The 10 steps to buying a business

Buying an existing business is a smart way to become a business owner without subjecting yourself to the risks and time required to get a business off the ground from scratch. Instead of struggling to build a new business from the ground up, you get to take over an already established business - along with its customer base, stream of cash flows, tenured employees, and business assets. 

On the other hand, the business acquisition process is not as simple as just finding a listed business, agreeing on the selling price, and then closing the deal. 

You’ll find, for instance, that many of the businesses on sale today are not exactly what they claim to be. Some of them have not been valued accurately, while others are plagued by financial, legal, and operational problems. 

So widespread are the issues, in fact, that industry statistics suggest that only a third of the listed businesses will ever sell. It’s even worse for the buyers: only 1 in every 15 small business buyers manage to eventually close their sales deals with business sellers. This means that over 90% of aspiring business buyers end up falling through mid-way. 

To help you avoid a similar fate, here are the 10 steps you should consider when buying a business. And while you’re at it, you might want to explore joining the Mainshares Operator Network. It's a set of resources, courses and advisors designed to back the next generation of American owner-operators. If you're accepted, you'll get access to a pool of business acquisition resources, fellow acquisition entrepreneurs, and a community of experienced owners who’ll guide you through the whole process. 

How To Buy An Existing Business 

Step 1: Preparation

One key aspect of preparation is to establish the target location. 

The business acquisition process begins with adequate preparation. This is where you identify the most appropriate type of business to pursue based on your specific needs, interests, and skills. 

The first consideration is usually the business industry, and this is determined by your work experience, passions, competence, and expertise. You ought to look into an industry that is not only familiar but also matches your skills, interests, and capabilities. 

Someone with a background in catering, for instance, might consider venturing into the hotel industry. That means they’ll need to narrow down their business options to food and hospitality-related establishments like restaurants, cafes, and coffee shops. 

Don’t stop there, though. For additional specificity, it’s always a good idea to factor in even the physical and financial attributes. 

You could, for example, take into account your preferred business size, type of entity, number of employees, business structure, and location. This is how many solopreneurs end up prioritizing small businesses with well-established outlets in densely-populated areas.

Please keep in mind, however, that while high-traffic locations tend to have the strictest zoning laws, they typically attract the highest selling prices. So, you’ll need a fairly sizable budget to pursue businesses in prime commercial areas. 

Step 2: Sourcing

Once you’ve selected your preferred industry, type of business, location, and business size, you can begin to actively search for businesses in the area that meet your preferences. The goal here is to pick out the best prospects from a variety of listed businesses. 

One of the places where you could easily source for that is online business marketplaces. This is a special category of digital platforms that act as bazaars for connecting business buyers with sellers. 

Bizbuysell.com and other business-for-sale sites, for instance, offer thousands of businesses for sale, with listings across all the popular business categories. You just need to specify the location plus the type of business you have in mind, and the system will pull all the available options from their extensive databases.

Here’s a word of caution, though. While such marketplaces make it easy for small business owners to connect with buyers, they don’t exhaustively screen their listings. They leave all the due diligence to buyers, which only complicates the business acquisition process.

To minimize the risks, you could find a business broker to do the sourcing on your behalf. They’ll help you evaluate all the available options to identify the right business targets (i.e., help "sourcing" a deal), after which they’ll advise you as you negotiate the purchase with the current owner and secure the financing needed to fund the deal.

In addition to working with business brokers, you can try sourcing for potential businesses from local CPAs, attorneys, franchisors, