Do you want to know how to buy an existing business? It’s a great idea to have your own business. For this reason, some entrepreneurs prefer to buy an existing business directly. Of course, you would find other reasons to buy a business, such as acquiring an income and merely growing your property portfolio.
Before you start your business buying journey, look for what you need to know to avoid buyer regrets. Buying a checklist of existing businesses will give you a step-by-step guide. We are covering the ten steps for buying an existing business. Know how to buy an existing business from start to end; here is a rundown on what to buy.
Follow the 10 steps below on how to buy an existing business.
Find a business to buy
The first step is not just to find an available business, and it is worth buying. There are lots of companies for sale. But it is not uncommon to have financial commitments that hold your interest. This will help if you find a business that is targeted for-profit and does not hide any skeleton.
Few things here you have to consider while selecting an existing business:
- Positive cash flow or a balance sheet
- The businesses you are familiar with
- Customer diversity (having more than 20% of a client’s income)
- A long-term growth plan
- A business that you will enjoy
Give the value of the business.
After identifying an existing business, it’s time to determine how much value you’re interested in the business. You have to find lots of vendors who value their business more, and it is essential to make sure that you do not pay extra.
When pricing a business, you have two options:
- Do it yourself
- Hire a professional
Hiring a professional is a bit expensive – you need $5000 or more. However, if you are not confident in your ability to make objective assessments, we recommend it.
Business Licenses and Permits
Ensure that the business you are looking is having all business licenses and the necessary permissions. If you purchase an existing business, you have to ensure that the current owner is not driven too much by any local business licensing law. Businesses in specific industries, especially food services and child care, need a valid permit for highly regulated openings.
Discuss the purchase price.
Once you have taken your decision, you need to move forward with the business acquisition. And think that you have a good idea of its value while negotiating the price. You will usually do this by offering a written or oral un-binding. If your offer is near the seller is willing to sell, they will start negotiating with you.
It will help if you go backward with most business transactions by negotiating different purchase prices and terms before reaching a temporary agreement. You can change these terms later if you find something that changes your opinion about the company’s values during due diligence.
Submit a letter of intent (LOI)
While you have a general idea about the terms and rules of the business purchase, you can submit a letter of intent. This letter is the evidence that shows everything you’ve discussed before, including the purchase price and your intention to buy the business.
The letter is a non-binding agreement that furthers the business acquisition process. It shows the seller that you are committing and ready to move forward in the process.
Complete due diligence
When you and the seller sign the LOI (letter of intent), you need to access more about the business information. Usually, when you first show interest in buying a business, you will get an initial overview of how the business performs.
However, when you enter into due diligence, you need to access any financial or legal information, you need to close all the transactions.
Obtain financial source
During due diligence, you should also look for a financial source to finance the transaction. Most businesses buy with a combination of debt and equity, which means you bring the purchase price and the rest through debt.
With SBA (Small Business Administration) loans, traditional bank loans, and a rollover (RBS) for business startups, you get plenty of options here. If you have a healthy 401K, the best solution is to go for ROBS, as you can finance a purchase without paying debt or interest.
If you purchase a business with employees, be sure to ask the organizational business chart how they rank and relate to each other. This should include compensation data, management procedures, benefit plans, insurance, and leave policies.
Other essential documents
This list of documents will give you a lot of information about the business, but you must check out some more. Your attorney or accountant will be able to identify additional documents related to the business you are interested in.
For example, ask the seller for property documents, equipment/asset lists, brand assets for advertising content, intellectual property assets, insurance coverage, employee policies and contracts, attachment information, and customer lists.
Close the transaction
If there is nothing to wait for, it is time to close the transaction. This is where you draft the final purchase agreement. And you need to agree on each of the terms of the contract with the seller.
You should always hire a lawyer to discuss this part of the process. At the very least, they can review the purchase agreement so that you can confirm what you got through negotiation.
FAQ: How to buy an existing business
Is it better to buy an existing business?
One advantage of buying an existing business is that regardless of a company’s past performance. There will be a history of the existing business from which you will make individual decisions. Even if the company is not having profit in the past, it may need skills and expertise to turn it into an effective enterprise.
How to do business without money?
One way to finance an existing business without losing money is to leverage a small business. In a for-profit buyout, you gain business assets to finance the purchase. When a condition is meting, you can make a leveraged buyout and the structure a “no-money-down transaction.”
How much do I pay for an existing business?
Generally, 20 to 25 percent is considering to pay for the first time. It means you should spend between $ 80,000 and $ 100,000 for an existing business. If it earns an estimated $20,000 per year, the buyer will recoup its initial investment in 4 or 5 years.
What to ask when buying an existing business?
Below are six questions you should ask yourself before you buy:
- Why would you want to buy this business?
- How do you make sure you succeed?
- How much capital do you have to access?
- How valuable is the business?
- Ask to talk to the current owner.
- Ask for recent financial statements of the business.
What is the difficulty of buying an existing business?
Older plants and equipment in the business may require significant improvements. You often have to invest a considerable amount of upfront and budget for professional fees for solicitors and accountants. The business may be poorly managing with low employee morale, so you have to work on this.
How do I get a loan to buy an existing business?
SBA loan: Small business administration is your best option when it comes to getting a bank loan. “SBA 7 provides” guarantees and security measures to all banks that can fund acquisition funds, “Commercial Capital.” Directions are usually minimal, although banks can add their own.