Are you looking to buy an existing business near you? Now may be the perfect time to become a business owner. At any given moment, there are thousands of small Business for Sale Near Me across the country. Buying an existing business can provide exciting opportunities to take over an operation with an established customer base, reputation, and cash flow. The prospect of buying a business can seem daunting, but with proper research and preparation, it can lead to acquiring a fulfilling and profitable enterprise.
The main benefits of buying an existing business include inheriting an instant revenue stream, taking over an established brand name, acquiring existing assets, and avoiding startup costs and pitfalls. However, purchasing a business is also a major investment that requires careful evaluation of finances, operations, marketing, and other aspects to ensure it aligns with your goals and abilities.
This guide will walk you through the key steps of buying a small business, from finding listings and valuing companies to performing due diligence, securing financing, negotiating terms, and closing the deal. With the right strategy and diligence, buying an existing business in your area can help turn your dream of business ownership into a reality.
Deciding to Buy a Business
Buying an existing business has several potential advantages compared to starting a business from scratch:
Pros:
Established customer base and reputation. An existing business already has customers, brand recognition, and a track record, which can take years to build as a new business. This can help generate revenue faster.
Existing infrastructure. The business likely already has the equipment, employees, suppliers, processes, licenses, etc. in place so you can hit the ground running instead of having to build these from nothing.
Proven business model. You can see financials and operations to evaluate if the business and model are viable, reducing risk compared to an unproven new idea.
Potentially faster growth. With existing infrastructure and momentum, you may be able to scale the business faster than a brand-new startup.
Access to financing. Banks and investors may be more likely to fund the purchase of an established business over a speculative startup.
Cons:
Higher upfront cost. Buying a business will likely require significant capital, whereas starting a new business can often be done more frugally.
Existing problems. An existing business may have unknown liabilities, problematic employees, outdated technology, or other issues that aren’t apparent until after taking over.
Learning curve. It may take time to fully understand the business operations and industry, especially if it’s in an unfamiliar field.
Integration challenges. Integrating the business into your existing operations, if applicable, can present difficulties.
Limited ability to shape culture and branding. It’s not a blank slate so there may be challenges changing the business model and branding.
Overall, buying an existing business can help jumpstart revenue but comes with risks. Starting a new business gives you more control but will take more time to establish. Assess your risk tolerance, desired timeframe, and available capital when deciding.
Finding Businesses for Sale
When looking to buy a business, there are several places you can search both online and offline to find potential opportunities.
Online Listings
Some of the top sites for finding businesses for sale online include:
BizBuySell – This is one of the largest online marketplaces for buying and selling small businesses. You can search by location, industry, asking price and other criteria. Listings include key details like financials, operations, and growth potential.
- BusinessBroker.net – This site lets you search for businesses for sale by state. Listings provide an overview of the business, expected sale price and contact details for the broker.
- LoopNet – While focused on commercial real estate, LoopNet also has a section for buying and selling operating businesses. You can search by type, size, location and other filters.
- Local classified/listing sites – Check sites like Craigslist and Facebook Marketplace for local business owners looking to sell. Listings here are generally by the owners directly.
Business Brokers
Connecting with local and regional business brokers can give you access to businesses listed for sale that aren’t advertised publicly online. Brokers have inside connections and exclusive listings. Search sites like the IBBA and LinkedIn to find experienced brokers focusing on your geographic area and industries of interest.
Networking & Referrals
Speaking with other local business owners, accountants, lawyers, real estate agents and financial advisors can sometimes lead to off-market opportunities. Letting your connections know you’re looking to buy can help you gain access to businesses for sale through referrals.
Local Resources
Check listings in your local newspaper classifieds section. Look for signs or notices posted on business windows and bulletin boards. Search SBA local resources and chamber of commerce directories for potential leads. Attend local business networking events and connect with owners looking to sell their business.
Valuing a Business
Determining a fair valuation is one of the most important steps when buying an existing business. There are several methods used to value a business, each taking into account different factors about the company’s financials, operations, assets, market value, and future outlook.
The most common valuation methods include:
- Multiple of Discretionary Earnings – This looks at the business’s adjusted net profit over the past 1-3 years. A multiple is applied based on the company’s risk and growth potential. This is one of the simplest and most popular methods.
- Multiple of Revenue – The company’s annual revenue is multiplied by an industry-specific multiple. This works best for asset-light businesses like professional services or software companies.
- Multiple of Assets – The total assets like property, inventory, and equipment are multiplied by a factor. This is commonly used for manufacturing, retail, and other asset-heavy businesses.
