After giving the idea serious thought, you’ve concluded that you want to run your own business. There’s just one problem: You can’t decide what kind of business to start! Maybe you know which industry to enter but can’t come up with an original strategy or business model. This dilemma has plagued countless aspiring business leaders. Luckily, many of these natural born entrepreneurs didn’t just give up. They opted for an alternative route designed for people in their exact situation: buying an existing business for sale.
Why continue wracking your brain for that “a-ha!” moment when you can just skip right to the fun parts?
Buying an existing business allows you to take an already successful idea to the next level. You get to use your knack for business growth without navigating the painstaking obstacles that come with starting from scratch. It’s no wonder hundreds of thousands of businesses change hands every year.
Finding the right business for you, however, poses numerous obstacles in itself. You have to know what you want, where to look, and of course, whether or not an option’s asking price truly makes sense.
This guide will walk you through each step and explain how to spot hidden problems before signing the bottom line:
People in your position usually don’t randomly discover successful businesses for sale. You have to search, and that doesn’t just mean on Google. The Internet will certainly lend some help, but not until you’ve exhausted the initial person-to-person steps. As any experienced business owner knows, the most useful information tends to come from speaking to the right people.
Here’s how to maximize your chances of finding established businesses for sale:
Contacting owners of local businesses directly will give you an idea of what’s for sale in your neighborhood and for what kind of price points.
“Why can’t I just find that information online?” you might ask.
Believe it or not, business owners typically don’t alert the public when they put their businesses up for sale. You won’t see the sale displayed on the business’s front door, nor on social media. This might give customers and employees the impression that the business has fallen into financial straits. The business owner doesn’t want to appear desperate to get the business off his or her hands.
If you converse with business owners in private, on the other hand, you’re much more likely to find out if they’ve decided to sell. Real estate agents often utilize this tactic when they go door-to-door in affluent areas. Local business owners could also connect you with other business owners who have recently put their business up for sale or expressed interested in selling.
Additionally, you could attend industry conferences to expand your network and even meet professionals who specialize in finding established businesses for sale. In sum, your pool of available businesses becomes much greater when your network does the same. So, do not hesitate to contact anyone who could possibly help you with your search, and that includes friends and relatives.
Many sellers hire business brokers to help them find potential buyers and negotiate the purchase price. You can make their job significantly easier by contacting individual brokers or brokerage firms. Brokers almost always have lists of businesses for sale in the area and will gladly put you in contact with their owners.
In addition to experience, make sure your business broker fully understands and aligns with your goals. You should feel like the broker has your interests at heart, as opposed to the seller’s interests.
The more reputable brokers will even start the partnership by telling you what kind of businesses to stay away from. They’ll tell you how to quickly spot sellers who hide their business’s flaws or have no intention of negotiating an appropriate price. If negotiating isn’t your strong point, your broker will also tell you which questions to ask and how much money to offer.
Sometimes, deciding to buy an existing business instead of starting one doesn’t make it any easier to figure out which industry to enter. Business brokers can help you answer this question by identifying which industries best complement your skills and passions.
In terms of price, most business brokers charge 5-10% of the final sales price as their commission. If you need lots of help with this whole process, you will surely get your money’s worth. If not, you probably don’t have to think about business brokers until you’re ready to close the deal on an attractive option. The actual transaction involves substantial paperwork. It’s the business broker’s job to carefully read each page and confirm that you’re making the right decision.
Several websites show the industry, location, and price of thousands of businesses for sale. This information could prove very useful for those who know what they want as well as those who haven’t the slightest idea. If you belong to the latter group, you could use these sites to compare the prices of different locations and industries.
Members of the former group already know which industry and location they want. So, instead of wasting time visiting businesses that don’t meet their criteria, they can simply enter their preferences into the different sites.
Websites like BizBuySell will also alert you when businesses that match your preferences go on sale. This particular site can even connect you with affiliate business brokers and show you how to find more who work in your city.
