You’re thinking of buying a business? That’s a huge milestone for anybody! But other than exciting, it can be a bit scary because there are many financial risks to it. Who doesn’t dream of being their boss, without a 9-17 office job. Maybe you’re just looking for some new challenge or an extra income. Whatever your motives are, you need a solid plan if you’re buying a business.
The good news is, there are many ways of doing it the smart way, with some good financial and legal tips. If you prepare yourself correctly, study the market and make some wise choices (maybe with the help of a smart professional), you can achieve everything you dreamt about. When building a house, you don’t start with the roof, right? Well, pretty much the same logic applies to buying a business.
Therefore, here’s one of the most comprehensive guides for that matter. Everything you need to know is covered, from finding the right business for you, tips for doing your research and getting the money, and in the end, successfully closing the deal. Let’s start the business owning journey a reality.
7 Steps to Buying a Business
When you decide for buy a business, it’s important to plan and do your due diligence so you don’t have regrets. Below are some important steps to help you through the process.
Know What You Want
Before you even start googling businesses for sale, you might want to think thoroughly about some personal stuff.
- What is your forte? Do you have some leadership skills, are you good at math, or is marketing what you’re best at? Then, what is your relevant experience in areas such as hospitality or maybe retail? If you hate getting up early, let’s say a coffee shop with breakfast won’t be the best option. You will hate your job, and clients might notice it. Let alone if you’re not a people’s person. Dealing with potentially grumpy clients might also not be suitable for someone with a temper.
- Why do you enjoy doing it? This business might become your main job eventually, or at least something that requires a lot of time and effort from you. If you like it, it will be easier because you won’t feel like just working. Are you passionate about cars, art, literature, animals, fashion, or real estate? Try to pick something the close as possible to your taste, but lucrative enough to be worth it.
- What kind of lifestyle suits you? Talking about not being an early bird, some businesses will require working long shifts, especially when you’re new and have to establish a client base. Are you counting on free weekends or at least free 2 days per week? Is working at night ok for you? This is the time to be realistic.
- Are you up for some financial risks? Now, every business can be risky at a certain percentage. But some are riskier, like investing in stocks, for example. If your business idea is riskier than others, it means you will need more capital at first, just in case something goes awry. On the other hand, you can buy a business that already works well and has a solid client base. Again, these businesses might be pricier as well, because if they work well, why would someone sell them? However, they come with lower risk, so the start-up capital will probably pay off.
A realistic mindset will save you from some potential business failures and you’ll be able to choose something that’s right for you.
Do Your Homework
Let’s say you’ve come up with some general idea. This is just the beginning, you have to be a detective now. Make some deep research into specific companies and that certain industry overall.
- Research the industry. Is the industry growing or maybe reducing? Are there any new laws that might affect it or some new technologies that could improve it? Let’s say you’re looking at a printing business. You have to investigate how digital media today impacts traditional printing. You can contact some people in the field and make conclusions based on their experience. All the other information is probably available on the internet.
- Understand the local market. What’s the economy like in that specific area you’re interested in? Make some research about demography as well. What kind of customer could you attract? Just because a business thrives in LA or Sydney doesn’t mean that it would be equally successful in a small town. Local councils, news and events can give you some perspective on what’s popular or lacking there.
- Know your ideal customers. We mentioned demography, right? So, who are you trying to attract? What’s their age, average salary and needs? The law of offer and demand is simple and you should be compatible with your target group.
- Check out the competition. Lastly, check who your potential rivals are. See their good sides and learn from them. But also, analyze their weaknesses and see what you could do better. You have to balance out your offer along with the pricing.
Find the Right Business
Now that you know what you’re looking for, let’s search for some real businesses.
- Business brokers. These guys are like real estate agents for businesses. Not only do they have listing and solid information, but can also guide you through the purchasing process. Therefore, they’re especially useful for first-time buyers. If you can find a broker specialized in your area and expertise, then you have a match.
- Online listings. This is a good starting point. Those are websites that have businesses listed for sale. By using filters, you can search by industry, location, and price. Just remember, not all information is complete, and this is just to filter out some things you don’t want to and make a basic list of possible businesses.
- Good old talking to people! A bit forgotten in times of digital marketing. Let people know you’re open for buying a business. Sometimes, the best opportunities aren’t available on the internet. Go to relevant industry events, meetings organized by local business owners, and don’t forget to talk to them and find out some interesting things.
