What you need to know before buying a small business or large company
How to Sort through the Deal Flow of 100,000+ Businesses for Sale
Buying an Existing Business Steps
If you’re considering buying an existing business, you’re not alone. Buying a business can be a great way to start entrepreneurship or expand your existing venture. However, becoming a small business owner by buying an existing business can have its risks. The due diligence process is critical during business acquisitions of any size, even with seller financing.
Should you buy an existing business?
With an existing business, you acquire an established customer base, leadership team dynamic, business models, solid profit margin, good cash flow, social media rating, and 20-year-old reputation to rely on. Additionally, you may avoid startup costs and the growing pains often associated with creating a business from scratch.
Many baby boomers are exiting companies they built for 25-35 years and have survived multiple economic downturns.
Research and Understand the Business Buying Process
However, it is essential to research and understand the complete process before offering to purchase a business. Still, many people dream of becoming their own boss and owning a business, but few know how to begin.
Continue reading for a step-by-step guide on successfully acquiring a business and launching your next chapter in entrepreneurship.
8 Steps to Buying a Business
1. Do your research.
Before considering potential offers, you must determine what type of business you want to buy. You should consider your interests, skills, and experiences to choose a company that fits you in many business categories.
It’s also vital to consider your area’s current market trends and economic conditions. Some industries may be more lucrative, so you must do your due diligence accordingly.
A list of questions to ask small business owners
Consider establishing a list of characteristics and factors you would require for a prospective business to be suitable. However, be reasonable with this list. For example, if you need that the business is in business for at least fifteen years, you will rule out a good number of otherwise suitable companies you could have considered. When dealing with business brokers, put yourself in both the buyer’s and sellers’ shoes. A win-win attitude will make the data flow much smoother and let the seller stretch to meet your needs as a buyer.
Then, tailor your search to the type of business that best aligns with your criteria. You can also read our article on buying an existing business. Often, the business owner will only sell a business once in their lifetime. Remember that when dealing with them and their fears.
For example, you might buy a small business based on your business goals and professional aspirations. On the other hand, your research might help you realize that franchising might be a better fit. Of the businesses for sale, a business that includes real estate meets your personal needs.
2. Research potential businesses to buy.
Once you know the type of business you are interested in, you must find a business for sale. Use online databases to search for companies in their market.
In this stage, you may want to work with a broker who can help you find businesses that meet your criteria and then negotiate the purchase on your behalf.
3. Assess the businesses that interest you.
Before you make an offer on a business, you must assess thoroughly the company to determine whether it would be an excellent purchase to pursue for financial and legal reasons. As a result, you should spend time looking at the business’s financial statements, legal documents, balance sheets, tax returns, assets and liabilities, customer base, business plan, and competitive landscape.
You may want to visit the business and talk to employees and customers to get a sense of its operations and reputation.
4. Determine the value of the business.
Once you’ve conducted due diligence on the type of business of interest and determined that it is a good fit for you, you will need to understand its value.
Since appraising a business to buy is a complex process, it would be in your best interest to reach out to a business valuation firm like Business Appraisal FL|GA|HI. An appraisal firm like BA FL|GA|HI specializes in estimating the value of various businesses.
You can also read our article what to know about small business valuations.
Business valuation firms conduct appraisals using various methods, including financial analysis of future earnings, future cash flows, market research, and comparable transactions.
A Certified Business Valuation
It is important, thus, to work with an experienced business valuation expert to ensure that you are getting an accurate valuation.
As a result, avoid relying on online services that offer quick valuations — some often done in under thirty minutes. To conduct the valuation, these platforms rely on individual user input to provide the required metrics regarding the entity’s assets, financial reporting, capital structure, industry, and growth prospects; this usually leads to overestimated assessments and faulty valuations.
5. Negotiate the purchase price and terms.
Once you’ve identified a business for sale and determined the value of the business, you’ll need to negotiate the purchase price and terms with the seller. Work with a business broker or attorney to help you do so. Business buyers can confirm the cash flow and control the selling price with a certified business valuation and an SBA pre-financing letter. A business valuation to SBA standards will mean much more than a business broker’s back-of-the-napkin approach.
6. Secure financing
You will want to obtain financing unless you have cash to buy the business outright. Many financing options exist, and all outside lenders will help you with your due diligence. Be careful of company owner provided financing as it will let you get sloppy versus outside-financing forced due diligence.
Several sources of financing are available, including banks, private lenders, and the Small Business Administration (SBA). An SBA loan, because it can finance against goodwill, is a preferred method of financing. You can also buy a franchise from existing business owners.
Buying a franchise is also an option, as they have a proven track record and financing options, whether you buy a new franchise or purchase a franchise from an existing business owner.
If the business you are looking to purchase has most of its assets in its accounts receivable, you can also look at invoice factoring to fund the purchase of a B2B business.
The lender will require a down payment and want to see financial records, tax returns, a certified business valuation, and other documents before approving the loan.
However, you may be surprised to learn that the seller might be a potential funding source. Seller financing is an agreement enabling you, as the buyer, to pay the seller in installments rather than using a traditional mortgage from a bank or financial institution.
7. Close the deal
Once you’ve secured financing, you’ll be ready to close the deal.
Work with an attorney or other professional to ensure all legal requirements are met, such as registering the business with the appropriate government agencies.
Your attorney may also help you draft essential documents to prepare you to take full ownership.
One of those documents may include a letter of intent (LOI), which establishes the commitment of the buyer and seller to do business with the other. Many LOIs will consist of specific stipulations, requirements, and terms. Your attorney can help you determine what those should be to protect you as an interested party in the transaction.
Then, you’ll be ready to sign a purchase agreement, which should include details such as the purchase price, payment terms, and any contingencies. At this point, ownership of the business will be transferred from the seller to yourself so that no other potential buyers can make any purchase offers.
If you are buying a partial stake in a business, a buy-sell agreement is critical to have with your new selling partner.
8. Transition the business
After the sale, you will need to transition the business. This involves hiring employees, establishing relationships with suppliers and customers, and implementing your own policies and procedures.
However, rule number 1 when buying an existing business is to do no harm. Unless you are purchasing a distressed company, come humble during the first six months and understand their key success factors in cash flow.
Buying a Business Conclusion:
Buying a business is a complex process, but it can also be a rewarding one. By following the steps above, you can increase your chance of success and ensure you are making an informed decision.
After conducting due diligence, work closely with professionals — like our team of expert valuators at BA FL|GA|HI — to ensure a smooth business acquisition process. Our appraisers will help you determine the value of a business to buy, which is a vital piece of information to consider before you acquire a business.
Understanding a company’s true value and worth can be extremely helpful as you strategize and consider moving forward with a potential purchase. Reach out to our appraisers at BA FL|GA|HI as you consider whether buying a business is right for you.