what to do on the first day of buying a business

Buying a business is a big decision — only when you pull the trigger on ownership an existing business, you go the opportunity to get an entrepreneur without starting a small-scale business completely from scratch. Every yr, more than 500,000 businesses change hands, and that number is expected to skyrocket in the next several years as millions of infant boomers begin retiring and selling their businesses.

Buying an existing business is and then popular because it lets you skip past some of the hurting points and costs of starting a new business. But the journey from finding a business for sale to closing the deal can be long and complicated.

Earlier y'all brainstorm the journeying of ownership a business concern of your own, find out everything you need to know to avoid buyer'southward remorse. Our buying an existing business checklist will give you lot a footstep-by-step guide. We'll also embrace the pros and cons of ownership a concern when y'all're still but thinking about the thought, and cease with how to buy a business organisation when you lot're ready to close the deal and go the keys.

Buying an existing concern checklist

If you're assail the thought of buying a business, then information technology'southward crucial to make sure y'all choice the right business for you . The easiest way to set yourself up for success is buying a business that yous're passionate about improving and taking to the next level. But passion alone isn't plenty — experience and knowing which questions to ask when ownership a business organisation are also of import when making your choice.

Here is your buying an existing concern checklist:

i. Figure out what blazon of business you want to buy

Narrow down your passions, interests, skills and experience. You'll be happier if you buy a small business organization that dovetails with what you already like and accept some feel in.

For example, if you've been a line cook at a restaurant for several years, maybe you've decided you lot'd like to ain your own eatery. Or maybe you've been an employee for a long time at a visitor that's now on the market. In that instance, who better to buy the business than someone who knows information technology as intimately equally you?

Although you might just desire to purchase a business for the financials alone — by its expected return on investment — it's also important to align yourself with the business's immaterial goals. Afterward all, the more knowledgeable and familiar you are with the business's model, products or services, customers, industry and trends, the more innovative and successful your new ideas will be.

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2. Search for businesses that are for sale

Online business marketplaces such as bizbuysell.com, the largest site of its kind with more than 45,000 agile listings.
Craigslist ads.
Classified paper ads under the "Businesses for Sale" category.
Request people in your network of minor-business owners.
Going to meetups or industry conferences to enquire other business professionals.
Working with a business broker.

Business brokers legally represent the seller, so y'all should exist careful nearly conveying certain information to them (such as how far you're willing to become in negotiations). However, a broker can help yous empathize what kind of concern you desire, prescreen businesses to cutting out all the failing companies, go on negotiations civil and smart and help you with all the necessary paperwork. Brokers practice earn a committee when a sale goes through, but information technology's typically paid by the seller.

3. Empathise why an existing concern is up for sale

There are plenty of reasons a business organisation owner might put their business upward for sale, including something every bit uncomplicated equally an innocuous lifestyle choice like retirement. Or, there might exist a more than worrisome reason, like a primal problem with the concern. If you're about to purchase a business, you'll want to know exactly why the businesses you lot're considering are no longer working for their current owners.

You should ask the current owners what challenges they've encountered, what they've done to try solving those problems and how those attempts fared. During every conversation with the electric current possessor, you should ask yourself, "Do I have what information technology takes to meet these challenges with different or amend solutions?"

Exist on the sentry for:

A poorly conceptualized business organization plan (there'south only not a market for the product or service).
Competitors that are far alee.
Existing business debts.
Location bug.
A brand issue.
Inventory difficulties (the price of product is likewise high, low quality is losing the business customers, storage is difficult, there'south no supply and demand balance, etc.).
Bad equipment (it's outdated and besides expensive to upgrade).

Make sure you lot know as much as you can near the existing concern'south successes, failures, challenges and time to come opportunities. In addition to speaking with the owner most these concerns, as well talk to existing customers, existing employees, locals in the area, neighboring businesses and so on. They'll give you lot an honest view of how the business is doing, without the bias of the seller trying to convince you to purchase.

4. Narrow in on a business that aligns with your upkeep, goals and resources

Until now, y'all might have been considering several different businesses, but now it'southward time to hone in on the best option. The best option is the business that aligns with your budget, goals and resources.

Calculating the ideal size, location, sales, staff and so on of your prospective business concern is an important step in your program of buying a business, since it will requite you a calibration to keep in mind when you're shopping around. Effigy out how much you'd ideally want to change a business, and assess how much that will cost you lot.

Money isn't the only thing you'll be spending. Look at the time and energy commitments y'all're planning to invest to brand the business your own. Some managers prefer to be "on" at all times, in the weeds with their employees, while others prefer to consul and, one day, own multiple businesses.

