful as you’d like, the property is likely to hold or potentially even increase in value over time. Owning the building may also help you keep costs predictable through the years, since you don’t have to worry about landlords raising rent. However, it also usually comes at an extra initial cost and may entail maintenance expenses. So if you’re not up for maintaining the building and covering any associated costs, you’re likely better off buying a business that doesn’t come with a physical location.

9. Equipment and Furnishings

Whether the business space is owned or rented, it may also come with equipment and/or furniture. For example, if the business includes an office, it may involve computers, printers, desks, and chairs. If it’s an industrial facility, it may include custom manufacturing equipment. These items are often essential to business operations. So including these items in the purchase is often beneficial. Just check to be sure they’re in good condition and up to your standards. Otherwise, you may be paying extra for items that won’t last. And check the replacement value and maintenance costs to factor into your financial considerations as well.

10. Taxes, Contracts and Legal Documents

Before you buy an existing business, it’s important to make sure it’s legally sound. Are there any outstanding tax debts or lawsuits? What about contracts that could impact your operations moving forward? If there are negative issues attached to the business, those may transfer over to you as the new owner. These can be incredibly expensive and may lead to more of a headache then the business is worth. However, if the taxes and contracts are all in order, it can help you sidestep a lot of the early paperwork that comes with starting businesses from scratch.

How to Handle Due Diligence

Due diligence is a very important stage of buying a business. After you’ve found a small business for sale that interests you in a marketplace search, you work with the owner to negotiate an initial agreement. Then you have a period to do research and make sure it’s a good fit. Here are some of the steps to take before you officially buy a business:

  • Review financial documents: The business’s finances will help you understand the business valuation, expenses, and revenue potential. Get the balance sheet, financial statements, and any other documents from the current owner and compare the financial situation to the market value of the business. If there are too many outstanding expenses or other issues that might impact the value of the business, you might propose changes to the purchase price.
  • Look at the business structure: The business structure is the legal makeup of the business. This can impact things like liability and taxes. So check the current legal standing and consult a lawyer, accountant, or professional if necessary.
  • Learn about operations: The operations describe the processes that the business uses to deliver its products or services. Work with the current owner to find out how the company facilitates sales. And observe the team in action if possible. You’re looking to learn the efficiency of the business and make sure you’ll be able to sustain those processes going forward.
  • Check contracts and legal information: When you buy an existing business, there’s a good chance they already have some contract agreements in place. These may be with vendors, partners, or clients. Go through all these small business documents to see how these agreements might impact your operations. For example, if you want to lower expenses by shopping for new vendors, existing contracts may get in the way. However, ongoing contracts with multiple clients may make the business opportunity more attractive.
  • Review customer and employee data: Your team and customers can make a huge impact on the success of your business. If the business already has a strong team, you’ll be more likely to keep the current operations going. And if it already has a loyal customer base, that can help you maintain a good business revenue through the years.

How a Business Broker Can Help

A business broker is a professional who facilitates the sale of businesses. They may have access to a marketplace of businesses for sale that you can search or browse to find available opportunities. You can also tell them exactly what you’re looking for in a business opportunity. And then they can keep an eye out for businesses that fit your needs.

Once you have found a small business that you’re interested in purchasing, a broker then helps you through the transaction. They can work on due diligence, outstanding legal issues, and negotiating the actual sale price for the listing. Think of them like a real estate agent, but for buying businesses instead of homes. Some of these professionals specialize in businesses in a particular industry or area. And others offer general services to anyone buying or selling a business.

To get help with your efforts to buy a business, use the Find a Business Broker feature from BizBuySell.

How do I evaluate the value of a business?

When looking at businesses for sale, you ultimately want to find a good value. Various factors, including earnings, assets, and market, can impact the business valuation. When it comes to earnings, look at the balance sheet and consider the state of the market to determine current and potential future earnings. Assets like property, product inventory, and equipment can also improve the value of the business. And a market approach involves looking at the industry and seeing what similar businesses are selling for in the area. The business you’re interested in may be priced slightly higher or lower than others in the marketplace due to factors like outstanding cash flow or valuable assets. But this approach usually provides a helpful starting point.

How does this differ from buying a franchise?

Buying an existing business has some similarities to buying a franchise. But they’re ultimately two different options. Buying a business involves purchasing the brand, location, operations, and assets from the previous owner. Generally, people sell their small business if they’re looking to move, retire, or explore a different passion.

Buying a franchise means buying into an existing business system under the umbrella of a larger brand. There may be multiple independent businesses operating using the proven systems and brand recognition developed by the larger business. To learn more about available franchises in your region, use the Search Franchises feature on BizBuySell.

Image: Depositphotos

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Rob Starr Rob Starr is a staff writer for Small Business Trends and has been a member of the team for 7 years. He is a graduate of Ryerson University in Toronto with a Bachelor of Journalism degree. His print credentials include employment with various Toronto area newspapers and three works of fiction: The Apple Lady (2004), Creekwater (2006) and Sophistry By Degrees (2008) published by Stonegarden Press In California.