Preparing to Purchase an Existing Business
Starting a business from scratch can be extremely challenging, which is why many aspiring entrepreneurs decide to purchase an existing business. Buying a business that is already established allows you to forgo all the headaches and financial stress associated with the initial startup phase, so you can move straight to reaping the rewards of being your own boss.
All that said, buying a business is a very complex transaction, and it is important to be well-prepared going in. Be ready to do your due diligence and carefully review the options available to you, so you will end up with the right business based on what you are passionate about and your unique talents.
If all of this seems overwhelming, remember that you do not have to do it all alone. As you look for available businesses for sale, it is wise to work with a reputable business broker in your area. Also known as “business intermediaries”, business brokers are seasoned professionals who match buyers with sellers and have an in-depth understanding of the complexities involved with these types of transactions.
Preparing to Buy an Existing Business: As you look for your ideal business to buy, it is helpful to understand some of the most common reasons why owners want to sell. These include:
- Pursuing a New Venture
- Health Concerns (either for themselves or a close loved one)
- Lifestyle Changes
- Capitalization (i.e., cashing out on the hard work they have put in building the business)
- Financial Problems
- Partnership/Ownership Disputes
Some business buyers are automatically suspicious of a business that is for sale, assuming that there must be something wrong with it. There are many positive reasons for an owner to sell business, but there are some potential red flags as well.
For example, if a business is selling because of an irreconcilable dispute between the partners, this dispute may have negatively impacted operations. Employee morale may be low and taking over a business like that may be far more challenging.
On the other hand, you might be able to get a better deal on a business that has some problems, and you might view the challenge of turning it around as an opportunity. It all depends on your own skills and abilities and what types of situations you are comfortable inheriting.
With all this in mind, here are some of the important steps to take when purchasing a business:
Decide What You Are Looking For: The first step in purchasing a business is to decide exactly what kind of business you want. Some things to consider that will factor into this decision include:
- Industry: What industry or industries are you interested in being in? This again goes back to your passion and skillset. What industries have you worked in previously? What are you particularly good at? Are you a professional, for example a CPA or nurse? These and similar questions will help you decide what industry (or industries) to focus on when searching for your new business to buy.
- Location: What city or area of the country do you want to be working in? Do you want to stay close to where you live now, or are you open to relocating? Keep in mind that the location of the business will impact many areas of it, such as taxes, labor costs, the price of a commercial lease, etc.
- Size: How large of a business do you want to own and operate? Do you prefer something small with just a handful of employees, or are you ready to take over a larger operation? A bigger business will usually be more profitable, but it will also come at a higher purchase price, and there will be more stress involved because of having to manage more “moving parts”.
- Lifestyle: How much time do you want to put into your business, and what hours of the day do you want to work? Do you prefer a business that allows you to work just during the typical 9 to 5 Monday through Friday window, or are you willing to be available during evening and weekend hours?
Have an in-depth conversation with your business broker answering these questions, so you can decide which types of businesses will fit your criteria. This will give your broker much better information to work with as they help you search for available businesses.
Research Available Businesses: Now that you know what you want, you are ready to start combing through the marketplace to see what is out there. As we touched on in the last point, this is one of the areas where your business broker will be particularly helpful. Your broker will search all the available databases as well as their own contacts to come up with a list of available businesses that matches what you are looking for. From that list, you can narrow it down to the top three or four businesses that you want to explore in further detail.
Evaluate the Businesses You Are Considering: Now that you have a handful of businesses on your shortlist, it is time to do your homework and perform your due diligence with each. This will involve examining financial statements, learning more about the business operations (e.g., management, employees, processes, etc.), examining any liabilities the business has incurred (e.g., pending lawsuits, environmental issues, etc.), coming up with a list of questions to ask the owner, and many other things. You may need the help of a CPA for the financial examination, and of course your broker will also be able to assist you in several different ways throughout this process.
Make an Offer Through Your Broker: Once you have decided you want to purchase a business from your shortlist, it is time to draft an offer with your broker. The offer should include an appropriate price, payment terms, whether you want owner financing, a noncompete provision (if appropriate), and other important terms and conditions.
At this point, the owner will either accept, reject, or counter your offer. As you continue to negotiate toward making a deal, it is best to lean heavily on the advice of your broker. Experienced brokers have helped put together numerous business purchases in the past, and they have the knowledge and expertise to help you successfully complete your purchase.