Guide to Buying a Business

Saturday, August 02, 2008

Have you always dreamed of buying a business but aren't sure where to start? Use our Guide to Buying a Business to guide you in the process.

Many dream of owning their own business. Owing your own business could give you a sense of independence that you would never have working for another company. Some people like the concept of starting a business from scratch. Others look at buying a business that already exists. Although it may seem like a daunting task, it is not difficult to understand how to buy a business.

Buying a Small Business

Why buy a small business? One of the main reasons that you might choose to buy a business versus starting a business from scratch is that the business has already gone through the start-up curve. You will not need to spend the time, energy and money that are required for the start-up phase. You will have existing customers, and most likely, receivables that will generate income.

Evaulate Your Skills

The first step in buying a business is to take a good look at your experience and skills. Does it really make sense to open an antique store if you have never collected antiques and your experience has been selling packaging materials? You should consider not only what you want to do, but what skills and experience you can transfer to your new business. If you still want to buy that antique store, you will have to calculate how much you will pay antique experts to help you get to know the industry and add that into your overall costs.

Finding a Business For Sale

After deciding the type of business that you wish to buy, as well as a general location for the business, it is time to find businesses for sale. You can locate businesses for sale by:

  • Contacting a business broker
  • Looking in newspapers under "Business Opportunities" or "Businesses for Sale"
  • Placing an ad in the "Want to Buy" section of your newspaper
  • Networking through word of mouth connections

This is extremely important. Don't attempt to try buying a small business on your own. You will need other experts in your corner, including your attorney, your accountant and your banker. These people will be essential to your success.

Do Your Research

Once you find a business in which you are interested, your work really starts to begin. You need to start researching the business. The goals of your research are to find out if the business is as healthy as you are being told and if the asking price is fair.

As you become more serious about purchasing a business, you will go through a process called due diligence. During due diligence, you and your team will scour confidential financial information from the company. Prior to starting due diligence, you may be required to sign a letter of intent or deposit earnest money and prove that you have financing available.

In addition to telling you the financial status of the business, a proper due diligence will tell you company information including:

  • Any contracts with suppliers that the company may have
  • Any litigation against the company, both past and present
  • Any contracts with customers
  • Any licenses or permits that the company has
  • Financing to Buy a Small Business

You have several options on financing to buy a small business. These options include:

  • Self-financing - Self-financing means that you will use your own funds to buy the business. This could include your savings or your credit cards. You might also take a second mortgage on your home or liquidate assets such as stocks.
  • Borrowing from friends or family
  • Obtaining a loan from your bank, either secured or unsecured
  • Obtaining financing through the seller
  • Using the Small Business Administration to get loans through approved lenders
  • Seeing if your state has a program that offers assistance in getting loans for small businesses
  • Bringing in investors

Buying a Small Business: Closing
This is another area where your team will help you. You really need to understand all of the legalese before you sign the contract. Make sure that everything you have been promised is in writing. Verbal agreements are much harder to enforce than written agreements if there is a problem.

Tips for Buying a Small Business

Don't spend all of your available cash on a down payment. You may need a cash cushion in the future. Don't be too anxious. No matter how interesting a prospective business may look on the surface, you may find out that it is not the right fit for you. Be objective. Do not rush to sign on the bottom line. Remember that this is a negotiation. You probably won't get everything you want. However, keep in mind that the seller won't get everything that he or she wants either.