Buying a business generally is less involved and less costly than building a business from the ground up. An existing company already generates revenue and has an existing customer base. The challenge is finding the right business to purchase.
One advantage is acquiring an established brand and trademarks. This helps reduce the investment that new business owners must make into getting the word out startup ventures. Further, an existing business comes with industry knowledge, a trained staff, equipment and inventory.
However, buying a new business is not without risk. The selling price may indeed be higher than the business is worth. Further, there is no way to know the true reason why the business is on the market. Perhaps it has lost a key employee to a competitor or has tax liens or other financial claims against it. There is a myriad of reasons why someone would look to sell a business. Try to find out the real reason.
Choosing the Right Business
Conduct your due diligence. First, look into a business and industry that you understand. Look into a business in which your interest, experience and skill set align. At that point, begin examining options. Some important things to consider:
- Reputation of the business
- Economic trends in the area
- Time commitment involved
- Loyalty of customers to the existing owner and the current staff.
How to Find a Business for Sale
A business broker helps match buyers and sellers, just like a real estate agent. Additionally, like anything else, you can use the internet to conduct research. For instance, Bizbuysell.com, the largest online business-for-sale exchange, lists over 45,000 companies that are on the market.
Once you have made the decision on what is the right business purchase, it is time to assemble a team that can help you close the deal. You’ll need a lawyer to help negotiate the contract. The final sales agreement from your attorney will define everything you need to finalize the purchase, including a listing of business assets, customer lists, intellectual property, and goodwill, as well as the company’s liabilities. You accountant, too, will play a critical role since he or she will help you examine the books of the existing business and determine a fair valuation.
Often the most important step is securing the financing to buy the business. Many people pursuing the American Dream of business ownership will use their savings or they may hit up family and friends to invest in the company. More likely than not, a purchaser will need to secure a business acquisition loan that provides the funding to purchase an existing business, acquire or open a new franchise location, or buy-out a partner in a business you presently own.
The current economic environment is ripe for purchasing a business. By many measures, the U.S. economy is doing quite well. As a result, banks have become more willing to lend than they were just a few years ago during the so-called post-Great Recession “credit crunch.” In fact, according to the latest Biz2Credit Small Business Lending Index (January 2018 figures), big banks ($10 billion+ in assets) are approving more than one-quarter of the loan applications they receive.
Meanwhile, regional and community banks are granting almost half (49.1 percent) of their funding requests. Additionally, institutional investors (pension funds, hedge funds, insurance companies and other institutions) have become active in the small business credit marketplace. Never before have so many options been available for funding.
The amount of funding and the cost of borrowing (interest rate/APR) will depend on the industry sector of the business you are trying to acquire, the balance sheet of the target company, your personal credit history, and the amount of your own money you are willing to invest.
Checklist for Closing on a Business
At closing, the buyer and seller will settle on aspects of the purchase that must be pro-rated, such as what percentage of the month’s utilities each party will be responsible for paying. In some cases, the original owner will agree to stay on for a specified period to help with the transition to provide guidance and training. Your lawyer will negotiate such things as part of the sale.
Where to Find Help Once the Business Is Yours
Everyone needs a mentor. The SBA has a plethora of resources available including a network of nearly 1,000 Small Business Development Centers (SBDCs) that are often connected to local colleges and universities. The SBDCs offer guidance at little or no cost. Additionally, the SBA works with SCORE, an organization of 12,000 retired professionals who serve as volunteers to give provide guidance in growing a business. Female entrepreneurs can benefit from the SBA’s Women’s Business Centers Women’s Business Centers that provide management and technical assistance and can help with business loans for women to start and grow their companies. There are over 100 WBCs located throughout the U.S. and Puerto Rico.