Popular sites like Craigslist will undoubtedly have plenty of ads showing local businesses for sale. Local newspapers and industry publications may have for-sale sections as well.
As mentioned in the previous sections, buying an existing business becomes much easier when you make other local business owners aware of your intentions. So, it couldn’t hurt to release your own advertisement. The more effort you put towards finding the right business, the higher the likelihood of that business finding its way to you.
Each of these initial steps involves expanding your network little by little. Many people you meet won’t have anything to offer in terms of referrals. But that doesn’t mean you should cease contact with them, especially those who work in your desired field. You never know who that game-changing tip will come from. And even if you still don’t hear anything, you will have at least befriended someone who can show you the ropes when you open up shop.
Like any other major business-related decision, you should only commit to buying an existing business after considering the associated risks. Actually, it might make more sense to label the following risks as “inevitabilities.” Accepting the high likelihood of imperfections in virtually all of your options will make this process much less intimidating.
Let’s run through the drawbacks of buying an existing business and how to deal with them:
Many people choose to buy rather than start businesses primarily because of the difference in costs. This makes sense, since you will almost certainly save on operational expenses. You won’t have to hire an entire team of workers, purchase expensive equipment or order massive amounts of inventory. These essential elements have already been taken care of.
Sometimes, however, the costs of buying an existing business can get pretty close to (or even match) typical startup costs. For example, you might have to pay for renovations or the materials required for testing out new products. In order to grow or at least maintain your customer base, you’ll have to ramp up your marketing efforts. If you intend to improve productivity to serve more customers, you’ll have to increase staff or implement new tools. Then there’s the costs of renewing your rights to intellectual property like patents and trademarks.
As you can see, numerous factors raise the final purchase price little by little. The seller can even justify raising the price solely because of the considerable income stream you will inherit as the new owner.
Thus, don’t expect your new business to come with no substantial costs whatsoever. These unrealistic standards will give you very few (if any) options to choose from. Instead, you should strive for appropriate costs for your industry and understand that businesses with less problems tend to have higher price tags.
Which brings us to the next risk of buying an existing business:
It doesn’t matter how much time you spend checking for potential red flags. At some point after buying your new business, previously-unknown problems will arise. Sure, you’ll have no trouble detecting blatant flaws like outdated equipment, existing business debts, or poor foot traffic. Other, less obvious issues, however, will undoubtedly fly under your radar.
For example, you might find that the business’s top competitors have become much more aggressive as of late. They may have launched new strategies or products with the potential to take up an even bigger share of the market. There’s also the possibility that the company’s longstanding business model has run its course. What worked fabulously ten years ago may have recently begun achieving the opposite result.
So, before buying a business, make sure you have the patience and ingenuity to solve unexpected problems at any moment.
Buying an existing business requires the utmost energy and focus. The actual process of finding and acquiring the right business often exceeds an entire year. You’ll spend much of that time working with the seller; someone you’ve never met. Before you get to know this person, the sense of unfamiliarity and suspicion will make you even more uncomfortable.
For that reason, get ready to put your mental and emotional health to the test. Lacking in these areas runs the risk of careless decisions. Hence, don’t begin this journey if either facet does not feel as close to 100% as possible.
The previous section of this guide mentioned the inevitability of hidden problems. Some of these problems can make your life slightly harder, while others can make it downright miserable. The latter scenario refers to someone who has clearly bought the wrong business. How can you avoid problems of this magnitude?
Ask yourself these questions before considering moving forward with any of your options:
Business owners put their businesses up for sale for various reasons. Many sell for the right reasons, like retirement or moving on to another venture. Others, however, sell for the wrong reasons. Revenue may have recently started to decline with no solution in sight. Customers may have lost interest in the products, or the location may have failed to attract customers. It’s also possible that the business simply cannot afford to fix its latest issue while maintaining operations.