The amount of resources you'll accept to invest depends in large part on the people and processes already in place and on the experience you have in the industry. For example, if yous're buying a tech company simply lack technical expertise, you'll need to invest fourth dimension learning the ropes or hiring people who have the experience.

five. Do your due diligence

Due diligence is the process of gathering equally much data and intel equally you can before buying a business, and it is a critical step in your journey to becoming a business possessor. During this menses, yous should piece of work with an accountant and lawyer to make certain you accept all the information you demand to move forward.

Every bit the buyer, you'll desire to have a good accountant on your side to review the business'south financials. It's also beneficial to accept a practiced business organization attorney to correspond you in negotiations and to assist you understand how the transaction will be structured.

Before you can begin your due diligence, the seller will most likely ask for a signed confidentiality agreement or nondisclosure agreement. By signing, you agree not to disembalm any confidential information about the concern that's uncovered during the due diligence process. This protects the seller in case you determine buying the business concern is not for you after reviewing all the documents.

There are many business documents, files, agreements and statements that you'll want to collect and analyze, ideally with the aid of a lawyer and accountant. Here are some of the must-have documents when doing due diligence in the process of considering whether to buy a business:

Business licenses and permits

Beginning up is to make sure that the business organization you lot're looking at has all the business licenses and permits it needs. If y'all're ownership a business organisation, you lot want to make sure that the current possessor hasn't run afoul of whatever local concern licensing laws. Businesses in certain industries, particularly highly regulated ones like food services and childcare, need a valid allow to stay open.

Organizational paperwork and certificate of good standing

If the business y'all're buying is a sole proprietorship or partnership, there may not be official "founding" paperwork. Withal, a registered business entity, such equally an LLC or corporation, will have organizational documents on file with the state. For an LLC, this is the articles of arrangement. For a corporation, this is the articles of incorporation.

The secretary of state in your land should also exist able to produce a certificate of good standing for the business you're interested in buying. This certifies that the business concern is approved to operate in the state.

Zoning laws

Bank check with your area's local zoning laws to make sure that you're ownership a business concern that isn't violating whatsoever restrictions. While some localities allow mixed-use commercial and residential zoning, others have tight restrictions on where businesses can be located. This especially goes for businesses like bars and nightclubs that may not exist desirable in a residential expanse.

Environmental regulations

Has this business concern been secretly dumping chemicals into the nearby reservoir or violating other environmental laws? Make sure the reply is a firm no before moving forward with buying the business. Double-cheque that this business abides by all of the area'due south small business organisation environmental regulations .

Letter of intent

As you move forward with buying a business, the seller issues a letter of intent, or LOI, to the buyer when both sides accept agreed on a price point and about which business organization assets and liabilities will be included in the transaction. The price proposal, along with the terms and conditions of the concern sale, should all be included in the seller's LOI.

The LOI is an indication from the seller that they are serious about seeing the bargain through to the stop. In one case you lot take it in hand, you can experience more comfy forging ahead with the remainder of due diligence.

Contracts and leases

One-half the fun of the decision to buy a business concern is all the stuff it comes with. Whether that ways a lease for the location, equipment or something else, you'll want to make certain the landlord is alright with transferring over these legal documents to your name. Otherwise, y'all'll need to negotiate a new lease, which can significantly add together to your expenses.

You'll as well desire to review any outstanding agreements that the possessor has with vendors or customers. This can be very revealing. For example, if your review indicates that 90% of the business's revenue comes from a unmarried client, y'all'll want to call up twice before buying. If that client parts ways with the business, it could put a serious dent in the business's potential.

Business financials

Before buying a business, make sure to examine its past few years of financials, including:

Taxation returns.
Residual sheets.
Cash menstruum statements.
Sales records and accounts receivable.
Accounts payable.
Debt disclosures.
Advertising costs.

Double-check that the tax returns and financial statements have passed an audit past a certified public auditor; don't accept those financials from the sellers themselves.

Utilize the concern's financials as an opportunity to analyze its income stream. The business yous purchase doesn't necessarily have to exist profitable nonetheless (specially if it's a young business), but there should exist a clear path to profitability.

Be in the know on whether the business's debts and liabilities will be included in the transaction or not, and exist wary of taking these on. For example, if some of the outstanding receivables the ex-possessor was dealing with are too former — ninety days or more than, for example — then they'll be pretty tough for you to collect on. You might be amend off request the seller to insure them or contact the customers themselves.

