Building a business is tough, but buying a business is no fun shopping trip either. For the perfect guide for your perusal, read on!
How to Buy a Business in 7 Efficient Steps
When in an existing business, it is very important to know for any entrepreneurs out there if you have decided not to start your business from ground zero as a start-up. So, how to buy a business?
Read on to explore!
Advantages of Buying an Existing Business
Although a brand new start-up will allow you to develop your ideas, philosophies, and core values for your business from scratch, buying an existing business has its advantages too.
- When you buy an existing business, you inherit its customer base.
- A lot of time and effort goes into branding a business properly. When you buy an established company, much of this branding work has already been done for you. This can save you a lot of money and time in the long run.
- One of the best things about buying an existing business is that you get to learn from the mistakes made by the previous owner/s.
Important Factors
Buying an existing business can be a great way to own your business. But it takes careful planning and research.
It is best to enlist the help of professionals such as business brokers, attorneys, and accountants to assist in finding the right business for you and conducting the proper due diligence.
- If it is too large, you may find it difficult to manage; if it is too small, you may not have enough room for growth. So, you must choose according to your resources and requirements.
- Make sure you are aware of how much the business costs and whether or not you can afford it. Overestimate hidden expenses.
- When choosing a business, be sure to select one that is located in an area that is convenient for you.
- It is important to choose a type of business that interests you and that you have experience in before knowing how to buy a business. This will help ensure your success in owning and running your own company.
How to Buy a Business: The 7 Crucial Steps
When it comes to buying a business, there are a few key steps you need to follow to ensure the process goes as smoothly as possible.
1. Decide what kind of Business you want to Buy
Buy a business in the industry that you are familiar with. Depending on your interests and budget, it could be a small local store or restaurant, a large chain, an online business, or anything in between.
You can even buy a franchise from established brands such as Mcdonald’s. If you are familiar with car dealerships or showrooms, buy a similar business.
If you go out and buy an existing business in an industry that you have no prior knowledge of, you will be like a fish out of water. You will be blind to all the latest trends, strengths, weaknesses, opportunities, and threats of and to the company.
Whereas, in an industry that you have worked in before and are familiar with, you will always have an upper hand since you will always be ready to tackle the challenges and welcome the new trends.
But if you are unsure about the kind of business you want to buy, many small business owners decide to work with a broker or intermediary to properly vet the company.
The intermediary will do their due diligence on the company by gathering documents such as accounts receivable and payable information, tax returns, organizational chart, and even past customer surveys.
It’s important to take your time during this phase to get to know the company that you may be purchasing.
2. Find out the Reason for the Business to be for Sale
Know exactly why the previous business owner is ready to sell his business. This will give you more context as to what you can bring into the company which has not been there before.
Is the reason why the owner is ready to sell their business because they were unable to keep up with the new trends?
If it is so, you can ponder upon this and bring out fresh perspectives and creative ideas for the business to stay afloat and in time, become thriving.
But you must consider all the angles for this quest for reasons before you plan on how to buy a business. They might lead to some red flags.
Is the business up for sale because it has lost all its intangible assets like goodwill and reputation? Were they doing extremely poorly and had lost all their prior customer base? Ensure to have your questions answered.
3. Take Account of the Business’s Earnings
Before the how-to-buy-a-business phase, a comprehensive analysis of the small business’s balance sheet, cash flow statements, accounts receivable, and tax returns are key elements in evaluating a potential acquisition.
Having an accurate view of its existing cash flow will give you an idea if there is sufficient money available to finance operations once ownership has transferred.
It’s also wise to review past performance metrics and projections on future cash flow potential before deciding on whether or not to purchase the business.
There are several ways to take account of the business’s earnings:
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Valuation Based on Assets
The valuation based on assets means taking total business liabilities from it including loans, mortgages, lines of credit, and more.
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Valuation of the Market
Valuation of the market means comparing the selling price of similar companies in the same industry that has been sold recently. This is the only possible way for the companies that disclose their transactions.
It might be difficult to compare the selling prices of small businesses as they seldom disclose such transactions.
4. Letter of Intent Needs to be Issued
By issuing a letter of intent, you get the “right to refusal,” making you the first buyer in line, even if there would be other potential buyers to buy the business.
This letter is an agreement that conveys your intention of buying the business to the existing business owner.
5. Conduct your Due Diligence
It’s important to do due diligence when buying a business; make sure you understand all legal documents involved in the transaction.
When researching a particular business, make sure to review its cash flow statements, balance sheets, tax returns, and organizational potential buyers must have financial statements available when going through the due diligence process.
This is to determine fair market value and get an accurate sense of current cash flow from existing customers, as well as any liabilities associated with a particular business.
Understanding sales agreements between sellers and purchasers provide clarity about which assets are being purchased and if seller financing or traditional bank loans are available as options for purchase price payments.
To accurately evaluate assets such as accounts receivable and inventories, a detailed organizational chart is useful to note both physical assets like real estate property along with intellectual property including brand trademarks or customer lists.
From financial statements and sales contracts down to licenses and permits associated with the particular business.
No stone should go unturned when it comes time to agree on terms between buyer and seller so that everyone is clear on what exactly is included in a sale agreement when it comes time to transfer ownership.
6. Get your Finances in Order
If financing is needed for purchasing a small business, working capital should also be evaluated by taking into account things like asking price, purchase price, hiring employees, and advertising costs so that you have enough resources available when starting.
Many lenders will require collateral such as personal property or savings accounts to secure any loans that may be necessary for small business purchases as well.
There are several ways to get your finances secure when buying an existing business:
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Small Business Administration Loan
The Small Business Administration (SBA) offers several loan programs for entrepreneurs looking to buy businesses as well as counselling services for new small business owners who need help getting started.
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Seller Financing
The existing business owner or the seller might be willing to help out the new business owner, by lending you the money needed to buy the business.
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Term Loans by Banks
Regular loans can be a bit difficult to qualify for. They need you to have an excellent credit score before lending you any money.
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Personal Financing and Partnerships
If you have a lot of savings, it’s time to put the savings into use. You can put your finances in and ask for a small loan from either the bank or Small Business Administration (SBA) Loan.
If not, you can always secure a silent partner who is ready to finance your business and in return, you give them partial ownership.
7. Seal the Deal
This typically includes signing contracts, transferring ownership of assets, and setting up payment schedules. Take help from your attorney, accountant, and broker.
Congratulations, you have now bought yourself a new business! Time to put in hard work and watch it grow.
Bottom-Line: How to Buy a Business?
Finally, there are post-acquisition tasks that include updating the existing customer base with changes in ownership, introducing yourself as the new owner to any vendors as well as solidifying customer relationships.
You can do this through existing sales strategies employed by the current owner but perhaps integrate some marketing strategies so customers remain loyal for many years after the successful purchase of their current owner’s establishment.
All the best!