In sum, you should not consider an option if you don’t know exactly why the business owner has chosen to sell. Sometimes, the only way to obtain this information is to ask the right questions. Thus, you should ask the seller about any problems they’ve encountered and how the business performed shortly before going up for sale.
Even if you feel that the seller has divulged enough information, you should still speak to employees, longtime customers, fellow local business owners, etc. This collection of perspectives will ultimately determine the accuracy of the seller’s answers. After all, sellers are naturally biased since their goal is to convince you to take their offer.
The “cost” in this question refers to money, time and energy. When examining your options, think about what kind of changes you’d have to make to achieve success and how much those changes would cost. In other words, envision the business you wish to create and consider what it’s going to take to turn the current business into your vision.
This includes changes to the business’s size, staff, image, revenue, cost of goods sold, profitability, etc. The amount of changes you’ll have to make will likely depend on the resources currently in place. Are the business’s top employees capable of executing your ideas? Does the business’s current brand identity need a makeover? Are the business’s vendors or suppliers still reliable?
If you’ve never felt passionate about your work, buying an existing business presents the opportunity to finally do what you love. Taking this route, however, will only achieve the desired result if you choose an industry in which you have significant experience. This makes you less likely to encounter unfamiliar areas.
If you enter an industry in which you have no experience, prepare to learn. Trying to implement your own ideas without first becoming familiar with your target demographic, industry trends, business model, etc. could prove hazardous.
Once you have found an attractive option, it’s time to call your lawyer and accountant and look at the hard evidence. These individuals will not allow you to take further action without all the necessary information.
In order to examine the following documents, you will most likely have to sign an agreement with the seller. This confirms that you will not publicize any confidential information you uncover during this step.
This refers to business partnerships as well as unowned assets like the physical location, equipment, etc. You might discover leases that will expire very soon or contain obviously unfair terms. In this case, you might have to negotiate new terms and add one more thing to that aforementioned list of costs.
As for contracts, you may find that the business obtains the majority of its products or revenue from one client. What would happen if that client went out of business? Hence, it’s probably best to steer clear of businesses that puts so much dependence on one client.
If you find no issues with any existing contracts and leases, make sure the individual or company that drafted the document has issue transferring it over to your name.
In addition to financial statements, this refers to tax returns, sales records, accounts receivables, accounts payables, and debt disclosures. Many businesses appear successful when in reality, they just got lucky not too long ago. You can test the legitimacy of an option’s success by examining three years’ worth of financial statements and documents.
Businesses under three years of age might not be profitable. Plenty of people buy young businesses but only if their financial statements denote that they will logistically become profitable in the near future.
And even if the tax returns and financial statements look good, pass them to your accountant just to be 100% sure. Only an expert can tell you if those numbers truly add up.
The value of these three elements will dramatically influence the final selling price. You should therefore assess their quality and relevance compared to the rest of the industry.
As for inventory, check how quickly each product has sold in the past as well as its value in today’s market. Then, apply the latter concept to equipment. It’s difficult to determine the true condition of an option’s physical space. Hence, you might want to enlist the help of an unbiased expert to make sure the space does not need renovations or repairs.
It’s extremely common for buyers and sellers to have very different opinions on price, which often results in seemingly perfect deals falling apart. You can avoid this scenario by enlisting the help of your business broker, lawyer, or any business valuation professional. These individuals typically use one of three methods for assessing the value of an existing business:
This method derives value from the business’s previous, current, and projected profits.
Best for businesses with large capital expenditures; this method incorporates all of the business’s assets and their projected value in the coming years.
This method derives value from the final selling prices of other businesses in the same industry and general location.
The final sale cannot take place without the following paperwork:
The final three steps may take time, and that’s okay. Once you have all the documents in place and agree to an appropriate price, you just need your lawyer and accountant to make sure everything checks out. Then, you can go ahead and sign the dotted line!
One last reminder: Since many of these steps involved your lawyer and accountant, keep these individuals close as you grow your new business. They will ensure that you stay compliant and continue to make smart financial decisions.
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