Steps for Buying an Existing Business

Many individuals romance the idea of owning their business someday. Owing a business can offer financial freedom and the ability to control day-to-day operations.

However, starting a business from scratch is extremely difficult. Statistics say that 75% of startups fail. The U.S. Bureau of Labor Statistics states that around 20% of new businesses fail in the first year, 45% fail within five years, and 65% fail in the first ten years. That’s why a lot of people never make a move to start a business.

Many serial entrepreneurs buy a business outright to scale past the challenges of starting a business from scratch. Some acquire businesses to remove the risk of competitors taking their business. Others buy a business to diversify their portfolios.

Buying an existing business has benefited many entrepreneurs. But it requires a great deal of time and financial investment. For already profitable businesses, these new business owners skip the startup phase to run a mature venture.

It’s vital to follow the recommended process to protect your intended business. We’ll outline the entire process of purchasing a venture.

Find a Suitable Business

You need first to find a suitable business to acquire. You don’t want to make the mistake of going for just any business that catches your fancy. A considerable percentage of the companies listed for sale aren’t worth buying. That’s why you must go for those offering financial promises.

When buying a business, it’s best to go for a firm in an industry you’re familiar with. This way, you can adequately evaluate processes and determine where costs can be minimized. The business also needs to have a positive cash inflow or a trend showing it’ll soon start hitting reasonable profit margins.

You also need to check their customer base. If a single client makes up 30% of their purchases, this could be a red flag. When you converse with business owners, you need to understand their plans for long-term growth.

Another factor that some entrepreneurs ignore is their interest in the business. If the business bores you out, you’ll likely get less involved. This can drive your profits down.

Value the Business

Once you have your target, you need to value the business. Many sellers want to get overpaid for their enterprise. You have to make sure that you counter this by checking how much it is worth.

To value a business, you can engage in the research and scrutiny of the books yourself. You can also consider hiring a professional to handle the job for you. Nevertheless, you have to realize that professionals can take a few thousand dollars for this task. If you’re not sure of doing a good job of valuing the company, you can hire a professional.

Business valuations can be calculated through profit margins or revenue. Every business in a different sector is evaluated differently.

Begin Negotiations

After valuing the company, you can proceed by starting a negotiation. You can go about this by making a written or verbal offer. If your offer is favorable, the seller will likely lower their sale price.

Nevertheless, business transactions are dotted with numerous offers and counter-offers, so don’t get discouraged by the back and forth.

The sellers can sometimes provide you with the terms of sale you can accept, negotiate or reject. If you discover something in the business that suggests the owners are not dealing in utmost good faith, you can change your terms.

Submit a Letter of Intent

Once you’ve negotiated the terms and purchase price of the business, you have to submit a letter of intent. This letter covers everything previously discussed between you and the business owners and shows your intent to purchase the venture.

A letter of intent isn’t binding by law. It only assures the business sellers that you’re serious about buying the enterprise. The main benefit of a letter of intent is to grant you exclusive rights to purchase the venture, usually for up to 90 days. This means that you’ll be the only person that can buy the business if you fulfill the terms of the agreement.

Perform Due Diligence

A letter of intent gives you increased access to information about the business. Perform due diligence by taking a closer look at the books when you can access them.

Before making the final purchase, you need to check key documents like their tax returns for the last couple of years, income statements, and existing debts.

Secure Funding

When you perform due diligence, you also need to start securing funds. A lot of businesses are purchased with a mixture of equity and debt. This means you’ll finance the purchase with a personal investment and a loan.

If you need quick access to a loan, you can go for a loan with no credit checks to get funds in under a day. There’s also the option of seller financing which involves the seller providing you with a loan to purchase the business.

Conclusion

Many entrepreneurs buy an existing business to navigate the difficulties of starting a business. Businesses are purchased for various reasons, including portfolio diversification or eliminating the risk of competitors.

To buy a business, you must take steps like finding a suitable business, valuing it, negotiating, submitting a letter of intent, and securing funding.

Did you learn something new? Have you ever bought an existing business? What challenges did you experience? How did you resolve it? We’ll be expecting your thoughts in the comments.