What you need to know before buying a business
Buying an Existing Business Steps
If you’re thinking about buying an existing business, you’re not alone. Buying a business can be a great way to get a start in entrepreneurship or to expand your existing venture.
With an existing business, you acquire an established customer base, team dynamic, and their reputation to rely on. Additionally, you may avoid startup costs and growing pains that often accompany you when creating a business from scratch.
Research and Understand the Business Buying Process
However, it is important to do your research and understand the complete process before you make an offer 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 what you can do to successfully acquire a business and launch your next chapter in entrepreneurship.
8 Steps to Buying a Business
1. Do your research.
Before you consider potential offers, you must determine what type of business you want to buy. You should reflect on your interests, skills, and experiences to choose a business that is a good fit for you.
It’s also vital to consider the current market trends and economic conditions facing your area. Some industries may be more lucrative than others, so it’s important that you do your due diligence accordingly.
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 require that the business be in business for at least fifteen years, you will likely be ruling out a good amount of otherwise suitable companies you could have considered.
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.
For example, you might decide to 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.
2. Research potential businesses to buy.
Once you know the type of business that you are interested in, you need to find a business that is for sale. Use online databases to search for companies on the 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, it’s important that you assess thoroughly the business to determine whether it would be a good 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, and competitive landscape.
You may consider visiting the business and talking to employees and customers to get a sense of the business’s 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 the business is a good fit for you, you will need to understand the value of the business.
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 by employing a variety of methods, including conducting financial analysis of future earnings, future cash flows, market research, and comparable transactions.
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.
6. Secure financing
Unless you have cash freely on hand to buy the business outright, you will likely want to obtain financing.
There are a number of sources of financing available; these options include banks, private lenders, and the Small Business Administration (SBA). An SBA loan, because of its ability to finance against goodwill, are a preferred method of financing.
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 will want to see financial records, tax returns, a certified business valuation, and other documents before approving the loan.
You may be surprised to learn, however, that the seller might be a potential source of funding. Seller financing is an agreement that would enable 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 that all legal requirements are met, such as registering the business with the appropriate government agencies.
Your attorney may also help you draft important documents to help you be ready 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 include certain stipulations, requirements, and terms. Your attorney can help you determine what those should be, so that you are best protected 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 offers of purchase.
8. Transition the business
After the sale is complete, you will then 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 buying a distressed company, come in humble the first six months and truly understand their Key Success Factors to 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 to buy a business above, you can increase your chance of success and ensure that you are making an informed decision.
After conducting your due diligence, be sure to 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 the right step for you.