If you think you have the chops to be an entrepreneur, but would rather not start with a new idea — or just plain don’t have a new idea worth starting — you may be a great candidate to buy an existing business instead.
While buying an existing business typically involves more upfront cost, it also presents less risk than starting from scratch. Financially, you’re looking at actual profit and loss records rather than rough estimates, and there’s a clear history of sales to point to. You may also acquire valuable patents or copyrights, or have the opportunity to drive a stagnant business in an exciting direction with your expertise.
Why founders sell businesses
It’s a common misconception — a cultural stigma, even — that if a founder decides to sell a business, there must be something wrong with it. Either it’s about to go under, or the financials are in bad shape, or the founders must know something you don’t, right?
In reality, founders sell their businesses for a myriad of reasons. They may be in a different life stage, and the needs of the business no longer match their lifestyle. Or maybe they’ve grown bored with the existing business model, or they’re excited about a new idea. The business they started may be a great one, just not one they are passionate about running day-to-day anymore.
How to buy an existing business
Do you want to be the buyer that ushers an existing business into a new era of success? Follow these steps to move forward.
1. Decide what you’re looking for.
Purchasing a business is a huge decision that will impact your life and livelihood for many years. So before you even start investigating options, start by knowing exactly what kind of business you’re looking for. Here are a few factors to consider:
- Location: Are you open to moving, or do you need something close to home? Or maybe you’re looking at businesses not tied to a specific location. Either way, remember that the location of your business will affect labor costs, taxes, and other financials that can change the business’s bottom line.
- Size: Do you want to own a small family business, or a large, bustling enterprise? Buying a larger business could mean bigger profits, but will likely also involve a higher purchase price and more stress in the transition.
- Industry: What are the areas where you already have experience? What causes are you passionate about, or what hobbies are you interested in?
- Lifestyle: Are you interested in a job involving lots of travel? Are you open to working odd hours, or would you rather stick to a traditional nine-to-five? As the owner of a business, the buck stops with you — so think twice before choosing the kind of hands-on business that might involve emergency phone calls at 3 a.m.
2. Research available businesses.
Once you know what you’re looking for, you’ll need to start researching businesses up for sale. But wait! This isn’t the time to start Googling “businesses for sale.” Not yet, at least.
First put out some feelers close to home. Are your friends who launched a successful app ready to move on to their next project? Do you work for a small business you love whose owners may be willing to sell? Or if you’re keeping it small and local, maybe the owners of your favorite local coffee shop are ready to sell out and move to Bermuda?
If you know of a business you wish you owned, there’s no harm in asking.
From there, move outward to your business contacts, and carefully take to the internet for your research. BizBuySell is a reputable marketplace for buying businesses online. But be careful—for every legitimate opportunity to be found online, you’ll encounter dozens of bad deals waiting to happen.
3. Consider working with a business broker.
If you’ve done some research on your own and haven’t found the business you’re looking for, consider hiring a business broker to prescreen businesses for you, help you pinpoint your areas of interest, and negotiate the terms of your eventual business purchase.
Business brokers work similarly to real estate agents in that they will typically charge you a commission—around 5 to 10 percent of the purchase price—so they only get paid when you buy a business. So while the assistance of a broker can offer may be worth the cost, proceed with caution, and don’t let yourself get pushed into a hasty decision.
4. Complete your due diligence.
When you find a business that’s a good match, a true entrepreneur will be immediately itching to dive head-first into purchasing the business and moving it forward. Before you get too excited, slow down and do your homework. A business that looks great at first glance could have serious issues hiding underneath that would make it a poor choice for sale.
Before you go any further, get your acquisitions team assembled. Especially if you’re not working with a broker, you’ll need an acquisitions attorney and an independent business valuations firm to help you determine the value and health of the business.
Have a business valuation performed to determine how much the business is worth, and consider how the current owner’s connections and expertise may affect that value. In a business-to-business company, for example, a business sale could cause the former owner’s clients to leave, which would seriously impact the value of the business.
Have a professional accountant evaluate the business’s written financials very carefully to make sure everything is on the up and up, and question anything that may be unclear. When you buy a business, you take on a tremendous amount of liability for things that may have happened before you were involved, so don’t leave anything up to chance.
5. Acquire the necessary funding.
While there are many benefits to purchasing an existing business, it can certainly be an expensive option. Unless you’re independently wealthy or have a financial backer, you’ll likely need funding to make the sale.
Once you’ve settled on a purchase price for the business and know how much funding you need, you have a few options for sources of financing:
- Seller financing: This is where the seller allows you to make payments over time to purchase the business, usually for the purchase price plus interest. If your seller is open to this option, it can be the best financial choice for all involved.
- Angel investors or venture capital: In this model, you would be partnering with someone else to purchase the business — they are the financial investor, and you are the on-the-ground operator. If the business succeeds, this will cost you significantly in profits. But if it fails, you won’t have to worry about paying debts on a business that isn’t making money.
- Business loan: Alternatively, you could take out a term loan to purchase the business through a traditional bank or an online alternative lender. The good news here is that lenders are often more open to loans for purchasing existing businesses with a known revenue history. Even so, your personal financials will play a big role in your ability to qualify.
Each financing source comes with its own pros and cons, so do your research and talk to an independent financial advisor to make sure the funding source you pursue is the best choice for your bottom line.
6. Draft the sales agreement
You’ve chosen a business, negotiated the terms, and secured the funding to make a purchase. All that is left to do is draft the agreement and sign on the dotted line. Again, make sure you’re working with a reputable acquisitions attorney here, and that you fully understand the written terms of the agreement before you sign.
Don’t leave any ambiguities that could cause trouble at closing or even after the sale has gone through.
Choosing to buy an existing business is a valuable entrepreneurial feat that will impact your life, your community and the lives of your employees for years. With the right connection and a lot of hard work on the transition, you may be the perfect person to turn a good business model into great future for all involved.
By Jared Hecht. Co-founder and CEO, Fundera. Posted on entrepreneur.com, 26 October 2015.