- Direct approach. Let’s say you saw a business that you liked a lot. Why not ask the owner if they’re interested in selling it? Maybe they’re thinking about it but haven’t announced it yet. This would give a certain leverage over the competition. Although it might come up as bold, you don’t really have anything to lose.
Check The Money
You’ve found a business you like. Now, put on your accountant’s hat (or hire one!) because you need to confirm if the business is financially sound. This is called “due diligence.”
- Financial reports. You have to check at least 3 to 5 years of money records related to this business: this includes profit and loss statements, balance sheets, and all the statements regarding the cash flow. It might be boring, but you have to dig deep into it. You need to find consistent profit, decent cash flow, and acceptable debt. If this is too much for you, you can find a business advisor.
- What the business owns and owes. What are the main assets, such as equipment, all the inventory and property? Also, think about the liabilities. Are these loans or unpaid debts? The assets must be worth the price and the debt must be manageable.
- Why is it being sold? The reasons might be many. Retirement, burnout, relocation… Those are reasonable things. But is there a problem with the business itself? A clear, believable reason is acceptable. However, you don’t want to be passed on a bad business.
- Customers and sales history. Think about the customer base. Is it stable and diverse or does it rely on a couple of big clients? How consistent are the sales? Are there loyal clients? If the business has one-time clients, then it might not be that stable.
- Contracts and agreements. Make sure to check all the important contracts such as supplier deals, contracts with the customers, all the leases, and employee agreements. You should be able to detect any problem regarding these documents.
Since this step is about protecting yourself legally, make sure to rush it now. You might lose a deal, but it’s way better than inheriting a financial mess in the future.
Get Your Money Ready
Unless you have a huge pile of cash, you’ll likely need to borrow money.
- Self-financing. Using your savings. This gives you full control and no interest, but it ties up your funds.
- Bank loans. Traditional bank loans are common. Other than a solid business plan, you’ll need a good bank loan, and some other collateral. What banks look at the most is the profitability of your business, which directly affects your ability to repay the loan.
- Seller financing. Sometimes, the current owner will agree to let you pay them back over time for part of the sale price. This can be appealing because it shows the seller has confidence in the business, and it might be easier to get than a bank loan.
- Small business loans/government help. There are special loans for small businesses if that’s your point of interest. Also, look for government grants and any support they might offer. Maybe your regional government offers some extra help for entrepreneurs.
A clear financial plan can leave out of trouble. Know how to spend the money and how much you can allow to spend.
Make an Offer and Negotiate
We are approaching the final stages. The research is all done. You checked the important numbers, and the financing is all set. It’s time to make an offer.
- How much is the business worth? This is where professional help (an accountant or business valuer) is super valuable. They’ll use different ways to figure out a fair price. Don’t just accept the seller’s asking price.
- Structuring the offer. Your offer isn’t just a number. It can include conditions (like the sale depending on your getting financing or a good review of the business). It might also include how the payments will be structured (e.g., one lump sum, payments over time, or a mix).
- This is a dance. Be ready to go back and forth. Be firm but fair. Understand the seller’s reasons for selling and use that in your talks. A good broker can be very helpful here.
Seal the Deal: Legal and Taking Over
After finding your desired business and setting an offer, it’s time to let your lawyer’s step in and do some paperwork.
- Legal agreements. Having a lawyer with good experience in business purchase is an additional benefit. They can go through the sale agreement, lease agreements, any non-complete causes (this is when the seller agrees to not operate a similar business in that area, thus they won’t become your sudden competition), and all the other important documents. This is a step where you shouldn’t become stingy. A good lawyer is worth a lot.
- Transition plan. By now you have to know how the seller will transfer the ownership to you. The documents this includes are different licenses, permits, all the customer lists, supplier accounts and you get training from the previous owner. Make sure to allow a smooth transition as this will make the business keep running and keeping the customers happy. You can agree to a certain period during which the seller can stay with you and help you get accommodated with the business.
- Employee considerations. The existing employees are one of the major concerns as well? Will you keep them? If not, then you have to understand your legal duties in case of redundancies. However, if the business already has some loyal employees who have been there for some time, they are probably well worth keeping them. The business will keep its essence and you won’t have to provide training for new employees.
Final Thoughts: Your New Beginning
To sum it up, buying a business is not easy but it can be a great investment for years to come. If you follow thoroughly all these steps, you’re chances of success are already higher. You will need a lot of patience, constant improvement, deep research, clever financial investments, and some good professional advice from time to time. Never rush or take things for granted, and don’t hesitate to ask for an advice.
Step by step and you will build a new future for yourself that will be solid and last for years or decades.
