Buying a Small Business

We’ve previous talked about resources for starting a business.

Most of the time when people think about starting a business, they think about starting from scratch – but that can be a long and difficult process.

Buying an existing business may be an easier way to get started. With an existing business, you immediately have a customer base, cash flow, and established business processes.

Of course, there are also risks to buying an existing business. Methods and equipment may be outdated. There may be new competitors, staff problems, or hidden liabilities.

It will be much easier to see potential problems, and also to operate the business once you purchase it, if you choose a business type you already know about, and a business that does not exceed your management abilities in terms of size, staff, or financial flow.

After determining the type of business and approximate size, you can begin looking for business opportunities.

You can look for a business by advertising in newspapers or online, and even buy approaching existing businesses that match your criteria. You may even search online for businesses for sale. At this stage, networking is important… businesses you initially contact may not be interesting in selling, but could help you find other businesses for sale.

However you find candidate business for purchase, you’ll want to assemble an evaluation team, including your accountant, a business attorney, your bank representative if you will need financing, and potential one or more business advisors with knowledge of the type of business you’re considering.

You can save a lot of time and effort by working with a business broker. In exchange for a small percentage of the purchase price, a business broker will help you find candidate businesses, conduct research and evaluate the businesses, and negotiate terms. Bear in mind that a business broker is no substitute for doing your own financial and legal review, but the broker can be very valuable in helping you obtain the information you’ll need, and raising questions and issues that you may not have considered.

Your broker can also:

  • Help to assess your background and skill to focus your business search
  • Find business opportunities and make sure they meet your criteria
  • Get answers to initial questions such as why the business is being sold, whether financing is available, and how much transitional management help the seller can provide
  • Provide a checklist for reviewing business records, physical facilities, inventory, staff, and even competitors
  • Work with your own accountant to evaluate the business and establish a business valuation
  • Facilitate the purchase by negotiating terms, and by managing paperwork to meet business and legal requirements for the transfer of the business
  • Work with you and the seller to put in place a transition plan to operate the business during and after the purchase process

The broker may also help find ways to finance the business. In addition to upfront cash and bank financing, there are many other options, including seller financing, lease-to-own, issuing stock, obtaining loans against receivables or selling business assets.

Current employees of the business may also be interested in buying shares and becoming part owners. Besides helping with financing, this can be a good way to build loyalty, provided you’ve done a good job of evaluating the employees, and determining if they are people you want to have as partners.

Buying a business is a major step, but assembling a strong team of advisors, and working with a professional business broker, can greatly increase your chances of finding the right business, and making a successful purchase.