Organizational chart

If you purchase a business with employees, make sure you understand how they rank and chronicle to 1 another by asking for a business organizational chart. This should also include compensation information, management practices and processes, benefit plans, insurance and vacation policies.

Status of inventory, equipment, furniture and building

Make sure to critically analyze these aspects of the businesses, since their values will directly impact the price of the business. You'll want to bank check:

What's on hand.
Its quality.
How sellable it is, both in terms of market place viability and its condition.
How fast and for how much each type of inventory has sold in the past.
The present status of equipment and article of furniture versus its original selling cost.
Whether it was maintained well or needs repairs.
Whether the furniture will be useful to you or if y'all'll need to replace information technology to be operational or for artful reasons.
If you'll need to make larger modifications to the edifice.
And other similar questions.

Sites like whayne.com can exist used to expect up equipment and obtain price estimates.

6. Evaluate the price of the business with the earnings, assets or marketplace approach

This is where many deals fall autonomously considering buyers and sellers ofttimes identify very different values on the same business, and several factors touch on a business'southward value.

Buyers and sellers usually use some kind of pricing model to get a ballpark number and frame negotiations. During this process, it can be very helpful to call in an independent business valuation professional person to brand an objective decision of value. Valuation services, which tin be found online or through word of rima oris, cost around $iii,000 to $5,000, but they can salvage you thousands more than in the long run by coming up with a good estimate.

Whether you practice this yourself or rent someone, it's helpful to accept some noesis of different business valuation method south. To become some insight, we spoke with Mike Bilby, CPA and certified valuation annotator, at Concannon Miller.

Bilby said small businesses should understand 3 main approaches to valuing an existing company when they're considering how to purchase a business:

Earnings approach

Best used for : buying existing businesses that are already turning a profit or have a positive forecast of earnings.

The earnings approach values a business based on its historical, current, and projected profits. Specific methods you may come beyond that fall into this approach include the capitalized earnings method and discounted greenbacks flow method.

For businesses with a history of adequately stable profits, that history can be used to anticipate future earnings and value the business. Even if a business hasn't generated a profit yet, earnings models can be used to predict how much the business might earn in the future. The disadvantage of the earnings approach is that it relies on a prediction of time to come earnings, which may not be authentic.

Assets approach

Best used for : ownership capital-intensive businesses, such every bit manufacturing and transportation businesses, and businesses that aren't profitable yet.

The assets approach measures the value of a business's tangible and intangible assets minus debts and liabilities. Tangible avails include things like equipment and real estate, and intangible assets include things like patents, trademarks and software. The assets approach considers the current off-white-market value of the business concern'due south assets but likewise the future return on investment that the owner could get from those assets.

Market place approach

Best used for : accounting for local factors or confirming a price that you arrived at based on one of the other two approaches.

The market approach measures the value of a business based on how much comparable businesses accept sold for. It's a skilful fashion to get a ballpark range for a business organization'south value and to account for local factors that the other approaches may miss, such as the business's location in a detail neighborhood.

It might be confusing to get all these approaches straight in your head, merely the point of all of them is to assess the current financial health of the business organisation, as well equally its growth potential. In reality, Bilby says, none of these methods exists in isolation. All three of these approaches tin exist used to get in at a fair price for a business, and the last toll will always exist the ane that both the buyer and the seller concord on.

vii. Secure majuscule to make the purchase

Once y'all and seller agree on a number, the next step in ownership a business is to go the money. There are a few dissimilar means you can get together the capital you lot'll need to purchase a business — some specific to buying an existing business, others pretty standard.

Here are some of the ways to finance a business conquering:

Employ personal or family money

If yous're able to cover the costs of ownership an existing concern, that's ever an option. This is more probable if you lot're buying a small business rather than a chain. Of course, you'll want to consult your auditor before ponying up a large lump sum of your own greenbacks. Too, make sure that you're not using all your coin buying a business because running a business takes majuscule, too.

Many businesses are too funded with money borrowed from family. If you go this route, you should understand the tax implications for gifts and family loans. Make certain that you and your family unit member put the exchange of coin in writing and follow IRS rules for family loans.

Seller financing

Some sellers will agree to holding a note, or accepting staggered payments — sort of similar a lender. This way, they get guaranteed income for the coming months (or years, depending on your plan).

There are rules around seller financing, particularly if you program to use some other form of debt financing also. For example, sellers have to be on "standby" if you're too getting an SBA loan, significant they have to concord that they won't exist paid back until you pay off the SBA loan.

Some sellers might besides be willing to trade in some assets, like some piece of furniture they really loved or the company auto, for a lower price.

