Buying a Small Business: Purchase Process and Financing
Buying a Small Business: Purchase Process and Financing

Do you dream of owning your own business? There is more than one way to achieve this dream. Some entrepreneurs start a business from scratch, while others buy an existing business.

There are certainly advantages to buying an already established business… but is it the right decision for you? Let’s find out.

Advantages and disadvantages of buying an established business

If the idea of ​​starting a new business isn’t your cup of tea, you might consider becoming the new owner of an existing business. Let’s look at the pros and cons of doing so.

Advantages

An established business has already done the hard work to get established, establish customers, and generate revenue, so you have less work to get up and running. Compare that to launching a startup, which will require a lot of upfront capital, as well as a lot of strategy and planning to be successful.

Another advantage is that you can get a clear idea of ​​the type of income you can expect. Smart business buyers ask existing owners to see their books. Reviewing business financial statements, such as cash flow statements and profit and loss statements, can help you determine the financial health of the business.

The inconvenients

On the other hand, you may not be able to find the type of business you are interested in selling or at an affordable price.

You can also inherit debts such as debt from the current owner, which can increase the cost of buying a business. And you may not be aware of any issues with the staff, vendors, or location until you take ownership and see for yourself.

Ask yourself why this person is selling the business. Is it because he’s getting restless and they want to get out before the ship sinks? You don’t want to be the one that goes down with the ship!

What to consider before buying a business

If you are considering buying a business, here are some things to consider.

What’s the real story?

Like I said, it’s important to ask why small business owners sell their business. If they’re thinking of retiring, that’s one thing. But if they have accumulated debt and cannot afford to run the business, then that becomes your problem.

Do your due diligence to find out as much as you can about the company. Don’t just look at the balance sheet; also talk to employees to see how they like the company and how it is run. Examine the equipment to see what state it is in.

How much will it cost?

The purchase price is just one of the expenses you will have when buying an existing business. If the equipment is obsolete, you may soon need to replace it. And consider that some employees might leave when you become an owner, so you may need to invest in hiring new employees.

Also consider any other fees or licenses you may need to transfer or obtain under your name as a new license. Review the business licensing requirements in your state so you know these costs up front and make sure you have the cash to cover all of these expenses.

Is there a debt?

If the business has outstanding loans or other liabilities, what are they and will you be responsible for repaying them? You may be able to negotiate this as part of the sales agreement so that you are not saddled with another company’s debt, which could get you off to a bad start when it comes to establishing credit. commercial.

What work needs to be done?

You may be able to walk into this business as a turnkey operation and do nothing more than put your name on your office door…or you may have major renovations, hiring, training, or purchases to be made. Consider your new landlord an opportunity to make design improvements if the location you are buying is run down or needs a lick of paint. A few cosmetic tweaks can let customers know there’s a new owner in town willing to serve them well.

Do you need help?

You can certainly buy a new business on your own, but hiring a business broker can help. Business brokers know how to find the type of business you are looking for and they can help you with the due diligence and negotiation process.

How to buy an existing business

Now let’s take a look at the steps to buy a business.

Step 1: Do your due diligence

It is your responsibility to dive deep into learning as much as you can about this business as you can. This means carefully analyzing financial records (or having a CPA do it, if you don’t know what they’re telling you about the company’s financial health), reviewing all assets, including intellectual property, and be aware of all liabilities.

Also check the company’s credit history, as you will inherit it. If the owner hasn’t paid their bills on time, this will reflect in the business’s credit scores and could impact your ability to obtain financing later on.

Step 2: Review the business plan

You will want to know as much about business operations as possible, so if the company has a business plan, ask to see it. This can give you some insight into the previous owner’s vision for the business, and you can see how aligned it is with where the business is today.

Step 3: Perform a business valuation

The owner will have given you the sale price, but now it’s up to you to do an appraisal of the business to see how well that price matches the market value of the business. A business valuation should include both tangible and intangible assets, including real estate, monthly installments and accounts receivable, and debts.

A business broker or accountant can help you with these calculations. Ultimately, you’re trying to figure out if, at the asking price, you’d be able to see a solid return on investment within a few years.

Step 4: Submit your Letter of Intent

This is a letter that, as you might guess, indicates your intention to buy the business, although you can choose not to if you decide it’s not the right business for you anymore. late. Some business owners won’t give you tax returns or other financial information until you give them your letter of intent.

Step 5: Gather your funding

We’ll cover this in more detail in the next section, but before you can buy a business, you need to make sure you have enough to cover not only the selling price, but also the other costs you’ve calculated. If you don’t have cash, you may need to take out a small business loan.

Step 6: Sign on the dotted line

Now comes the reward! You will sign the legal documents required to seal the deal. Once both parties have signed, the business is yours!

Financing options for buying a business

If you don’t have the working capital to cover the value of the business and other start-up costs, consider these financing options.

term loan

Banks and online lenders are willing to finance a business acquisition if you qualify. You will generally need good to excellent credit to qualify for the low interest rates offered by banks. Consider these lenders as an option for term loans:

SBA loan

Another option for small business loans is a loan guaranteed by the Small Business Administration. These loans also offer low rates for those who qualify. Here is a lender to consider:

Vendor financing

Some sellers, especially those who are motivated to sell, may be willing to fund the transaction themselves. If you don’t qualify for a low interest loan, this may be a good option. You may be required to provide a down payment based on the asking price and then make monthly payments for a predetermined period of time.

Find the company that’s right for you

Finding the right business that meets your needs and fulfills your dream will take time, but if you do your due diligence, you have the potential to build on an established business with your own unique style.

This article was originally written on March 17, 2022 and updated on March 21, 2022.

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