- Discounted Cash Flow Analysis – Future expected cash flows are projected and then discounted back to the present using a discount rate based on risk. This method accounts for future growth potential.
- Comparable Business Sales – Recent sale prices of similar businesses are used as a benchmark. Adjustments are made for differences in size, profits, location, etc.
Key factors impacting a business’s value include profitability, growth trends, diversification, management, assets, market conditions, competitive advantage, brand strength, and barriers to entry.
Working with a professional business appraiser is recommended to determine a supportable, fair valuation. They will account for all relevant factors and utilize accepted methods to reach a justifiable price.
Due Diligence
When buying an existing business, conducting thorough due diligence is crucial. This involves reviewing key documents and records to verify the accuracy of the seller’s representations and fully understand what you would be buying. Some key items to review include:
- Financial Statements and Tax Returns – Review several years of financial statements, tax returns, bank statements, accounts receivable/payable, credit card, and loan statements. This will help you assess past financial performance and current financial health.
- Legal Documents – Review licenses, permits, franchise agreements, leases, contracts, insurance policies, lawsuits, liens, patents, trademarks, employee agreements, etc. This ensures proper documentation, identifies risks/obligations being assumed, and highlights intangible assets.
- Inventory – Review inventory lists, inventory counting procedures, inventory costing methods, and physical inventory. This provides insight into inventory quality, controls, and valuation.
- Fixed Assets – Review lists of equipment, vehicles, computers, furniture, etc. including original cost and accumulated depreciation. Inspect condition of assets. This helps determine fair asset valuation.
- Customer Information – Review customer lists, key contacts, contractual arrangements, and sample invoices. This provides insight into customer base and sales operations.
- Employee Information – Review employee list, job descriptions, payroll details, personnel files, and benefit programs. This highlights personnel needs and obligations.
Conducting thorough due diligence reduces the risk of buying a business and allows you to make an informed offer based on verified information. Competent business brokers and legal/accounting advisors can help guide the process.
Financing
Financing is a critical component when buying a business. There are several options to consider:
Business Loans
Taking out a traditional small business loan from a bank is one route. Banks will want to see a solid business plan detailing how you’ll repay the loan. Interest rates and terms vary. SBA loans are a popular option, with the SBA guaranteeing a portion of the loan to the bank.
Seller Financing
Many sellers are open to financing a portion of the sale price directly to the buyer. This spreads payments out over time, reducing needed capital upfront. Be sure to consult a lawyer and detail repayment terms and collateral in a written contract.
Partnerships
Bringing on a partner can provide capital to buy a larger business. Make sure to clearly define partnership shares, roles, and exit plans upfront. An operating agreement is essential.
Crowdfunding
Online crowdfunding platforms like Kickstarter and GoFundMe allow you to raise funds from a large pool of backers. Offering rewards can entice backers. This works best for consumer-facing businesses.
Home Equity Loans
If you have sufficient home equity, a home equity loan or line of credit can provide funds for a business purchase. However, your home will be used as collateral.
401(k) Funds
You may be able to leverage funds from your 401(k) or IRA. However, strict rules apply, and taxes and penalties may be incurred. Consult a financial advisor before using retirement funds.
Overall, explore all financing options in detail. Aim to fund at least 20-30% of the purchase price from your own capital or investors. Debt financing can cover the remainder. With the right mix, you can fund your dream business acquisition.
Making an Offer
Once you’ve found a business that you’re interested in purchasing and completed your due diligence, it’s time to make an offer. Making an offer involves determining your offer price and submitting an offer letter to the seller.
Determining Your Offer Price
There are a few key factors to consider when determining your offer price:
- The asking price – This is the starting point for negotiations. While you’ll likely end up offering less than the asking price, you don’t want your offer to be insultingly low.
- Valuation of the business – Look back at the valuation you determined earlier in the process. Ensure your offer aligns with the actual value of the business based on its financials, assets, market value, etc.
- Financing – Consider how you plan to finance the purchase and how that impacts the amount you can offer. Work with your lender or investor to determine your budget.
- Negotiation strategy – Decide if you want to start lower to leave room for negotiation or start closer to the asking price. Keep in mind the seller may already be expecting buyers to offer 10-20% below asking.
- Market conditions – If it’s a hot market with lots of buyer competition, you may need to offer closer to the asking price or even above to win the bid. In a slower market, you may have more room to negotiate down.
Take all of these factors into account when deciding on your initial offer price. You can make an offer contingent on final due diligence so you have flexibility to adjust the price later if needed.