Partner upward

By turning to a partnership instead of buying a business organisation solo, you can split the payments y'all'll exist making while even so owning that visitor.

Taking on a partner when buying a business organization isn't only useful to cut costs, though: You can also bring someone on lath with more specific experience or a different skill set. Just don't forget to draw up a partnership agreement, and so co-ownership doesn't cause whatever problems downwards the line.

Sell stock to employees

By selling visitor stock to your employees, yous tin get a big discount — making up 50% or even 90% of the business price past some measures. You'll probably want to sell non-voting stock, if possible, to retain buying over the business organization. In social club to issue stock, you'll take to organize the business organization (or re-organize it) every bit an Due south corporation or C corporation.

Start past leasing the business

Information technology might exist possible for you to lease the business organisation instead of buying it outright — with the selection to make the big purchase downwardly the route once you're able to afford it.

Understandably, not all sellers will be open to this option, since they more likely than non want to wash their hands and walk away from the sale. Yet, if leasing is something you'd exist more comfy with — even though it may toll more money in the long run — you might as well ask.

Debt financing

Buying a concern will give you lot tons of documents to approach a banking company or culling lender with for financing: financial histories, taxation returns, employee records, greenbacks flow analyses, inventory and equipment valuations, and much more. This wealth of information makes business acquisitions a practiced candidate for loans because lenders aren't working with a risky bare slate.

If you're looking for a pocket-size-business organization loan , here are a few potential financing options that might help in ownership a business:

Term loan.
Nugget-based financing.

Getting a business acquisition loan is typically easier because the lender has a history to assess. But only similar with any business organization loan, lenders will scrutinize all of the post-obit:

Borrower's personal credit score.
Business credit score.
Annual revenue.
Time in operation.
Taxation returns.
Balance sheet.
Cash flow.
Outstanding debts.

For term loans and SBA loans for when you purchase a business, banks typically crave buyers to put down a 20% to 25% down payment on acquisition loans. However, the SBA recently fabricated some changes that make it easier for buyers to obtain SBA 7(a) loans for buying a business organisation. Now, the SBA requires the buyer to put downwards just 10%, and merely half of that (5%) has to come up from the heir-apparent'due south own greenbacks. The rest tin come in the form of a seller's note as long every bit the seller agrees to be on total standby — meaning that the seller won't be paid back on their note until after the bank is paid.

When getting a business acquisition loan to help with buying a business, you'll too have to provide a formal business valuation (like nosotros discussed earlier), explain your relevant experience, offer an updated business concern plan, and show financial projections for the business under your command. In curt, you'll want to tell a story of how y'all'll improve the concern.

8. Close the bargain with the advisable documents

The last pace in our buying an existing business organisation checklist is to close the deal.

When you've finally found the right business organization, done your due diligence, agreed on a fair price and gathered the capital you need, brand sure yous (or a broker) have all of these documents, notes and agreements in place before yous officially purchase a business organization:

Beak of sale

When buying an existing concern, this document will prove the actual sale of the business organisation, officially transferring ownership of the business organisation's assets from the seller to you.

Adjusted purchase price

This is the final count of the cost of your purchase, including all prorated expenses—like rent, utilities, and inventory.

Charter

If you're taking over the business's lease, make sure your future landlord is in the know. On the other manus, if you lot're negotiating a new charter, double-cheque that everyone understands its terms.

Vehicle documentation

Does the business you're buying come with whatever vehicles? If so, you might have to transfer ownership with the local DMV — make sure to go the correct forms completed by the time of sale.

Patents, trademarks and copyrights

Similarly, when buying an existing business, all patents, trademarks, and copyrights might crave certain forms to become transferred to you, the new possessor.

Franchise paperwork

Not-compete agreement

It's standard practice — and generally a skilful idea — to ask for a not-compete from the former owner. This way, the previous owner won't prepare a competing shop right beyond the street.

Consultation/employment agreement

This document should be drafted in the case that the seller is staying on as an employee. Make sure to file this understanding if so.

Asset acquisition statement

The IRS Form 8594 volition list the assets y'all've acquired, and for how much. This document is pretty important in the "buying an existing business" checklist for your tax returns, so don't forget it.

Bulk sale laws

Bulk sale laws have to do with the sale of business inventory and are designed to prevent business owners from evading creditors by transferring ownership of the business concern to someone else. To comply, prospective buyers usually take to notify the local taxation or financial dominance most the pending sale.

And that'due south everything you need to know nearly how to buy a pocket-size business. Merely knowing how to exercise information technology is one matter, knowing why y'all're doing it is another. And so let's talk almost reasons for buying a business organisation.

