There are some benefits to buying an existing business if you’re not as interested in starting from scratch.
For one thing, when you purchase an existing company, someone else has probably already done a lot of the startup legwork, like verifying that there’s a market for your product or service, establishing a customer base, hiring employees, and negotiating a lease.
The key to buying a business is doing the right research so that you can be confident that what you see is what you’re going to get.
Decide what type of business you want to buy
The kind of business you should buy depends on the types of work you’ve done in your life, classes you’ve taken, or perhaps special skills you’ve developed through a hobby.
It’s almost always a mistake to buy a business you know little about, no matter how good it looks. Not only will you have to struggle up a big learning curve after you buy it, but you might not know enough about the industry to determine whether a particular company is a good value or if it has the potential for high growth.
Beyond choosing something that you know and understand, even better if you can land on something that you love. It’s less difficult—and a lot more fun—to succeed in business when you enjoy the work you’re doing.
Find the company you want to purchase or ask a business broker for help
After you’ve decided what type of business you want to buy, you’re ready to begin your hunt for the perfect company.
Consider starting your search locally—close to home. For instance, if you’re currently employed by a small business you like, find out about the present owner’s circumstances and whether she would consider selling the company.
Or, ask business associates and friends for leads on similar businesses that may be on the market. Many of the best business opportunities surface by word of mouth—and are snapped up before their owners ever list them for sale. Other avenues to explore include newspaper ads, trade associations, real estate brokers, and business suppliers.
Finally, there are business brokers—people who earn a commission from business owners who need help finding buyers. It’s fine to use a broker to help locate a business opportunity, but it’s foolish to rely on a broker—who doesn’t make a commission unless he makes a sale—for advice about the quality of a business or the fairness of its selling price. You’ll need to do your own due diligence.
Do due diligence on the business’s history and finances
When you find a company you’re interested in, you’re going to want to find out as much as you can about it well before you make an offer.
Request and thoroughly review copies of the business’s certified financial records, including:
- Cash flow statements
- Balance sheets
- Accounts payable and accounts receivable
- Employee files, including benefits and any employee contracts
- Major contracts and leases
- Current or past lawsuits or debts, and other relevant information
This review (lawyers call it doing “due diligence”) will tell you a lot about the company you’re buying and will alert you to any potential problems. For instance, if a major contract doesn’t allow the current owner to assign it to you without the other party’s permission, you should enlist the owner to help you obtain the other party’s consent.
Most importantly: Don’t be shy about asking for information about the business.
Questions to ask if you’re interested in buying a business:
- Who holds the title to company assets?
- Is there any potential or ongoing litigation?
- Have there been any workers’ compensation claims or unemployment claims made by company employees?
- Has the company consistently paid its taxes and any potential tax liabilities?
- Can any commercial leases and major contracts be assigned to the new owner?
- Is there an up-to-date business plan? How do the company’s actuals stack up against their financial forecasts?
- Has the company given any warranties and guarantees to its customers?
- Does the company own trade secrets, patents, or other intellectual property? How does it protect those assets?
- Does the company hold registered trademarks?
- Are business licenses or tax registration certificates transferable?
- Is the business in compliance with local zoning laws?
- Is there any toxic waste or environmental problems on company property?
- If the business is a franchise, what will it take to get the necessary franchisor approval of the sale?
This isn’t an exhaustive list; you should review any business records that will provide you with information to help you decide whether the business is a smart purchase.
If the seller refuses to supply any of this information, or if you find any misinformation, this may be a sign that you should look elsewhere for the right business to buy.
If you’ve never run a business before, this is a great time to use your network. Talk to people you know who work in similar industries. If you don’t know anyone in your prospective industry, look for networking opportunities through trade associations, or even a business mentor through an organization like SCORE.
Close the deal: Write up a sales agreement
If you’ve thoroughly investigated a company and wish to go ahead with a purchase, there are a few more steps you’ll have to take.
First, you and the owner will have to agree on a fair purchase price. A good way to do this is to hire an experienced appraiser who can estimate the company’s fair market value.
If you’re newer to negotiating business deals, read up a bit on how to be an effective negotiator—“Negotiating for Advantage” by Richard Shell is a good place to start. It’s also a good idea to brush up on the key elements of business valuation, so you’re in a better negotiating position. Price and value points will certainly be different based on whether you’re looking to purchase an underperforming business, or one that’s already demonstrated a steep growth trajectory.
If all goes well, you and the business owner will agree on a fair price as well as other aspects of the purchase, such as which assets you will buy and the terms of payment—often, businesses are purchased on an installment plan with a sizable down payment.
After you have outlined the terms on which you and the seller agree, you’ll need to create a written sales agreement and possibly have a lawyer review it before you sign on the dotted line.
For information on how to create a business plan for a business that you’ve purchased, check out Tim Berry’s article, Planning for Purchasing a Business.
Editor’s note: This article was originally published in 2007. It was revised in 2018.