Having your own business is a dream come true. It’s not easy to construct one from the ground up. As a result, some entrepreneurs decide to buy a company outright. Another motive to buy a business is to acquire a potential competitor or to diversify your financial portfolio. We are discussing how to buy a business in this article to help you get started.
The decision to purchase an existing business is significant, as you can become an entrepreneur without starting a small business from scratch.
We have created a step-by-step buying an existing business guide for you. Beginning with how to buy a business, we will also look at the pros and cons of purchasing an existing business while you’re still thinking about it.
Buying a small business follows a similar path regardless of your motivation. We’ll walk you through the entire process of how to buy a business, from finding and researching the perfect firm to sealing the sale so you know what to anticipate.
- Buying a business for a variety of reasons
- Buying a business checklist
Buying a business for a variety of reasons
To know how to buy a business, first, you have to look into its advantages and disadvantages of that. Purchasing a business is similar to shopping for a home. Although some individuals like the history and charm of an older home, others choose something turnkey since they don’t want the baggage that comes with an older home. When you buy a company that has been established for a while, there are many benefits and disadvantages.
Advantages of Purchasing a Business
Purchasing a business is similar to shopping for a home. Although some individuals like the history and charm of an older home, others choose something turnkey since they don’t want the baggage that comes with an older home. The following are the advantages of knowing how to buy a business.
- A tried and proven business model
When starting a new firm, the planning phase will take up most of your time. You’ll need to draft a business plan and determine how to implement it.
When you are planning to buy a business that’s already up and running, though, you’ll usually find that the following things are in place:
- A structure or office space.
- Inventory and equipment are both critical.
- A well-known brand and a company’s brand identity (whether or not you want to change it, people know it).
- The base of customers.
- Manufacturing resources, as well as a vendor and supplier base.
- Employees that are willing to share their skills and expertise.
- Policies and procedures for management.
- An understanding of your market and competitors.
Each item may be in poor shape, and the company may not yet be profitable. On the other hand, purchasing an existing firm implies that it already has some structure in place, saving you time and helping you to identify what you need to concentrate on quickly.
- Operating costs are reduced
The lower operational costs are one of the most significant advantages of buying a company. For example, the first supplies, food and beverage, signage, and a bespoke kitchen design for a brand-new restaurant can cost upwards of $450,000.
Your initial running costs are cheaper when you buy an existing firm because of many business components. They’ll already be in place and ready to go when you take over.
Because these costs are included in the transaction, you don’t need to spend as much of your budget hiring workers, developing marketing tactics, or building a client base. Instead, you might put more money into growing the company and making it more aligned with your goal.
- Financing is easier to get by
While buying a firm isn’t always a secure investment, lenders and investors consider it less risky than starting a new business. This is because a lender or investor may use a track record of financial success to assess the company’s current performance and forecast future results.
There’s also information on the company’s market position, rivals, brand recognition, and customer base that’s already available.
This makes investors more likely to participate in the company, and lenders may be more willing to provide you with a business acquisition loan. The present owners may even lend you money to help you finance the transfer of ownership.
- Intellectual property
Suppose your target company has patented its products or has a copyrighted tagline or trademarked emblem that attracts clients. In that case, that intellectual property value will almost certainly be transferred to you as part of the deal. That implies that you may buy more than meets the eye when you buy a business.
This shouldn’t be considered with every business purchase, but it could be crucial if you’re dealing with something that you believe could be grown further. What if this little firm became a national franchise?
That patent and copyright suddenly become a lot more valuable. Patents, copyrights, and trademarks are frequently included in the sale of software companies, computer companies, and creative businesses.
Disadvantages of purchasing a business
Make sure to avoid buying a business that is not a good investment. Many owners are selling companies that are underperforming or unprofitable. While this may be an opportunity to purchase a company, it may also be a risky investment. Consider these drawbacks in knowing how to buy a business:
- Purchase costs are higher up front
Purchasing an existing business can save money on running costs like inventory and equipment. However, you’ll almost certainly have to pay a hefty purchase price. Such purchasing costs could be higher than the cost of starting a new business.
