Starting a business from scratch is not the only way to start a business.

In fact, in a lot of instances, it is much easier to buy an existing business than starting from ground zero.

For example, when you buy an existing business you already have things like recurring revenue, an established customer base, and a track record to go off of.

In this post, we will explain the 6 general steps of buying an existing business and what to look out for when choosing a business to buy.

Now let’s get started with how you can buy a business.

6 Steps on How to Buy a Business

Step 1: Figure out what you’re budget is

The good news is that most businesses that are bought are acquired using some form of financing.

You can do this either through debt financing using a bank business loan or seller financing where you and the seller come to an agreement on payment terms.

Read this post next if you want to learn more about business loans.

Anyway, in either case, you should have some capital saved as a down payment on purchasing a business. At the very least 15-20% of the purchase price.

Now the cost of a business varies greatly with size, location, and industry.

But we can say the average sales price of a business is between $150 to $200,000.

However, you can easily find businesses in the $15 to $30,000 range.

Again, it depends on the size and type of business.

If you want to buy a small flower shop or dry cleaners, this would be significantly cheaper than buying a gym or management company.

The bottom line is, you need to know how much you have to spend on buying a business.

As well as the type of business you’re interested in, so you can choose the business that is the best fit for you.

Step 2: Determine what type of business you want to buy

What industry interests you the most? What industry is likely to continue to grow 5, 10, 20 years down the road?

These are just a few of the questions you should ask yourself.

Ultimately, it makes the most sense to choose a business or industry that you have worked or have experience in.

For example, if you’re a hairstylist, you could look for hair salons to buy.

Or if you are a lawyer and have always wanted your own practice, you can look into law firms for sale.

When you choose an industry that you have experience in, the transition from employee to owner is much easier.

That is when compared to buying a business you know very little about.

Also, when you buy a business you’ve worked for, you’ll be better equipped to spot those businesses that have operational red flags.

Step 3: Do your research

You can look at sites like BizBuySell and search for businesses for sale by location, price, industry, and more.

If you need more help in finding the right business to buy, consider contacting a business broker.

They charge between 5 and 10 percent commission of the business purchase price, but can help you in several ways by:

1. Helping you decide on the type of business you should buy.

In some cases, it comes down to more than just the industry, but also some business details. For instance, how many employees and customers they have.

You may learn that you don’t want to manage a certain number of employees, or don’t want to serve a particular customer base.

A broker can help you think through these sorts of details.

2. They can help with vetting businesses for you.

Brokers help businesses buy and sell all of the time.

They know what questions to ask to make sure only qualified businesses come to your attention which can save you a lot of time.

They are also experienced in analyzing the market and assessing if a particular business is a good deal or not.

3. They can also help you with negotiating prices.

This is to make sure that both you and the seller agree on a price that will make everyone happy.

After you completed your research, hopefully, you have a business or 2 that meets your criteria.

Step 4: Reach out to the seller

In order to move forward with the deal, they’ll likely require you to sign a letter of intent.

A letter of intent is a non-binding agreement that allows you (the buyer) to do a more thorough review of the business and prevents the seller from negotiating with other buyers during this time.

It also demonstrates the seriousness level of both the buyer and seller.

The seller may also request that you sign a nondisclosure agreement.

By signing a nondisclosure agreement, you would agree to not disclose any confidential information that you may find during due diligence.

Step 5: Due diligence

Due diligence is the process of gathering as much information about the business before actually buying.

If you own a home, then you already know that before buying it, you had a week or two for due diligence.

And it was during this time, that you were able to investigate further into the home you were considering.

The same process is true with purchasing a business.

Some of the business documents that should be requested during due diligence are:

1. Organizational paperwork – like the articles of incorporation or articles of organization. You should also request a certificate of good standing from the state.

2. Business licenses and permits – depending on the business industry, certain licenses and permits are required.

So you want to make sure that the business has what it needs to operate.

3. Leases and contracts – you want to learn who the business is legally tied to.

You’ll want to know of any landlords it has, and if they would be willing to transfer the lease to you.

And also, if there are any outstanding contracts with customers and vendors.

Here you could learn if most, or all, of its supplies come from a single vendor or if half of the business revenue is from a single customer.

Both of these things would be a red flag but wouldn’t come to light without first reviewing the outstanding contracts the business has.

4. Business financials – like tax returns, profit and loss statements, cash flow statements, and balance sheets.

Here is where you learn about the company’s revenue, expenses, profitability, outstanding debt, accounts receivable, business assets and other pertinent information.

A concern here is that most people don’t know how to interpret financial statements so to mitigate this risk.

So, you should consider hiring CPAs like LYFE Accounting to help with reviewing the financials.

Multiple financial periods should be reviewed to analyze any trends and to clarify questions with the seller regarding ups and downs.

Reviewing the financials is a certain way to learn if the business is priced correctly.

A CPA or business valuation specialist should be able to take the financials and value the business based on a few different methods.

You don’t want to buy a business that is overpriced.

Also, if applicable, you should also request inventory information such as how much is on hand and its condition.

5. Organization Chart – shows employee rankings and relationships among job roles.

This also includes any employee compensation information, operating procedures and processes, insurance, benefits, and vacation policies.

Step 6: Close the deal

So you’ve found the right business for you, completed due diligence, and have the capital you need to close the deal.

All that needs to be done, is that both the seller and buyer sign the bill of sale.

The bill of sale is an important document that shows the sale price and transfer of ownership.

As the buyer, you may also want the seller to sign a non-compete agreement.

Just think about this for a second. The seller ran the very business you’re buying and is the most knowledgeable on how to operate and grow that business.

This person could easily become a competitor and take revenue away from you.

But if you have them sign a non-compete agreement, you can eliminate this risk.

Other Considerations When Buying a Business

1. Training and support

It is best to have the owner around for a period of time to help you get transitioned and acclimated to the business.

Usually, sellers are willing to stay on board with you on a part-time basis to train and support you.

Make sure to get this in writing though. If a seller is unwilling to do this, that’s normally a red flag.

2. Type of sale

There are 2 types of sales in buying a business, and those are an asset sale or a share sale.

An asset sale means that the original business and all of its liabilities cease to exist when you buy the business. This tends to be the preference among buyers.

And a share sale means you would inherit all of the business’s outstanding liabilities.

Sellers tend to prefer a share sale since the liabilities would no longer be theirs, and there are some tax advantages for sellers of a share sale.

3. Reputation of the business

This can obviously be reviewed during due diligence, like looking up any company reviews that are out there and potentially speaking with a few references.

But it’s also important to assess if the business is dependent on the individual owner’s brand.

Some customers may like a business solely because of its owner which presents a problem to potential buyers.

On the flip side, when looking at the company’s reputation, there could be some negative perceptions out there.

The bottom line is you should know the company’s brand and reputation with the community and its customers.

4. Consider if you want to buy a business or open a franchise

Buying a franchise is somewhat similar to buying a business but the main difference is buying a franchise gives you less control.

This is because the franchisor is really selling the rights to use their logo, name, and business model.

This leaves little to no room for changes and creativity within the business.

But, this could also be a good thing since you have more guidance on how to operate the business.

Buying a business gives you more control but less guidance.

You can choose how to run the business and the direction of it. But there is not as much ongoing guidance that a franchise would provide.

Those are just a few things to think about when buying a business.

And if you’re looking for someone to help you manage your investments, then check out our investment advisory services here.