According to statistics, entrepreneurs who choose to buy an existing business have a 90%-95% chance of remaining open after five years.
This is an impressive stat, considering the high failure rates associated with new businesses. By purchasing an existing business, you can sidestep a lot of the risks that come with building one from scratch. Including high startup costs and slow revenue growth within the first few years.
An existing, healthy business comes with fewer teething problems, established revenue, and existing infrastructure.
But to enjoy these benefits, you have to know how to buy a small business that will survive and generate a return on your investment.
If you’re thinking of buying an existing business, this checklist is the perfect place to start. Let us, a team of business acquisition experts, walk you through the steps you need to take.
Define Your Needs
The first step in how to buy a small business is to get clear on your requirements. What type of business are you looking for? What are your needs, wants, and non-negotiables?
Buying a business is a little bit like buying a house, but instead of marble counters, you might be looking for things like agility, strong teams, or high customer satisfaction levels.
Other factors include things like:
- Potential for growth
If you’re not sure what type of business to buy, think about your existing skills and areas of expertise. What industries do you have experience in?
Set a Budget
Another critical step in business acquisition is determining your budget. If you’re wondering how much you should buy a business for, the answer depends on:
- What you can afford
- What financing you can access
- What the business is worth
- What capital inputs it requires
- Any financial risks the business carries
- Potential for growth
The best place to start is by establishing a detailed budget that maps out how much you can spend and allows for additional costs like:
- Legal fees
- Professional fees
- Due diligence
- Business valuation costs
- Unforeseen costs
- Working capital
You should also calculate a negotiation margin. This will give you leverage and flexibility during negotiations with sellers.
Assess the Business Landscape
It’s also vital to assess the business landscape. This will allow you to evaluate the long-term viability of the business. Don’t assume that just because the business is doing well now, that it will continue to thrive.
Imagine buying a DVD store back in 2011. By now, you would have probably been out of business, as DVD sales have plummeted by over 86% since 2008.
It’s not always easy to predict market developments, but due diligence can uncover important trends. In the case of DVD sales, thorough market analysis could have revealed the rise of streaming services and video on demand.
To make sure you don’t buy a business that will become a white elephant, start by researching industry trends and investigating things like:
- Shifts in consumer preferences
- Technological advancements that might impact the space
- Any potential regulatory changes
You should also evaluate current and future demand and consumer purchasing patterns in the industry. Why do customers pick one similar business over another in the space?
You can also investigate new and emerging markets and try to uncover underserved customer segments.
Do a deep dive into any competitors and evaluate what they’re doing right, what they’re doing wrong, and how you could top their efforts.
Bring Professionals Onboard
As you can see, buying a business can be a complex endeavor. You may have to conduct a lot of research before you’re ready to even start looking at individual businesses to potentially buy.
Bringing professionals on board allows you to make informed decisions, increase your chance of a successful (and profitable) business acquisition, and tackle legal complexities.
You may need to work with:
- A business broker
- A business appraiser
- A due diligence specialist
- An accountant or financial advisor
- An attorney
- A lending expert
- An insurance advisor
If you’re considering buying a business with operations that could pose environmental risks, you may also need the services of an environmental consultant.
This might look like a long list of professionals to source, but you don’t have to hire each of these services separately. If you partner with a good business broker, you might find they can meet most of your needs.
For example, here at Gulfstream Mergers & Acquisitions, we provide our clients with everything they need to successfully buy a business, from business valuations to due diligence support, market, industry, and sector analysis, and financing assistance.
Being able to access all these services under one roof can help you streamline the business purchasing process, save time, and reduce miscommunications and stress.
Find Promising Businesses and Assess Them
Once you’ve determined what type of business you want and the details of your budget, you can start “shopping” around for potential businesses to buy.
Not sure where to find small businesses that are for sale? One way is to browse online marketplaces that specialize in business listings. This can give you an idea of what’s out there, but jumping at an online listing can come with a set of risks.
Buying a business is a big purchase. Any time you buy a large asset, you want to protect your interests and work with a trusted third party.
Just like you probably wouldn’t buy a house without working through a real estate agent, you shouldn’t buy a business without working through a broker. Even if you irrevocably trust the current owner, you should still have professional help on your side.
If you partner with a reputable business broker, they will likely have a list of pre-vetted businesses for you to consider.
At Gulfstream Mergers & Acquisitions, we thoroughly assess all of the businesses that come onto our books. We dig into the financials, assess the value drivers, and quantify the risks.
Of all the businesses for sale that we’re presented with, we isolate a select few to offer to our buyers. In other words, we eliminate the chaff from the wheat, ensuring that buyers have access to legitimate, promising businesses with true value behind them. This also benefits sellers, as they’re assured of a successful and relatively swift sale.
Negotiate the Sale Terms
Once you have found a promising business that meets all of your requirements, the next step is to negotiate the terms of the sale. Key terms to negotiate usually include:
- The purchase price
- Due diligence period
- Asset allocations
- Employee considerations
These are just a few examples of the types of terms you may need to negotiate. You might also wish to include a non-compete agreement that prevents the seller from opening a competing business in the same area.
Or, maybe the seller wishes to be involved in the business for a certain period after the sale to aid in the transition. In this case, you’ll need to negotiate the level and duration of seller involvement.
Once you have successfully negotiated the sale terms, you can draw up a purchase agreement and close the deal. Both of these steps should be done with the help of professionals.
Along with setting a budget, you’ll also need to consider your business funding options.
If you have capital set aside, utilizing this is the simplest and most straightforward way to fund your purchase. However, this can limit your financial flexibility and your buying power.
Applying for financing gives you increased buying power, and there are a variety of routes you can take. You can look into SBA loans, seller financing, asset-based financing, and lease financing. You can also consider bringing on a partner or investor or leveraging online lending.
Wondering how to get a loan to buy a small business with zero money down?
Nowadays, there are financing options available that can allow you to buy a business with little-to-no capital upfront. If you’re wondering how to buy a business without having to supply capital, we are the people to speak to.
At Gulfstream Mergers & Acquisitions, more than 85% of transactions are 100% funded. How do we achieve this? Through close ties to some of the largest banks and a history of trust.
Because we thoroughly vet every business that passes through our books, the major banks we associate with know that transaction financing for our clients doesn’t come with high levels of risk. The businesses our clients buy are solid, profit-generating concerns that can easily repay their asking price over time.
Now You Know the Basics of How to Buy a Small Business
If you have your eye on business acquisition, clarify your needs and set a budget. If you accurately assess the business landscape and engage the right professionals, you will meet with success.
Now that you know the basics of how to buy a small business, do you want to take the next step?
Gulfstream Mergers & Acquisition has more than 20 years of experience assisting clients in acquiring businesses. We streamline the entire process, from assessing potential target firms to closing the deal.
Get in touch to start a conversation about your business acquisition goals.