Because, in addition to the apparent assets, you’ll be purchasing ownership of the following:
- The base of customers.
- A well-developed brand.
- We’ve done everything from the logo to the store’s interior design.
- Concept and strategy for a business.
- Testing items takes time, effort, and money.
- Processes, procedures, and policies have been refined.
- Stream of income (if the company is already profitable).
- Assets and machinery.
- Copyrights, patents, and trademarks are examples of intellectual property.
When buying an existing firm, these factors will be the subject of discussions between the buyer and seller and will be factored into the ultimate acquisition price.
- Unawareness of the specifics
You’ll be less familiar with the inner workings of a business you didn’t establish and the minutiae of its goods, procedures, workers, and financials than if you built it yourself. This could be a challenge, especially if you’re just getting started.
This is especially true if you’re entering a field where you’ve never worked. You’ll need to devote a significant amount of time to learning the ropes and be prepared for a high learning curve.
- Chance of hidden problems
As a potential business buyer, you’ll go through a thorough due diligence procedure to acquire information on the company and its present owner. However, no matter how much data you gather, you always face the danger of encountering a problem that you are unaware of or is more severe than it appears.
Buying a business checklist
How to buy a business can be a little complicated but can be a good idea if you do your research. You must carefully evaluate the business’s physical characteristics, financial statements, and the relations between the company, its customers, its community, and its competitors if you want to make a good decision.
If you’re purchasing a company, make sure you are fully aware of what you’re getting into by requesting comprehensive information from the seller about the company’s operations and finances. The following is a list of information and documents you should examine:
1. Look for a company to buy
The first step for how to buy a business is to identify a company that is not only available but also worth purchasing. There are numerous businesses available for purchase.
On the other hand, there are not as many financially promising opportunities as those that pique your interest. You must choose a company willing to make money and has no skeletons in its closet.
When you’re preparing to buy a firm, keep the following in mind:
- Positive cash flow (or a trajectory that shows potential)
- An industry you’ve worked in before
- a wide range of clients (no one client should be more than 20 percent of revenue, roughly)
- A long-term expansion strategy
- A company that you might envision yourself working for
- Where can I look for a firm to buy?
Before ranking your favorites, look in as many places as possible. You’re more likely to find a treasure if you extend your search. Don’t give up when you’ve found a company that matches all of your requirements.
2. Consider the company’s worth.
Once you’ve decided on the company you want to work for, it’s time to figure out how much it’s worth. Many sellers will overvalue their business, and you mustn’t overpay.
When establishing a company’s worth, you must consider the following in order to decide how to buy a business.
- Do it on your own
- Invest in a professional.
- The issue with hiring a professional is that it can be rather costly.
We advise avoiding it if you’re dubious about your capacity to make an objective decision.
Business revenue, net income, or EBITDA are commonly used to determine the value of a company while figuring out how to buy a business. Because each business is handled differently, we can’t give a single solution about how to value a firm.
3. Negotiate the price of the transaction
The next step for how to buy a business is to negotiate the deal. If you’ve decided to buy a firm and think you’ve got a good idea of how much the firm is worth, it’s time to talk about the price.
This is usually done by making a non-binding offer, either in writing or verbally. If your request is close to the seller’s asking price, they will begin negotiating with you.
Before reaching a tentative agreement, most corporate transactions require back-and-forth bargaining of different purchase prices and parameters. These terms can be changed later if something comes up during the due diligence that makes you reconsider the company’s value.
You must decide whether you wish to purchase the company’s assets or sell the shares as part of the transaction.
Most sellers prefer a stock sale for tax reasons. You’ll agree to take on any tremendous legal responsibilities in a stock transaction because the company’s operations will continue with a new owner. Some dealers will even discount the purchase price if you agree to a stock sale.