Reasons to purchase a business

Buying a business is kind of like being in the market for a domicile. Although some people similar the history and character that comes with an older habitation, others don't want the baggage that can saddle an older home and prefer something turnkey. Similarly, there are plenty of advantages when y'all purchase a business that's already been around for a while, but at that place are drawbacks, as well.

Pros of ownership a business

Proven business concern concept

When launching a brand-new business, the bulk of your time will be spent on the planning phase. You'll have to write a business plan and figure out how to turn that programme into a reality.

Merely when you lot buy a business that's already upwards and running, you'll typically have all of this in place:

A building or office space.
Inventory and equipment.
An established brand and business make identity (whether or non you want to modify it, people know information technology).
Customer base.
Vendor and supplier base, plus manufacturing resources.
Existing employees who tin share their cognition and expertise.
Management processes and policies.
An understanding of your competition and market.

Granted, each of these things may not be in slap-up status, and the business might non be turning a turn a profit yet. All the same, ownership an existing business means it has some structure already in identify, which will relieve you fourth dimension upfront, letting you speedily see what you demand to goose egg in on. Particularly if you lot're testing a new market or entering an industry that you don't take much experience in, zipping past the hard startup stage can be a huge advantage.

Lower operating costs

One of the major benefits of buying a business is that the operating costs are lower. For example, startup costs for a brand-new restaurant can run upward of $450,000 for initial supplies, food and drink, signage and a customized kitchen blueprint. With an existing business, your initial operating costs are lower considering — unless your conquering is pretty atypical — many parts of the business are already in identify and ready to go once you're at the helm.

You lot don't need to spend as much of your budget on hiring employees, developing marketing strategies or building a customer base because those come with the transaction. Instead, you tin can pour more cash into expanding the business concern and adapting information technology to your vision.

Easier to obtain financing

While the move to buy a business isn't always a safe bet, lenders and investors see it equally lower-risk than launching a new company. This is because there's a history of financial performance that a lender or investor can use to approximate how the business concern has performed to date and to predict time to come performance. Plus, there'southward also existing data effectually the company'south market place position, competitors, make recognition and customer base.

All this makes investors more than likely to invest in the business and can make lenders more comfortable in giving you lot a business acquisition loan. The current owners can even participate in financing the transfer of ownership by giving you lot a loan.

Intellectual property is on the table

If your business-to-be has patented their products or has a copyrighted slogan or trademarked logo that wins over customers, so that intellectual belongings value volition probably transfer over to y'all in the acquisition. That means when you buy a business organisation, you sometimes purchase more than what the eye can meet.

This isn't on the table with every concern acquisition, but it could be critical if you're dealing with something that you lot call back could be expanded even more. What if you turned this small business into a national franchise? All all of a sudden, that patent and copyright becomes a lot more valuable. Patents, copyrights and trademarks are often included in sales of software companies, tech businesses and creative businesses (e.grand., music, design and art).

Cons of buying a business

Higher upfront purchasing costs

Past buying an existing business, you'll exist able to save money on operating costs, such as inventory and equipment. However, you'll probably face some pretty sizable purchasing costs. In fact, those purchasing costs might exist greater than what it would take yous to offset a new business.

That'south considering, in addition to the obvious assets, you're also ownership ownership over the following:

Customer base.
Built-out brand.
Design work, from logo to store interior.
Business concept and plan.
Time, effort, and money spent testing out products.
Refined processes, procedures and policies.
Income stream (if the business is already profitable).
Assets and equipment.
Intellectual property, such as copyrights, patents and trademarks.

All of these items volition be the subject area of negotiations between the heir-apparent and seller and cistron into the terminal purchase price when ownership an existing business.

Unfamiliarity with the details

If you're buying a business y'all didn't start, y'all'll understandably be a chip less familiar with its inner workings and the details of its products, processes, employees and financials than if you built the business yourself. This could be a bit of an obstacle, especially when yous're just starting out. This is especially true if you are entering an industry that you lack experience in. You'll need to spend a lot of time learning the ropes, and gear up for the learning bend to be steep.

Take a chance of a hidden problem

As a prospective concern heir-apparent, you lot'll become through a adequately intensive due diligence process, where you'll gather information nigh the business and the electric current possessor. But no matter how much information you uncover, you lot ever run the chance of taking on an result that y'all're not aware of or that's worse than it appeared. For example, equipment could be damaged, or the brand might take a bad reputation. One time you purchase a business, y'all buy those issues, like information technology or not.

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Source: https://www.nerdwallet.com/article/small-business/buying-an-existing-business