What you need to know about purchasing an existing company.
By Hannah Massen
Contrary to popular belief, not everyone starts their businesses from scratch. While many of the most popular success stories feature a young, eager entrepreneur going door to door until someone discovers their product, buying a business is an equally ambitious – and lucrative – option. While buying a business typically involves a bigger upfront cost, it also presents less risk than launching a startup. You’ll have years of financial statements, media analytics, and an existing customer base to help you make more informed decisions regarding your company’s trajectory.
More people are realizing the value of buying an existing company. Roughly 500,000 businesses change hands every year, and that number is only expected to grow as more baby boomers retire. But in order to buy a business, someone has to be selling.
It’s a common misconception (if not a cultural stigma) that if a founder decides to sell a business, there must be something wrong with it. Either it’s about to go under, there’s no market for the services, or the founder knows something you don’t, right? Wrong. Founders sell their businesses for a variety of reasons: they might be ready to retire, about to move out of state, or are excited about a new opportunity in a different market. No matter their reason for moving on, they’ll be looking for a buyer who’s ready to usher their business into a new era of success.
Buying a business is a big decision, but we’ve laid out the steps you should take to ease the transition and avoid buyer’s remorse.
1. Narrow down your options. If you’re set to inherit the family company, continue to step two. But if you don’t have your eyes on a particular business to buy – or aren’t even sure what industry you’re interested in – consider the following factors:
Location: Are you open to moving, commuting, or do you need something close to home? Your answer will affect more than just daily wake-up time. Taxes, labor costs, and financials can vary by location, all of which will impact a business’ bottom line.
Size: Can you see yourself running a small, local business or a high-growth company? While taking over a large corporation could mean more profits, it could also present a steep initial cost and a stressful transition.
Experience: What interests, passions, or experiences have you had that would help you in your new career? You’ll learn something new no matter what type of business you buy, but it may be beneficial to have some familiarity with the industry.
2. Start searching. There are plenty of places to find businesses for sale that fit the criteria you’ve decided on. Check ads on Craigslist, BizBuySell.com, or your local newspaper to keep tabs on what’s going up for sale. Networking with other professionals or attending meetups and conferences might connect you with someone who’s looking for a potential buyer. If you’ve done your research and still haven’t found what you’re looking for, consider working with a business broker. They’ll be able to prescreen businesses for you, negotiate terms of purchase, and help you pinpoint your interests.
3. Do your due diligence. When you find the business you want to buy, it’s time to gather as much information on the company as you can before signing on the dotted line. As the buyer, you’ll want to have an accountant on your side to renew the business’ financials. It’s also helpful to have a business attorney to represent you in negotiations. There are plenty of documents, files, and agreements you’ll want to analyze, but be on the lookout for business licenses and permits, trademark registration information, contracts and leases, and financial statements.
4. Find your funding. Once you and the seller agree on a purchase price, you have a few options for sources of finance:
- Seller financing: This is where the seller allows you to make payments over time, usually for the purchase price plus interest.
- Venture capital: In this instance, you would work with an investor to purchase the business. If the business succeeds, you would owe the investor a significant portion of the profits. But if it fails, you won’t have to worry about paying back debts.
- Business loan: You also can take out a loan to purchase the business through a traditional bank or online lender. While your personal finances will play a role in determining the types of loans you qualify for, lenders are usually more open to loans for purchasing existing businesses.
5. Draft a sales agreement. You’ve found your business, negotiated the terms, and made a payment plan. Now, all that’s left is to put it in writing. Your sales agreement should list everything you’re purchasing in detail, including tangible and intangible assets, customer lists, and intellectual property. Have a lawyer help you write this document, or at the very least, help you review it carefully before you sign.
Whether you’re looking to change industries or acquire another company for your existing brand, buying a business can be a smart move – and a win/win for all involved. When you’re finally at the helm, you’ll be able to revitalize what might have been a stale company with fresh ideas and insight.