How To Buy An Existing Business

How To Buy An Existing Business


By Kelly Bagla, Esq.

Buying a business is a huge decision but when you pull the trigger on buying an existing business, you get the opportunity to become an entrepreneur without starting a small business completely from scratch.  Every year more than 500,000 businesses change hands, and that number is expected to skyrocket in the next several years as millions of baby boomers begin retiring and selling their businesses.

Before you begin the journey of buying a business of your own, find out everything you need to know, and the things you don’t know, to avoid buyer’s remorse, but more importantly to avoid costly legal battles. The easiest way to set yourself up for success is buying a business that you’re passionate about and taking it to the next level.  Passion alone is not enough, experience and knowing which questions to ask when buying a business are also important when making your choice.

Here are some steps to take when considering the purchase of an existing business

1)   Search for businesses for sale. 

There are plenty of ways to find the right business for sale that fits your criteria.  These include online business marketplaces, classified ads, asking people in your network, attending industry conferences, and working with business brokers.  Please note that business brokers legally represent the seller so you should be careful about conveying certain information to them such as how far you are willing to go in negotiations.  Do NOT hire the seller’s broker to represent you in the purchase of the business.  This is the number one mistake made by buyers when buyers sign a dual representation agreement with the seller’s broker.  The is no way the seller’s broker can represent both seller and buyer to their best interests as interests will naturally be competing.

2)   Understanding why an existing business is up for sale.

There are plenty of reasons business owners might decide to sell their business, including something as simple as time to retire, move out of the state where the business is located, or simply looking for a change in career.  There could be other reasons to sell the business such as a fundamental problem with the business.  If you are about to buy a business, you will need to know exactly why the business you are considering is no longer working for the current owners.  You should ask the current owners what challenges they are encountering, what they have done to try to solve the problem, and how those attempts fared.  You should be on the lookout for:

  • Existing business debts
  • Brand issues
  • Poorly executed business plan
  • Inventory difficulties
  • Bad or broken equipment
3)   Do your due diligence.

Due diligence is the process of gathering as much information and intel as you can before buying a business, and it is a critical step in your journey to becoming a business owner.  During this period, you should work with an accountant and lawyer to make sure you have all the information necessary to move forward or not with the purchase.  As the buyer, you want a good accountant on your side to review the business financials.  You also want a good business attorney to represent you in negotiations and to help you understand how the transaction should be legally structure for maximum protection from potential lawsuits.  Before you can begin your due diligence, the seller will most likely ask for a signed confidentiality agreement or a nondisclosure agreement.  By signing you agree not to disclose any confidential information about the business that’s uncovered during the due diligence period.  This protects the seller in case you decide this business is not right for you.  There are many business documents, files, and agreements that you will want to collect and analyze, ideally with the help of your attorney and accountant.  Here are some of the must have documents when conducting your due diligence:

  • Business licenses and permits
  • Organizational paperwork for the seller, such as corporation or LLC documents
  • Contracts and leases
  • Business financials
  • Inventory, equipment, furniture, building
  • Intellectual property
  • Zoning laws
  • Environmental laws

4)   Purchase price.

This is where many deals fall apart because buyers and sellers often place very different values on the same business, and several factors affect a business’s valuation.  Buyers and sellers usually use some kind of pricing model to get a ballpark number.  During this process, it can be very helpful to call in an independent business valuation professional, such as https://www.iktholdingsinc.com/ with 20 plus years of experience to make an objective determination of the value.  Whether you do this yourself or hire someone, it’s helpful to have some knowledge of different business valuation methods, such as:

  • Earning approach
  • Asset approach
  • Market approach

5)   Capital

Once you and the seller agree on a number, the next step in buying a business is to get the money.  There are a few different ways you can gather the capital you will need to purchase the business.  Here are some of the ways to finance a business acquisition:

  • Use personal or family money
  • Seller financing
  • Traditional bank loan
  • SBA loans
  • Partner with someone
  • Debt financing

6)   Tips on moving forward.

If you have already decided that purchasing a business is the right choice for you, you may still have questions.  Here are some suggestions to help you start on your path to becoming a successful business owner:

  • Consult with a business broker as they should have real life experience and can offer good advice, but beware as they get paid commission, so find someone that is trusted in the community.
  • Check the credit history of the seller to gain insight into who the seller is and if the mistakes are seller related or industry related.
  • Talk to the owner and ask direct questions.
  • Talk to the employees and ask them direct questions.
  • Talk to customers and let them know you are interested in buying the business, and they will give you their feedback without hesitation.
  • Investigate, research, and evaluate the business.
  • Make it legal by hiring the right attorney and accountant to help you purchase the best business you can buy with limiting your liability.

It’s never an easy process buying business.  We can help.  Click here https://baglalaw.com/contact/  to schedule your consultation.  Becoming a business owner, you control your own destiny, choose the people you work with, reap big rewards, challenge yourself, give back to the community, and you get to follow your passion. Knowing what you’re getting into is smart business because the responsibility of protecting your business falls on you.