On the days you’ve felt trapped in your cubicle or exhausted from the physical demands of your manufacturing job, you may have dreamt of breaking free from the grind and running your own business. You probably also had tons of exciting startup ideas, but the daunting task of starting from scratch may have dissuaded you from pursuing them.
There is another option to consider, however. Just as you don’t have to build a new house every time you decide to move, you can simply buy an existing business. Taking over a small business that’s already up and running means that many of the initial steps like branding, location, staff and customer base are already taken care of.
That doesn’t mean you are guaranteed to land a profitable business, though. You will still need to do some careful planning and research before making such an important purchase. To guide you, we’ve compiled a checklist on how to buy a business, with 10 important steps to success.
1. Decide What Kind of Business You Want
It’s tempting to just follow your entrepreneurial urges and start scanning marketplaces for available businesses that interest you. While it’s not a bad idea to see what’s out there, it’s important to consider some practical matters first.
- Time: Will this business be a full-time endeavour or a side project to supplement your current job? Be honest about how much time you can and want to devote to keeping a business running. Choosing a partner who will take on full-time responsibilities or buying a small online business may be a better option if your schedule is already packed.
- Interest and skills: These two things do not always align. The ideal plan when you buy a business is to select an industry you have knowledge of and are passionate about. You don’t have to be an expert, but many businesses fail because the owners lacked the necessary expertise to succeed in that arena.
- Type: Do you want a small operation where you do most of the work, or are you interested in a larger business with several employees? Do you prefer being a favourite local business, or do you hope to eventually own multiple locations? If the latter, you might want to give some thought to buying a franchise.
- Education: No matter what industry you choose, consider taking classes to solidify your knowledge in that field. Check out your local community college for courses designed especially for aspiring small business owners. Accounting, managerial, small business software, marketing and branding classes all help hone valuable skills for keeping your new venture in business.
- Money: You’ll want to give some advance thought to how you will finance a business, whether through your own money or someone else’s. As every entrepreneur should know, only buy what you can truly afford, and remember that you will need to keep your household running even if the business is not making much profit at the start. Don’t forget the initial money necessary for acquiring an existing business, as well as for experts like lawyers and accountants.
2. Research Available Businesses
When you want to buy a business, looking for options close to home is ideal for first-time buyers. Many begin by taking over a small business they’ve been employed by for several years. Check with family members and any business contacts about possible opportunities or seek them out yourself. If the owners of your favourite bistro are talking about retiring, for example, ask if they’re interested in selling the business.
If nothing is immediately available to you, check online marketplaces like BizBuySell or BusinessesForSale.com. There are also sites that carry listings exclusively for online businesses, like Shopify’s Exchange marketplace. The perks of sites like Shopify is that they use their own data to give you accurate revenue and traffic information for each business listing.
As with all online marketplaces, be wary of scams. If you’re not confident in wading through listings and finding red flags in communications, consider hiring a business broker. They’re essentially a realtor for businesses, either brick-and-mortar or online, and work on commission. In many cases, only the seller pays the commission, so just be aware that the broker’s interests may be more aligned with theirs when it comes to the price.
3. Calculate Potential Financial Returns
One way to narrow down your list of potential businesses is to calculate the potential return on your investment (ROI). You’ll also want to do a more extensive calculation once you select one or two options and have access to their financials.
While ROI formulas can get very complicated, the basic idea is to compare the net income of the business to your investment and figure out how long it will take you to make a profit. If you’ve paid $500,000 for the business and it’s clearing $100,000 a year, for example, it will be five years before you’ve made back that initial investment.
Remember that it is net income you’re evaluating. Monthly or yearly sales numbers mean nothing until you subtract all the operating expenses. This includes interest on your business loan, marketing costs and accountant fees. One of the toughest parts of starting a business is figuring out your business budget, but buying an existing business means there is hopefully plenty of data on expenses like supplies, staff, utilities and more.
While you can make projections about the business, these numbers aren’t set in stone. Just because a business is making $100,000 in profit a year right now does not mean that number will stay the same the next year, let alone five years from now. Costs also fluctuate. Be aware that some markets are more volatile, like restaurants in big cities that surge with popularity and wane when customers move on to the next hot location.
If a business isn’t yet making a profit, it’s not necessarily a bad bet. Look at how they operate, their marketing, their reviews. If you see obvious areas that you can improve, estimate the profit with your projected sales increases. A business accountant or financial adviser can help you with all the variables in calculating the return on your business investment.
4. Investigate Your Potential Purchase
This is what is referred to as ‘due diligence’. Find out everything you can about a company before you buy it. Investigate the location, the owners, their website, their brand recognition and market share. Check with the Better Business Bureau and other ratings sites to see how well the company has been treating their customers. For online businesses, use website evaluation tools like SEMrush or Moz’s Link Explorer to check its traffic, loading speed, SEO, errors and any red flags about spammy linking.
