The decision to buy a business is a big one—but when you pull the trigger on buying an existing business, you get the opportunity to become an entrepreneur without starting completely from scratch. And lots of people consider buying a business each year, so you certainly shouldn’t feel like you’re thinking about something totally out of left field!
Every year, more than 500,000 businesses change hands, and that number is expected to skyrocket in the next several years as millions of baby boomers begin retiring and selling their businesses.
Buying an existing business is so popular because it lets you skip past some of the pain points and costs of launching a brand-new company. But the journey from finding a business for sale to closing the deal can be long and complicated.
Before you begin your journey to buy a business of your own, find out everything you need to know to avoid buyer’s remorse, and all of the business loan help you can get.
From understanding the pros and cons of buying a business when you’re still just thinking about the idea, to closing the deal and getting the keys. Here’s a rundown of how to buy a business, from start to finish.
Buying a business is kind of like being in the market for a home. Although some people like the history and character that come with an older home, others don’t want the baggage that can saddle an older home and prefer something turnkey. Similarly, there are plenty of advantages when you buy a business that’s already been around for a while, but there are drawbacks, as well.
1. Proven Business Concept
When launching a brand-new business, the bulk of your time will be spent on the planning phase. You’ll have to write a business plan and figure out how to turn that plan into a reality.
But when you buy a business that’s already up and running, you’ll typically have all of this in place:
Granted, each of these things may not be in great condition, and the business might not be turning a profit yet. (That part is really important!) However, an existing business has some structure that will save you time up front, letting you quickly see what you need to zero in on. Particularly if you’re testing a new market or entering an industry that you don’t have much experience in, zipping past the difficult startup phase can be a huge advantage.
2. Lower Operating Costs
One of the major benefits of buying a business is that the operating costs are lower. For example, startup costs for a brand-new restaurant can run upward of $450,000 for initial supplies, food and beverage, signage, and a customized build out of the kitchen. With an existing business, your initial operating costs are lower because—unless your acquisition is pretty atypical—many parts of the business are already in place and ready to go once you’re at the helm.
You don’t need to spend as much of your budget on hiring employees, developing marketing strategies, or building a customer base because those come with the transaction. Instead, you can pour more cash into expanding the business and adapting it to your vision.
3. Easier to Obtain Financing
While the move to buy a business isn’t always a safe bet, lenders and investors see it as lower risk than launching a new company. This is because there’s a history of financial performance that a lender or investor can use to gauge how the business has performed to date and to predict future performance. Plus, like we mentioned, there’s also existing data around the company’s market position, competitors, brand recognition, and customer base.
All this makes investors more likely to invest in the business and can make lenders more comfortable in giving you a business acquistion loan. The current owners can even participate in financing the transfer of ownership by giving you a loan (more to come on this in a bit).
4. Intellectual Property on the Table
If your business-to-be has patented their products or has a copyrighted slogan or trademarked logo that wins over customers, then that intellectual property value will probably transfer over to you. That means when you buy a business, you sometimes buy more than what the eye can see.
This isn’t on the table with every business acquisition, but it could be critical if you’re dealing with something that you think could be expanded even more. What if you turned this small business into a national franchise? All of a sudden, that patent and copyright becomes a lot more valuable. Patents, copyrights, and trademarks are often included in sales of software companies, tech businesses, and creative businesses (e.g. music, design, and art).
The decision to buy a business is a big one—but when you pull the trigger on buying an existing business, you get the opportunity to become an entrepreneur without starting completely from scratch. And lots of people consider buying a business each year, so you certainly shouldn’t feel like you’re thinking about something totally out of left field!
Every year, more than 500,000 businesses change hands, and that number is expected to skyrocket in the next several years as millions of baby boomers begin retiring and selling their businesses.
Buying an existing business is so popular because it lets you skip past some of the pain points and costs of launching a brand-new company. But the journey from finding a business for sale to closing the deal can be long and complicated.
Before you begin your journey to buy a business of your own, find out everything you need to know to avoid buyer’s remorse, and all of the business loan help you can get.
From understanding the pros and cons of buying a business when you’re still just thinking about the idea, to closing the deal and getting the keys. Here’s a rundown of how to buy a business, from start to finish.
What goes up must come down, right? Now for the drawbacks of choosing to buy a business:
1. Higher Upfront Purchasing Costs
By buying an existing business, you’ll be able to save money on operating costs, such as inventory and equipment. However, you’ll probably face some pretty sizable purchasing costs. In fact, those purchasing costs might be greater than what it would take you to start a business.
