How to Buy a Small Business

Dominique W. Brooks
store for sale

Buying a business is a matter of matching your skills and experience to what's available on the market. While buying an existing business may be less risky in some ways than starting a business from scratch, you still want to make sure you do your homework and ask the right questions before making this decision.

Steps to Buying a Business

Identify an Opportunity

You first have to select an industry that interests you. You also have to consider what size company you are looking for and the number of employees and locations that are involved. Other considerations are the geographic location of the existing business and the cost of operating in that area. Once you establish some basic requirements for your business search, you can start looking for specific opportunities.

If you aren't sure what type of business is available for purchase in your area, here are some places to look:

  • Classified ads within your local newspaper
  • Online on sites like Craigslist or other online classified sites
  • The local chamber of commerce
  • Trade associations

Business brokers are another option for finding a business to purchase because they will connect buyers with sellers. Brokers will also do some screening of the business for sale to protect you as well as guide you through the actual process. However, brokers do charge a commission which will drive up your purchase price.

Once you identify a business to purchase - either on your own or through a business broker - there are several steps to follow to make sure that you are making a good decision.

Start Early Negotiations

Typically when a seller tells you that he/she is interested in selling a business, they tell you about their asking price and some basic terms of sale. You can't do a significant amount of negotiating at this time because you don't know many details about the business. However, if the price is too high or there is a qualification upfront that you are not comfortable with, you can walk away and keep looking.

If the early terms seem like a reasonable starting place, you can move to the next step.

Sign a Letter of Intent

In most cases, you and the seller will sign a non-binding letter of intent that lists the preliminary selling price and terms that you both have agreed to. This letter also contains a confidentiality agreement so you can investigate the company and the seller can open his books to you and your team. The letter of intent also sets the clock in motion; you often have between 60 and 90 days to complete your due diligence on the company.

Conduct Due Diligence

It is important to look into the structure and finances of any company that you consider purchasing. You probably need some help with this investigation from your accountant and/or attorney. It is vital to understand why the owner is selling the business. Is it because the industry is failing or is the company itself in trouble? You don't want to buy into problems that you had nothing to do with.

You also need to understand the market, the company market share, and opportunities for growth.

  • Does the company have the opportunity to be profitable?
  • Will your costs of operation increase because of some outside reason?
  • How many licenses and permits will you have to maintain to operate this business?

Looking at the company's books - including tax returns -- for the last few years, business leases, and all assets and inventory that will come with the business can give you more information about the state of the company's finances. You will also want to make sure that there are no liens against the company or any of its assets.

You should also make a point to speak with present and past customers, suppliers, and other vendors about the company and its practices. The Better Business Bureau, credit agencies, and trade associations can alert you to any complaints against the company or any sanctions that may have been levied.

Assess Value

After completing your basic due diligence, your attorney and accountant will help you dig deeper into the company's finances to determine how much the business is worth and to compare the value to how much the seller wants for the company. Some people hire a business appraiser to make this determination.

Create a Purchase Agreement

Your attorney will draft a purchase agreement that includes your purchase price and what assets (such as inventory, customer lists, and contracts) are to be included in the sale. This agreement may also include details about liabilities for products or services that already have been sold or provided. If the seller is going to stay on as an advisor or employee, this should be in the agreement as well.

At this point, there may be some negotiation on both sides about price, buildings, and other assets as well as payment plans. Part of this negotiation may involve seller financing too; if you can get some seller financing, it may make it easier to get other types of financing because the risk to the lender will be less.

Secure Financing

You will have to secure financing for your business purchase. You generally will need to have the purchase price established before you can close on most financing deals; however, you can start looking at your options beforehand. You may be able to get money from a variety of funding sources to make your purchase such as banks or credit unions, friends and family, grants, or the Small Business Administration. Seller financing may also be an option that may be available to you; you and the seller should have already discussed this possibility before this time.

To get a loan from a bank, you will need to have collateral and fill out a loan application. The lender will also want some information about the company you want to buy including financial statements, tax returns, and a copy of your business plan to demonstrate how the company will move forward. The seller needs to know the status of your loan application; open lines of communication helps eliminate any confusion.

Sales Agreement

When everything has been agreed upon, both parties will sign all of the necessary documents. This may occur at a lawyer's office or through an escrow agent. These papers include:

  • All contracts including bill of sale
  • Promissory notes
  • Any transfer papers for assets or vehicles
  • Bulk sales forms
  • Any IRS paperwork
  • Outside party documents like leases

You will give the seller the down payment and you now own a business!

You've Bought a Business - Now What?

You have spent the great deal of time working to buy a business, but now what do you do? You may want to jump in with both feet and change everything immediately, but there will be time for that later. You should spend time learning the business and the industry from the inside. Get acclimated; the changes can come later.

How to Buy a Small Business