Should You Buy a Business and How To Do It

Thinking about buying a business? If so, you’ve come to the right place.

In this article, we’ll look at the pros and cons; the difference between franchising and buying; and we’ll provide you with basic steps on how to buy a business.

Pros of Buying a Business

1. Reduced startup time.

Building a business from scratch requires new systems and processes. That takes time. It also takes time to perfect your sales pitch and figure out the best marketing channels for selling. 

It’s not the case with an established business. Operating equipment, processes, and a loyal customer base are already in place. That’s not to say you won’t tweak things. But it’s less time-consuming than developing something completely new.

2. More favorable financing options.

Ask a bank for a loan for an unproven business startup, and you may meet resistance.

On the flip side, it’s often easier financing a business purchase when the business has a proven track record of revenue generation. Also, you may even get more favorable rates.

3. Established cash flow equals peace of mind.

Bringing in sales from the get-go as a result of an established customer base is good for your pockets — and your psyche. 

It means you can depend on money right away to support you and your family. And grow your business. 

4. Already-formed business partnerships.

Need to order products and materials or fix a broken-down piece of equipment? With a new business, you need to seek out, establish, and nurture different business relationships. Fortunately, with an existing business, they’re probably already in place.

That’s a huge advantage as you transition from buyer to owner/operator. Your supply chain is there for you.

5. Knowledge base in place.

If the business you buy already has trained staff, it can be a major bonus. After all, they know the customers — and the business processes. They have experience and insight that can bring you up to speed on operations more quickly than if you started from scratch.

Cons of Buying a Business

1. Hidden problems.

There’s a reason the business you’re interested in buying is up for sale. Finding what those reasons are might be tough to learn. See what the owner is willing to reveal. 

Here are some questions to ask when buying a business:

• Why do you want to sell your business?
• How long have you owned it?
• How many hours do you put in each week?
• How much do you pay yourself?
• What were some of the highlights/lowlights during ownership?

2. Aging structure, equipment, and systems.

Renovating a building, repairing equipment, and updating technology are all costly red flags when buying a business. Initially, it might be one of the reasons the business is for sale. Inspect everything.

3. Poor reputation and culture.

Negative online customer reviews and an undertrained, unmotivated staff can be the death knell of any business. Go online. See what people are saying about the business you’re considering buying. It may give you insight into what may not be working well.

4. Not the right fit. 

Buying a profitable business might sound like a great idea. But if you lack the expertise and knowledge to run that business, there’s no guarantee the profits will continue pouring in.

5. Hidden liabilities.

Unpaid sales tax, payroll, and vendors. If you’re buying a business that hasn’t paid its bills, you could get stuck with them, so check that out. 

You can contact the local tax collector’s office, consult a tax attorney, or use an online legal service to make sure you’re free and clear of these hidden liabilities.

Different Options for Buying an Existing Business

Let’s say you’ve weighed the pros and cons and you’re still serious regarding buying an existing business. Now what?

It’s time to consider your options. Let’s explore next steps, the difference between franchising and buying a business, and the basic steps to purchasing one. 

Franchising a business.

Franchising a business means you’re buying the right to use an established brand name, its logo, and products. 

You’re also benefiting from the brand’s marketing plan. The franchise is basically guiding you on how to run your business.

Buying an existing business.

When you buy an existing business, ownership passes from the previous owner to you. Although it comes with an existing blueprint, established customers, and perhaps even employees, there’s no corporate headquarters to tell you what to do. How the business is run is totally up to you. You’re in control.

Factors to consider.

No matter which type of business you determine is right for you, it’s a good idea to do your due diligence. To give you the best chance of success, we compiled this buying an existing business checklist:

Step 1. Value the business.

It’s important to gain a full understanding of the company’s finances and market value.  Consider seeking advice from a financial advisor, accountant, tax professional, or legal expert, because you’ll need that info to negotiate the purchase price.

Step 2. Write and submit a letter of intent to purchase the business.

A letter of intent¹ is basically an agreement to agree to purchase. You’re letting the current business owner know you’re interested in buying their business and — if they sign it — they’re letting you know they’re serious about selling it to you. 

Letters of intent are usually not binding. That comes later. However, it’s still a good idea to have a lawyer draft it up.

Step 3. Get other important documents together.

Confidentiality agreement. Contracts and leases. Financial statements. Tax returns. Sales agreement. Purchase price adjustment. Again, this is where it’s helpful to have an attorney and accountant. Together, they can create all the important documents you’ll need in the purchasing process.

Step 4. Secure your financing.

Need a loan? You can go directly through a bank. But before you do, you might want to research SBA loans² for buying a business. 

Because the Small Business Administration supports these types of loans, lenders see them as less risky, which helps you secure lower interest rates.

Check out our guide to small business funding to learn more about finding and applying for grants and loans.

Step 5. Protect your investment with insurance.

Chances are that when you buy an existing business it’s because you want to hit the ground running. Preparing for that can take a lot of time and may not leave you with a lot of bandwidth to handle other important items, such as insurance. 

That’s where we can help. At Simply Business^®, we specialize in small business insurance. That means we can help you get the coverage you need to help protect your investment. And we make it fast and easy, too.

Just use our handy online quote tool to get a customized quote in minutes. Or if you want to talk to one of our licensed insurance agents instead, give us a call at 844-654-7272. 

Keep Going. Keep Growing.

If you’re thinking about buying an existing business, hopefully this article gave you some things to think about to be successful. Should you decide to move forward, just know that Simply Business will be by your side in more ways than one. 

In addition to helping you find customized insurance from leading carriers, we also have a lot of helpful articles, tools, and guides in our Resource Center. They’re available 24/7 to you for free of charge.

We also have partner resources to help you find customers, enhance your skills, and connect with other business owners. So keep going and keep growing. 

References:

(1) Learn more at eforms.com/letter-of-intent/business-purchase/

(2) Learn more at sba.gov/funding-programs/loans