How to buy an existing business: 7 steps to a successful purchase
Buying a business is a considerable decision. But buying an existing business allows you to gain the perks of being your own boss without the cost and heartache of starting from scratch.
However, the process of finding a business to buy and completing the transaction can be a complicated and lengthy process that isn’t without risk. Understanding the process can help you achieve a successful business acquisition.
Here are 7 steps to buying an existing business from beginning to end:
Step 2: Gather proof of funds.
Step 5: Complete due diligence.
Step 7: Close the Deal.
Step 1: Determine what kind of company you want to purchase and why.
The first and most crucial step to buying a business is determining what business is the right fit for you. Defining why you want to purchase a business in the first place can help you pinpoint what you’re looking for.
Start by asking yourself why you want to buy a business. For example, are you wanting to buy out a competitor, be your own boss, or build your investment portfolio? Then, to help you gain clarity on what you’re looking for, here are a few other questions to ask yourself:
How much time and resources are you willing to put into a business after your purchase?
What business can you see yourself enjoying?
What skills do you already obtain that can further a new business?
What industries are you already familiar with?
Where would your ideal business be located?
Knowing what you’re looking for is the first step to buying the right business for you.
Step 2: Gather proof of funds.
Because there are several more buyers in the market than businesses available for sale, purchasing a business can be a competitive endeavor. For this reason, it’s essential to be prepared to pursue a great opportunity when it comes your way.
Gathering proof of funds ahead of time shows that you’re a serious buyer and can purchase a business that fits your criteria. Similar to residential real estate transactions, getting prequalified sets you apart from other buyers when a business becomes available for sale.
Depending on whether you’re using cash to fund your purchase or working with a lender, you may need the following for your proof of funds:
Official bank statement
Bank’s name and address
An open line of credit
A copy of checking, savings, or money market account balances
SBA pre-qualification letter (if going through the SBA to acquire funding)
Step 3: Search businesses for sale that meet your criteria.
Once you’ve determined which type of business to buy and what best fits your needs, skills, financials, and potential requirements, you’ll need to start the search for that best fit.
Whether you’re looking for a franchise or an existing independent business, there are several places to find the right business for sale. Consider the following:
Online business marketplaces
Classified ads in the local newspaper
Asking other small business owners in your ideal industry
Reaching out to others in your network
All of these are viable options, but be aware that while some options can get you connected to the best business to buy, they may leave all of the research, negotiating, and financing up to you, the buyer. At this point in the journey, you may find it beneficial to create a team of experts who can help guide you through the process, including:
An attorney, to help you prepare and review legal documents.
An accountant, who can review the books and financials of prospective businesses.
A lender, if you will need to secure financing for the purchase.
A business broker, who can help you understand what business is right for you to purchase and connect you with businesses for sale.
Step 4: Evaluate the price of the business.
Once you’ve locked in on a potential business to buy, the next step is to evaluate the price of the business for sale. Some sellers will overvalue their businesses, and it’s up to you to ensure that you don’t overpay.
The three most common business valuation methods are:
Asset-based approach - involves totaling the fair market value of the company’s assets and subtracting its liabilities.
Market-based approach - looks at how much comparable companies have sold for.
Income-based approach - which calculates a company's worth based on its past, present, and future profits
Remember that evaluating a business's price can be a complicated endeavor, so you may want to consider asking for help or hiring a professional if you aren’t confident in your ability to make an educated assessment.
Step 5: Complete due diligence.
Once you feel confident in the business’s value and are serious about purchasing, you’ll submit a Letter of Intent (LOI). This document lists everything you’ve negotiated with the seller so far and outlines the terms of the potential sale.
Once an LOI is signed by both you and the seller, they will be more likely to provide access to in-depth information about the business, such as taxes, finances, and legal documents. You must examine all of the details of an existing business so you can determine the financial risk involved.
To ensure you get a complete perspective of how the business is operating, be sure to evaluate the following:
Organizational documents of the business.
Certificate of Good Standing.
Business licenses and permits.
Zoning laws and environmental regulations.
Contracts and leases.
Legal issues, if any.
Inventory and equipment status.
Financial information, including tax returns, balance sheets, income statements, cash flow statements, accounts receivable and accounts payable.
These documents will tell you a lot about a business, but there may be more you’ll want to examine. Consider working with an accountant or lawyer to help you understand and obtain all the applicable documentation.
Step 6: Secure financing to make the purchase.
If you are using cash to fund your business purchase, you’ll be able to skip this step.
If this will not be a cash transaction for you, working on securing your financing while you’re also going through the due diligence process is essential.
Depending on your goals, needs, and the agreed upon sale price, you may need to gather capital outside your funds to complete the purchase. In this case, there are a few financing options to consider:
Bank financing through traditional loans.
Small Business Administration (SBA) loans. These loans are guaranteed by the SBA and available through SBA-approved lenders.
Seller financing. This is when the seller offers a loan instead of an outside lender. You would then be liable to the seller and need to make payments to them.
Partnership. A partner can alleviate the financial burden by making half of the payments or dividing the cost of the purchase.
Keep in mind that capital will also be needed to run the business successfully after the purchase. Consult your accountant or financial advisor when determining which option is best for you.
Step 7: Close the deal.
When you’ve found the right business to purchase, completed your due diligence, and secured financing, it’s time to finalize the sales agreement so you can close the transaction.
Often, escrow will help manage this process. Still, it can also be helpful to have an attorney so they can assist you with final negotiations or review legal documents to ensure you are getting what was agreed upon. Have the following items ready to complete the business transfer:
Bill of Sale. This document proves the business has been sold, and the ownership has been transferred to you.
Purchase Price. Ensure all your paperwork shows the final purchase price, including any prorated expenses.
Lease, if applicable. If you are taking over the current owner’s lease, work with the landlord so this document is updated.
Patents, trademarks, and copyrights. Some forms may be required to get these items transferred to you.
Non-compete agreement. Protect yourself by asking the current business owner to sign a non-compete form, preventing them from setting up a new shop that would be in direct competition with you.
Asset acquisition statement.
Once all the necessary documents are complete, you’ll need to choose a closing date and work with your lender to fund the purchase, if required.