One of the important steps to starting a business is getting all the right licences and permits. Make sure the existing business you’re buying has all the proper documentation and has complied with zoning laws.
If their accounting report was done in-house, get an outside audit done to verify their financials. Be aware that you may have to sign a non-disclosure agreement before looking at the company’s records. Find out if you’ll be taking on any debts, if suppliers have been paid and how many customers are late with payments.
Truly evaluating the health and value of a business, and putting a fair price on it, can be difficult. Particularly when buying a larger establishment, consider hiring an independent valuations firm. It can cost around $3,000 to $5,000 but can save you from overpaying a lot more than that.
5. Understand Why the Business Is for Sale
The risk in acquiring an existing business is there can be hidden problems that will cause your venture to fail. Just like someone selling a car with a suspiciously low price, a small business owner may be trying to unload a total lemon on an unsuspecting buyer.
There are many reasons why an owner may be selling a successful business, however. They may simply be retiring or looking for a new investment, or they may lack the expertise in the industry that you have. Talk to the owners extensively, as every conversation will reveal more about their motivation to sell.
Doing due diligence is like being a detective, so just like the authorities in your favourite TV procedural, you should canvass the neighbourhood. Talk to employees, suppliers, the chamber of commerce and neighbouring businesses to get a feel for the company and how well it’s doing. If you’re looking at a store inside a shopping mall, for instance, the other shop owners can let you know about upcoming rent hikes or diminishing customer traffic.
6. Acquire Financing
Once you’ve decided on a business and know the asking price, you need to get your financing in order. There are several different ways to finance your business, depending on how much you need, how fast you can pay it back, and how much of your own capital you’ll be spending. If you’re not independently wealthy and paying cash upfront, financing options to buy a business include:
- angel investors
- selling stock to employees
- venture capital
- business loans
- seller financing
While bank loans can be difficult to acquire, buying an existing business with a solid customer base and profits makes your sales pitch easier. Be aware that they still may want you to put up some of your own assets as collateral.
Many first-time buyers opt for seller financing, with the former owner typically putting up 30% to 50% of the purchase price. The incentive for them is that they’ll get interest in the 6% to 8% range on top of their investment. In turn, you’ll have to come up with less money, and the owner will be motivated to help you succeed in taking over the business.
7. Negotiate for More
When purchasing a new home, most buyers negotiate more than just the price. A lot of haggling typically occurs over the home inspection, with buyers willing to pay more if the seller resolves issues like a sunken driveway or malfunctioning appliance. The same kind of negotiation can occur when you’re buying an existing business.
Particularly with motivated sellers, push for whatever add-ons you can get. The seller may be happy to unload the company vehicles or the office furniture for a fraction of what it would cost you to buy them brand new. Eric Siu, a digital marketing agency CEO, recommends asking for financial incentives as well, like a clause that releases you from repaying further seller financing if the business fails.
8. Verify What You’re Buying
Whether it’s a brick-and-mortar establishment or an online business, make sure you know exactly what you’re buying. Before you sign on that dotted line, verify the condition of the building, the furnishings and any equipment. Check the status of the inventory.
Discuss the transfer of any intellectual property, patents, customer lists and insurance policies. Since an online business is more nebulous, make a detailed plan with the seller that covers all aspects of the transition like domain names, phone numbers, email addresses and customer records.
Consider using an escrow service to hold the funds during the transaction for an added layer of safety. Lawyers can also act as escrow. The escrow service won’t release the funds until the buyer has all aspects of the business, and the seller knows they’ll get their money once the deal is complete.
Holding back some funds in escrow can also ease the transition after the sale. This can help cover any unexpected refunds, late payments and other issues the seller should be responsible for.
9. Get all the Documents
It’s advisable to have an acquisitions attorney assist you with the sales agreement and other documents. No matter what you’ve agreed on verbally or via email, you must get all the appropriate documentation to be assured of ownership. This includes:
- bill of sale
- vehicle registration
- patents, trademarks and copyrights
- non-compete agreement
- asset acquisition statement
You’ll want as many records as you can relating to the running of the business as well. Ask for customer lists, vendor agreements and insurance information. If you’re taking on an existing large staff, ask for an organisational chart and a breakdown of payroll and benefits.
10. Announce New Ownership
Once you have your new business, you’ll want to make the transition as smooth as possible. First, notify all suppliers and creditors about the transfer of ownership. Make personal contact with vendors to start off the relationship on a positive note.
Try to arrange for an article or mention in the local paper, the town’s website, an industry blog or podcast. It’s a great way to introduce yourself to the community and one of the many opportunities to promote your business.
As you can see, you’ll have a lot to consider and plan for when you decide to buy a business. It can be a substantial investment in time, effort and money, and you’ll want to be well-prepared.
Have you recently purchased an existing business? What are the lessons you wish you’d learned before taking over? Join the discussion below and share your tips on how to buy a business successfully!