That’s because, in addition to the obvious assets, you’re also buying ownership over the following:
All of these items will be the subject of negotiations between the buyer and seller and factor into the final purchase price.
2. Unfamiliarity
If you’re looking to buy a business you didn’t start, you’ll necessarily be a bit less familiar with its inner workings and the details of its products, processes, employees, and financials. This could be a bit of an obstacle, especially when you’re just starting out. This is especially true if you are entering an industry that you lack experience in. You’ll need to spend a lot of time learning the ropes, and prepare for the learning curve to be steep.
3. Risk of a Hidden Problem
Ever watch a show where the second a buyer closes on a house, they find out the inspector missed a massive crack in the foundation? Too late to go back on that purchase now!
Well, as a prospective business buyer, you’ll also go through a fairly intensive due diligence process, where you’ll gather information about the business and the current owner. But no matter how much information you uncover, you always run the risk of taking on an issue that you’re not aware of or that’s worse than it appeared. For example, equipment could be damaged, or the brand might have a bad reputation. Once you buy a business, you buy those issues, like it or not. A bit later, we’ll tell you how to catch most of these problems before it’s too late.
If you’re set on wanting to buy an existing business, then of course it’s crucial to make sure you pick the right business for you. The easiest way to set yourself up for success is to buy a business that you’re passionate about improving and taking to the next level. But passion alone isn’t enough—experience and knowing which questions to ask when buying a business are also important when making your choice.
Here’s how to pick the right business to buy:
Narrow down your passions, interests, skills, and experience. You’ll be happier if you buy a business that dovetails with what you already like and have some experience in.
For example, if you’ve been a line cook at a restaurant for several years, maybe you’ve decided you’d like to own your own restaurant. Or maybe you’ve been an employee for a long time at a company that’s now on the market. In that case, who better to buy the business than someone who knows it as intimately as you?
Although you might just want to buy a business for the financials alone—by its expected return on investment—it’s also important to align yourself with the business’s immaterial goals. After all, the more knowledgeable and familiar you are with the business’s model, products or services, customers, industry, and trends, the more innovative and successful your new ideas will be.
This is where you’ll need to decide on the more hard-and-fast aspects of your new business acquisition.
For example, figure out how much you’d ideally want to change the business, and assess whether that lines up with your budget. Calculating the ideal size, location, sales, staff, and so on of your business is an important step, since it will give you a scale to keep in mind when you’re shopping around.
Money isn’t the only thing you’ll be spending. Look at the time and energy commitments you’re planning to invest to make the business “your own.” Some managers prefer to be “on” at all times, in the weeds with their employees, while others prefer to delegate and, one day, own multiple businesses.
The amount of resources you’ll have to invest depends in large part on the people and processes already in place and on the experience you have in the industry. For example, if you’re buying a tech company but lack technical expertise, you’ll need to invest time learning the ropes from existing staff.
There are plenty of reasons a business owner might put their business up for sale, including something as simple as an innocuous lifestyle choice like retirement, or something more worrisome—like when there’s a fundamental problem with the business. If you’re about to buy a business, you’ll want to know exactly why this business isn’t working anymore for its current owner.
You should ask the current owner what challenges they’ve encountered, what they’ve done to try solving those problems, and how those attempts fared. During every conversation with the current owner, you should ask yourself, “Do I have what it takes to meet these challenges with different or better solutions?”
Be on the look out for:
Make sure you know as much you can about the existing business’s successes, failures, challenges, and future opportunities. In addition to speaking with the owner about these concerns, also talk to existing customers, existing employees, locals in the area, neighboring businesses, and so on. They’ll give you an honest view of how the business is doing, without the bias of the seller trying to convince you to buy.
There are plenty of ways to find the right business for sale that fits the criteria you’ve decided on.
These include:
Business brokers legally represent the seller, so you should be careful about conveying certain information to them (such as how far you’re willing to go in negotiations). However, a broker can help you understand what kind of business you want, prescreen businesses to cut out all the failing companies, keep negotiations civil and smart, and help you with all the necessary paperwork. Note that, with a broker, there’s a commission involved, but it’s typically paid by the seller.
As the buyer, you’ll want to have a good accountant on your side to review the business’s financials. It may also be beneficial to have a good business lawyer to represent you in negotiations and to help you understand how the transaction will be structured.
If you’re looking to buy a business for the first time, a business broker may be worth the cost. But if you’re confident you can handle the process on your own, hold off on hiring a broker until the very end—because even the savviest entrepreneurs can have trouble filing forms and following proper legal procedure.
to be continued...