Five Factors to Consider When Buying an Existing Business

May 24, 2021

If you believe you have the skills to be an entrepreneur but would prefer not to start with a new idea – or simply do not have a new idea worth starting – you may be a good candidate to buy an existing business instead.

While purchasing an existing business usually entails a higher initial investment, it also entails less risk than starting from scratch. Financially, you're looking at actual profit and loss statements rather than estimates, and there's a clear sales history to point to. You may also be able to obtain valuable patents or copyrights, or you may be able to steer a stagnant business in an exciting direction with your expertise.

Why do founders sell their businesses?

It's a common misconception, even a cultural stigma, that if a company's founder decides to sell it, there must be something wrong with it. Either it's about to fail, the finances are in disarray, or the founders must know something you don't.

In reality, entrepreneurs sell their businesses for a variety of reasons. They may be in a different stage of life, and the demands of the business no longer correspond to their needs. Perhaps they've grown tired of the current business model, or they're excited about a new idea. The company they founded may be a great one, but it is not one they are passionate about running on a daily basis.

Even when a founder is ready to move on, it is difficult to let go of something they built from the ground up. Finding the right buyer – someone with the passion to take the business to new heights and the strategic mind to make the business perform well into the future – allows a founder to move on with confidence, knowing that the business they built is in good hands.

How to Purchase a Pre-Existing Business

Do you want to be the buyer who ushers in a new era of success for an existing business? To proceed, follow these steps.

1. Determine your search criteria.

Buying a business is a big decision that will affect your life and livelihood for a long time. So, before you even begin looking into options, you should know exactly what type of business you're looking for. Here are a few things to think about:

Location: Are you willing to relocate or do you prefer to stay close to home? Perhaps you're looking for businesses that aren't tied to a specific location. In any case, keep in mind that the location of your business will have an impact on labor costs, taxes, and other financials that can affect the bottom line.
Size: Would you prefer to run a small family business or a large, bustling enterprise? Buying a larger business may result in higher profits, but it will also likely result in a higher purchase price and more stress during the transition.
Industry: What are the areas in which you have prior experience? What causes do you care about, and what hobbies do you enjoy?
Are you looking for a job that requires a lot of travel? Are you willing to work odd hours, or do you prefer a traditional nine-to-five? The buck stops with you as the owner of a business, so think twice before going into a hands-on business that may involve emergency phone calls at 3 a.m.

2. Conduct a market research on available businesses.

Once you've determined what you're looking for, you'll need to begin researching businesses for sale. But hold on! This is not the time to look up “businesses for sale.” At least not yet.

Start by putting out some feelers close to home. Are your successful app-launched friends ready to move on to their next project? Do you work for a small business that you adore and whose owners may be interested in selling? Or, if you prefer to keep things small and local, perhaps the owners of your favorite local coffee shop are ready to sell and relocate to Bermuda?

There's no harm in asking if you know of a company you'd like to own.

From there, reach out to your business contacts and conduct careful research on the internet. BizBuySell is a reputable online marketplace for purchasing businesses. But be cautious: for every legitimate opportunity available online, there are dozens of bad deals just waiting to happen.

3. Carry out your due diligence.

When you find a business that is a good fit, a true entrepreneur will be itching to jump in head first and purchase the business and move it forward. Before you get too excited, take a deep breath and do your homework. A company that appears to be in good shape on the surface may have serious problems lurking beneath the surface, making it an unsuitable candidate for sale.

Before you go any further, put together your acquisitions team. You'll need an acquisitions attorney and an independent business valuations firm to help you determine the value and health of the business, especially if you're not working with a broker.

Obtain a business valuation to determine the value of the company, 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, reducing the value of the business significantly.

Have a professional accountant thoroughly review the company's written financials to ensure that everything is in order, and question anything that is unclear. When you buy a business, you assume a lot of responsibility for things that happened before you got involved, so don't leave anything to chance.

4. Obtain the required funding.

While there are numerous advantages to purchasing an existing business, it is unquestionably an expensive option. Unless you are independently wealthy or have a financial backer, you will almost certainly require funding to complete the sale.

Once you've decided on a purchase price for the company and determined how much funding you'll require, you have a few options for funding:

Seller financing: This is when the seller allows you to pay for the business over time, usually for the purchase price plus interest. If your seller is willing to consider this option, it may be the best financial decision for everyone involved.

Angel investors or venture capital: In this model, you would partner with someone else to buy the business; they would be the financial investor, and you would be the on-the-ground operator. If the business is successful, you will lose a lot of money. However, if it fails, you will not have to worry about repaying debts on a losing business.

Business loan: Alternatively, you could obtain a term loan from a traditional bank or an online alternative lender to purchase the business. The good news is that lenders are often more willing to make loans for the purchase of existing businesses with a proven revenue history. Nonetheless, your personal finances will play a significant role in your ability to qualify.

Each financing source has advantages and disadvantages, so conduct research and consult with an independent financial advisor to ensure that the funding source you pursue is the best choice for your bottom line.

5. Create the sales contract

You've decided on a company, negotiated the terms, and secured the funds to make the purchase. All that remains is to draft the contract and sign on the dotted line. Again, before you sign anything, make sure you're working with a reputable acquisitions attorney and that you fully understand the written terms of the agreement.

Don't leave any ambiguities that could cause problems at closing or even after the sale.

Choosing to buy an existing business is a valuable entrepreneurial venture that will have long-term effects on your life, your community, and the lives of your employees. With the right connections and a lot of hard work on the transition, you could be the ideal person to turn a good business model into a bright future for everyone involved.

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