4. Communicate the Letter of Intent (LOI)
Once you have a rough idea of the terms and structure of the business purchase, you’ll send a letter of intent. This letter summarizes everything you’ve already agreed to, including the purchase price, and affirms your intention to buy the business.
This is a non-binding agreement that merely aims to speed up the process of buying a company. It shows the seller that you’re ready to make a commitment and move forward with the deal.
In most circumstances, the letter of intent also gives you exclusive rights to buy the business for a set amount of time, usually up to 90 days.
This means you’ll be the only individual who can buy the company within the time limit, and the seller must complete the transaction in good faith. This is the crucial step for how to buy a business.
5. Due diligence must be completed
When you first show an interest and know about how to buy a business, you’ll usually be provided a basic assessment of its performance.
However, you will have access to any financial or legal information you believe is necessary to complete the deal when you conduct due diligence. Once you and the seller sign the LOI, you’ll have access to more information about the company.
Before you close, we recommend that you check the following documents at a minimum:
- Documents for the business’s organization (e.g., incorporation docs, certificates of good standing, business licenses, etc.)
- Returns from the previous three years of corporate taxes
- Income statements, balance sheets, and cash flow statements are required for the current year.
- For the last three years, revenue has been broken down by customers.
- Existing business debt information
- As needed, customer lists with sensitive information are filtered out.
- Are there any contracts that can be allocated to the new owner?
- Other property documents, such as a commercial lease
- If the property has renters, rent is collected.
- Disclosure document for all franchises (if the business is a franchise)
- Information for employees and managers Marketing and promotional materials
- If there are any legal records for pending lawsuits
These are the points you need to look into to know how to buy a business.
6. Obtaining funding
Next, an essential step for how to buy a business is to obtain funds. Most companies are bought using a combination of debt and equity, which means you’ll pay cash for a portion of the purchase price and borrow the rest. It would help if you worked on funding for the deal throughout due diligence.
SBA loans, traditional bank loans, and a Business Startup Rollover are just a few of your options (ROBS). A ROBS is the best option if you have a solid 401(k) since you won’t have to take out a loan or pay interest if you finance the purchase.
Find out if seller financing is an option before starting your due diligence since this could help you avoid some of the financial stress that comes with getting a loan.
Seller financing is a loan provided by the business owner rather than an outside lender. This necessitates a significant amount of paperwork, typically from you as the new business owner and the company itself.
As a result, going through this process as part of your due diligence is critical. When it comes time to close, you’ll want to ensure your lender is ready to fund the transaction.
7. Complete your transaction
The last step involved in how to buy a business is to seal the deal. This is where you and the seller will create a final purchase agreement and agree to the terms of the sale. If there were no surprises during due diligence, it’s time to agree.
You should always engage a lawyer to help you with this portion of the process. At the very least, they might review the purchase agreement with you to ensure you’re getting all you paid for.
Once both parties sign the purchase agreement, you can schedule a closing date and have your lender fund the transaction. Your funds will typically go into escrow (meaning a bank or legal company will hold the money for safekeeping) on the day you want to close until all paperwork is finalized.
After both parties have granted their consent, the seller will hand in the money. You will be the sole proprietor of the business.
If you’re buying a business with shares, you won’t have to worry about this because the company’s entity won’t change. When the transaction is completed, you’ll need to apply for any essential business licenses to ensure a smooth transition of your business activities.
Several states will allow you to operate with your existing rights during the changeover phase, but don’t forget about it.
How to buy a business is Starting from the ground up isn’t the only option. Purchasing an existing firm can help you get up and running quickly. Here’s all you need to know about how to buy a business.
Most people envision establishing a business from the ground up, generating their ideas, and building the company from the ground up. However, beginning from the ground up has its drawbacks, such as the challenge of creating a customer base, marketing the new firm, hiring personnel, and establishing cash flow, all without a track record or reputation to fall back on.