Submitting an Offer Letter
Once you’ve settled on an offer amount, put it in writing in an offer letter to the seller. The offer letter should include key terms:
- Your offered purchase price and payment terms
- Proposed closing date
- Plans for financing, including contingencies
- Contingencies based on due diligence
- Requests for what will be included in the sale (inventory, equipment, furnishings, etc.)
- Provisions about the lease, employees, training, etc. if applicable
Submit your offer letter to the business broker or seller directly. Be prepared to negotiate if they counter or reject your initial offer. Maintain open communication as you work towards an accepted offer.
With a solid offer in place, you’ll be one step closer to finalizing the acquisition of your new business.
Negotiating the Sale
Negotiating the purchase of an existing business can be a complex process that requires careful preparation and strategy. Here are some tips for negotiating effectively:
- Have a target price in mind but be flexible. Going into negotiations, you should have a well-researched idea of what you believe the business is worth and what you can afford to pay. However, avoid revealing your ceiling price right away or sticking stubbornly to one number. Be willing to consider reasonable counteroffers.
- Listen to the seller’s perspective. Try to understand where the seller is coming from on price and terms. Ask questions to learn why they believe their asking price or terms are fair. Look for areas of common ground.
- Make the first offer, but leave room to go up. As the buyer, you’ll generally want to put the first dollar amount on the table. However, don’t open with your best and final offer. Leave yourself room to make concessions if needed.
- Focus on areas besides just purchase price. Negotiate not just the sale price but other terms like seller financing, inventory to be included, transition period, training, and consulting. Expanding the negotiation can create more opportunities for compromise.
- Be ready to provide verification. The seller will want to verify your ability to pay and experience to operate the business. Have financial statements, business plans, and other materials ready. Proving you are serious and qualified can strengthen your position.
- Remain professional. Negotiations can sometimes get emotional or adversarial. But maintaining a calm, professional demeanor will make it more likely you can find common ground with the seller.
With preparation and strategic negotiating, you’ll be more likely to arrive at a price and terms that satisfy both you and the seller. Stay patient, flexible, and focused on shared interests to close the deal.
Closing the Deal
Once you’ve negotiated a sale price and terms, it’s time to close the deal and finalize the purchase. This involves several steps:
Signing the Purchase Agreement
The purchase agreement, negotiated earlier, will be the main legal document governing the sale. Both parties should review it carefully before signing. It will likely include details like the purchase price, payment terms, what assets are included, timing for the transition, and more. Make sure everything aligns with what you agreed upon.
Transferring Assets
Work with the seller to transfer over any licenses, permits, contracts, and other assets that are part of the sale. Update registrations and notify vendors of the change in ownership. The seller will need to cancel or transfer any existing insurance policies as well.
Handling Finances
You will need to arrange financing and make sure funds are available by the closing date. The seller must be paid according to the terms outlined. You will also need to set up new bank accounts, accounting systems, and merchant services for the business.
Transitioning the Business
Both parties should develop a transition plan to smoothly hand over operations. The seller should provide training, introduce you to key employees and customers, transfer any intellectual property, and exchange other information vital for running the company.
Inspecting the Business
Schedule a final walkthrough of the premises to ensure everything is in the agreed-upon condition. Check inventory levels, equipment condition, signage, and the general state of the property.
With careful attention to these details, you can ensure the closing and transfer goes smoothly. While exciting, make sure to be patient and thorough in setting up your new business for success.
Final Tips
When buying a business, it’s important to be thorough in your research and planning. Here are some final tips to keep in mind:
- Seek advice from professionals. Connect with business brokers, lawyers, accountants and financial advisors for guidance. Their expertise can help you avoid costly mistakes.
- Understand all legal and financial obligations. Review leases, contracts, licenses, insurance policies, debts, and other commitments that will transfer with the sale. Know what you’re getting into.
- Negotiate a fair purchase price. Work with a valuation expert and don’t overpay. The price should align with the business’s financials and growth potential.
- Create a transition plan. Have a strategy for integrating operations, employees, systems and branding after taking over. Make the transition of ownership as smooth as possible.
- Arrange financing early. Whether using savings, loans or investors, make sure funding is secured before finalizing the sale. A lender will also want to review the business valuation and financials.
- Be patient. It takes time to find the right business at the right price. Avoid rushing into a bad deal. Stay focused on finding the best fit.
With careful planning and preparation, buying an existing business can be a fulfilling endeavor. Do your homework, seek advice, understand the risks and rewards, and proceed with cautious optimism. The hard work can pay off with a business you enjoy running and owning for years to come.
