How to buy a business: 6 tips for taking on an existing business

DISCLAIMER: This article was written in 2020 and has not been updated. For more up to date information about small business funding products and options, please browse our recent articles.

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When COVID-19 hit, it put a huge percentage of small businesses in the United States in a challenging position. And while many have recovered since stay-at-home orders and other COVID-related restrictions were lifted, many are still having a hard time moving forward—which has led to a number of businesses for sale. If you’re in the position to buy an existing business, now could be a good time to make a move. Many current owners are looking to connect with prospective buyers and sell their businesses, which means you could get into a new business—and get in at a bargain. But, as business buyers, what do you need to know to make sure that your business purchase is not only a good deal, but is also going to be a good business investment in the long-term? Let’s take a look at six tips you need to know before taking on an existing business:

Know where to look

Most businesses don’t hang a “for sale” sign in their window when they’re ready to sell. So, if you want to buy a business, you need to know where to look. There are a few different avenues you can explore to find businesses for sale, including:

• Online marketplaces. Online marketplaces like Shopify Exchange or BizBuySell are a great place for former owners to list their businesses for sale—and for prospective owners to find those businesses and make an offer.
• Business brokers. Business brokers are in the business of buying and selling businesses—and if you’re on the market to buy a new company, they can be a great resource.
• Word of mouth. Your network can be one of the best resources to find businesses for sale. Ask people you know in your industry or other entrepreneurs if they’ve heard of any businesses for sale that could be a fit for what you’re looking for.

Buy the right type of business

When you buy a business, you become the new owner—and a small business’ success greatly depends on the person and team running it. So, before you buy a company, it’s important to make sure that you understand all aspects of the business and that you’re the right person for the job—or, in other words, that you’re buying the right type of business for your background and skill set. For example, if you come from a consulting background, buying a restaurant might not make the most sense—and instead, you might consider buying a competing consultancy where you understand the business model and could more easily hit the ground running. You can always take the leap and go into a completely new niche or industry; sometimes that kind of leap can have a major pay off. But buying the kind of business that you already understand and have experience in can make purchasing another business less risky—and increase your chances of success.

Evaluate the potential

Go over tips like completing market research (getting to know the industry), Before you buy a business, it’s important to evaluate the business’ current and future potential—which means doing some research into the market, competition, and customer base. Some research you’ll want to do—and questions you’ll want to ask yourself—before you make the decision to buy a business include:

• Industry potential. What are the pros of the industry? What are the potential drawbacks? What is the industry’s growth potential—and where is it headed one year, five years, ten years from now?
• Competitor research. Who are the company’s main competitors? How are those businesses performing? What is the company’s point of difference—or, in other words, what sets it apart from the competition?
• Customer potential. Who are the company’s ideal customers? What are their pain points? How is the company connecting with their existing customer base—and what are potential strategies for reaching new customers?
• Revenue potential. What’s the revenue potential for this business? How much money is it currently bringing in—and how much money could it bring in?

Do your due diligence

due diligence (understanding the accounting books and especially assets vs liabilities) Before you buy a business, it’s imperative that you get a clear understanding of the current state of the company and their finances—also known as due diligence. In order to do your due diligence, you’ll need the seller to provide a variety of documentation on their business, including business assets, business liabilities, and all of their important financial statements (including their balance sheet, cash flow statements, P&L statement, and tax returns). Once you have all the necessary, you can go over it with your accountant and/or lawyer to evaluate the true value of the business—and decide whether that business is the right investment for you. Keep in mind that once you buy a business, as the new business owner, you become financially responsible for that business—so due diligence is one of the most important steps of the business buying process to ensure you don’t end up in over your head, with a business with more liabilities and assets—and not enough income potential to close the gap.

Make sure you have the seller financing you need to make the deal

Identifying the business you want to buy is the first part of the process—but you can’t actually buy that business unless you have enough money to cover the purchase price. If you have enough cash to purchase the business outright, great! But if not, there are plenty of ways to secure financing, including:

• Take out a business loan. You could borrow the money necessary to purchase the business. Different lenders have different credit and down payment requirements, so make sure to explore different options to find the loan that makes the most sense for you.
• Talk to investors. Another option is to present the business opportunity to investors—and strike a deal that if they invest working capital in your business, you’ll provide a certain return on their investment.
• Take out a commercial real estate loan. If you’re buying a brick and mortar business, in addition to a traditional business loan, you can also explore a commercial real estate loan to finance the property. Like business loans, commercial real estate loans have different credit and down payment requirements, so shop around until you find a loan that’s the right fit.

Bring in a legal team to facilitate the purchase

Buying a business is a massive legal undertaking; there are a number of legal documents that need to be drawn up (like the sales agreement), transfers to be made (like the articles of incorporation), and issues to iron out (like the ownership of intellectual property). And if you want to do it right, you should definitely bring in the professionals. Working with an attorney that specializes in business acquisition will ensure that the process of transferring the business from the former owner to you, the new business owner, goes smoothly. And while there’s no denying that hiring an attorney to facilitate the business sale is an investment, it’s definitely a worthwhile investment (as any business owner who didn’t work with a legal team—and found themselves dealing with messy legal issues down the road, like a former owner suing for profits—can tell you).

Get out there and buy the right business for you

Buying an existing business can be a complex process. But with these tips, you’re armed with the information you need to find, negotiate, and buy the right business for you. Happy hunting!