So you want to be an entrepreneur, but don’t have an idea you want to pursue? Then you may be a great candidate to buy an existing business. Buying an existing business may involve more cost upfront, but it also represents less risk than starting from scratch.
One advantage is that, once you are a serious, qualified buyer, you can sign a nondisclosure agreement. That will provide you with access to the actual financial records for the business that interests you, including tax returns, records of profit and loss, and sales history.
When you review these documents, you may find an opportunity to take a business that’s become stagnant and turn it around or maybe even drive it in a new and exciting direction.
Potential buyers sometimes look at an existing business and wonder what’s wrong with it. They ask themselves, what does the owner know that I don’t?
The truth is that owners sell their businesses for many different reasons. They may be in a different life stage, the needs of the business no longer match their lifestyle, they may have just grown bored, or they might be excited about a new idea.
Even when an owner wants to move on, the decision isn’t an easy one. But finding the right buyer — someone with a new excitement for the business who can help it perform well moving into the future — helps the owner move on knowing the business will be in good hands.
If you want to be one of those buyers who leads an existing business into a new era of success, then here are some steps that will help.
Know what you’re looking for
Buying a business is a huge decision that will impact your life and livelihood for many years. Before you even start investigating options, decide what kind of business you’re looking for. Some things to think about:
- Industry: What are you passionate about? What areas do you already have experience in that might transfer? What hobbies are you interested in?
- Location: Are you open to moving or do you need something close to home? The location of the business will affect labor costs, taxes, and other financial factors that can impact the business’s bottom line.
- Size: Do you want a small family business or a larger one? Buying a larger business could mean bigger profits, but will also mean a higher purchase price.
- Lifestyle: Are you looking for a traditional nine-to-five or are you open to working odd hours?
Once you’ve answered all these questions, there are still many things to consider.
Contact a good business broker
Find a business broker you like and are comfortable working with and have him or her help pre-screen businesses for you. The broker can help you identify opportunities that are a good match and negotiate the terms of an eventual purchase.
Business brokers are similar to real estate agents in that they typically charge a commission—around 10 percent of the purchase price—so they only get paid when you buy a business.
Do your due diligence
When you find a business, before you get too excited, slow down and do your homework. Have a business valuation done so you know how much the business is worth. Consider how the current owner’s connections and expertise may affect that value. For example, if you’re considering a business-to-business company, would the owner’s departure cause clients to leave? Losing key clients would seriously impact the value of the business.
Have a professional accountant evaluate the business’s written financials and question anything that may be unclear. When you buy a business, you take on some liability for things that may have happened before you were involved, so don’t leave things up to chance.
Unless you’re independently wealthy or have a financial backer, you’ll likely need to obtain the funding needed to make the sale. Once you’ve settled on a purchase price for the business and know how much funding you need, there are several options for sources of financing.
- Seller financing: This is where the seller allows you to make payments over time to purchase the business, usually for the purchase price plus interest. Most often this may be available for a portion of the purchase price; it’s rare to be able to get a seller to totally finance you, but if the seller is willing and able, then this option can be the best choice for all involved.
- Angel investors or venture capital: The means partnering with someone else to purchase the business. They are the financial investor while you are the on-the-ground operator. If the business succeeds, this will cost you significantly in profits.
- Business loan: You might take out a loan to purchase the business through a traditional bank or an alternative lender. Lenders are often open to loans for purchasing existing businesses with a known revenue history. Even so, your personal financials will play a big role in your ability to qualify.
Each financing source comes with its own pros and cons, so do your research and talk to an independent financial advisor to make best choice for you.
The sales agreement
Once you’ve done all of the above, it’s time to write the sales agreement and sign on the dotted line. Work with a reputable broker and attorney. Make sure you fully understand the terms of the agreement and that they are clearly written before you sign. Ambiguities can cause problems at closing or even after the sale.
Making the decision to buy an existing business will impact your life. Choosing the right one gives you the opportunity to turn a good business into a great future.