The Complete Guide to Buying a Business: Everything to Know

March 15, 2023

You’ve been dying to work for yourself, but you don’t want to take the time to build a business from scratch. Consider buying a business that has some success already.

But you shouldn’t buy the first business you find. Instead, consider some vital steps to take that can make or break your future as a business owner.

Read on to learn more.

Determine Your Budget

The first step in buying a business is setting a business budget. Consider how much money you have in personal savings or in revenue from other businesses you own that you can put toward a new business.

As you decide on a budget, though, think about various business financing options. Outside of your own money, you can look into business loans, grants, or investors.

You could also use a line of credit if one is available to you. Depending on the seller, they may be willing to set up a financing plan so that you can pay for the business over time.

If you have friends and family willing to help, they could lend you money. However, this can be risky because you could jeopardize your relationships if you fail to pay them back.

Think about the funding sources you’re willing to use. Then, you can come up with a plan for how to afford a business, and you can start looking for businesses that suit your budget.

Don’t forget about what can affect the cost, from the financial history of the business to the industry and projected growth.

Consider What Type of Business You Want

Another essential part of the business buying process is to decide what kind of business to purchase. For one, you should decide if you want to get a service-based business or a project-based company.

Next, decide if you want to buy a local or regional business or if you want to buy an online business. Finally, think about the different industries and which ones interest you the most.

Then, you can narrow your search to businesses for sale that fulfill your requirements. Or maybe you’re more flexible, so you look for a business that’s priced well.

However, it’s a good idea to have some experience with the industry or the type of business you want to buy. That way, you can take over right after the sale.

You can hire a new CEO and other executives to run the business. But that can take time, so you may need to do some of the heavy lifting after the sale, especially if the current owner doesn’t want to stay on board.

Don’t forget to consider the future of the industry as well. The last thing you want is to buy a business that could die out in a few years.

Know Where to Find Businesses for Sale

Next, you should consider where you can find businesses that are for sale. An easy option is to contact a business broker since they can connect you with multiple business owners looking to sell their companies.

You can also look online at a few business marketplaces where sellers list their businesses directly. If you find a business that interests you, contact the seller for more information.

Another excellent place to find potential businesses is through professional associations. You can build your network and contact business owners letting them know you may want to buy their company.

Contact local commercial real estate agents. They may know of clients who are looking to sell not only their business property but the company as well.

If you know other business owners, let them know of your plan to buy a business. They can tell other business owners they know about your plans, and you could learn about businesses for sale that aren’t listed publicly.

Finally, you can ask the owners of businesses you visit often whether they’re looking to sell. If they’re not selling right now, you can ask them to notify you if that ever changes.

Hire Some Help

You’ve found a business that you want to buy and that is up for sale. While you can continue the process alone, it’s better to hire at least a couple of people to help you.

At a minimum, hire an accountant and a lawyer to help you. The accountant can review the business’s financial statements and projections, and they may be able to spot red flags or future financial issues.

Then, you can assess the risks of buying the business and if you’re comfortable taking on those risks. If not, you’ll know to keep looking for your next business.

Hiring a lawyer is just as beneficial, but they’ll help you research the legal side of the company you intend to purchase. The lawyer can review any lawsuits the company has had.

You can also ask your attorney to review business licenses and permits, zoning laws, and other regulations. That will tell you whether the business is currently complying with the law.

If it’s not, you’ll know what you need to do as soon as you finalize the purchase. Then, you can avoid any future lawsuits once you start running the company.

Research the Business

Next, you’ll need to do your due diligence and research the business. Ask your accountant and lawyer to help you check everything from the financial history to the legal issues facing the company.

You may need to sign a letter of intent telling the seller you wish to buy their organization before you start this step. Take as much time as you need to learn about the business.

Compare official business documents with what the seller is telling you. If you find any inconsistencies, ask about them to get a straight answer.

Don’t be afraid to walk away from the purchase if you find the seller isn’t willing to answer your questions. There’s a good chance they may be trying to scam you.

At this point, you can bring in other experts along with your accountant and lawyer. You can hire a business appraiser to evaluate how much the company is worth.

If you find anything that makes you uncomfortable, back out of the deal. Even if you signed a letter of intent, it won’t bind you to the purchase.

Get a Valuation

If you haven’t already, you’ll need to get a valuation of the business you want to buy. Ideally, this would come from a third party so that the value isn’t biased in your favor or the seller’s.

You can value a business in a few ways, the first of which is the asset-based method. This involves calculating how much all of the assets are worth before subtracting the value of the liabilities.

Another option is the discounted cash flow (DCF) method. You figure out the projected cash flow for the business and compare it to the time value of money.

It may also make sense to use the revenue method where you calculate the value based on a multiple of the revenue. In some industries, the revenue is less than one, but it could be two times or more.

Ask a business broker or appraiser about the best valuation method for the business you want to buy. Then, you can hire a third party to use that method to come to a fair business price.

Draft a Contract for the Sale

When you’re ready to buy your new business, you’ll need to draft a business purchase agreement. You can hire a lawyer to write the contract, or the seller may do so.

If the seller provides the contract, have your lawyer read it over to make sure everything looks good. The contract should detail the name of the seller and the name of the buyer.

It also needs to cover the business and its assets that are included in the sale. Make sure the contract also lists any liabilities that will transfer with the sale and the sale price.

You can also outline the payment terms, such as seller financing or a cash purchase. If you want the seller to stay on and help with the transition, note that in the contract.

Finally, you may want to include a noncompete clause to prevent the seller from starting a competing business. Depending on the first draft, you might need to make a few changes.

After you and the seller are happy with the contract, you’ll both need to sign it. Then, you can send them your payment and officially take ownership of the company.

Are You Buying a Business?

Buying a business can be a great way to start to work for yourself. However, you need to consider everything from your budget to the legal implications.

Do your research to make sure the business you buy is on the right track. Then, you won’t have to risk a bunch of lawsuits or financial collapse after you take over the company.

If you want to make sure you don’t spend too much, get a valuation of the business as well. Learn how we can help with that.

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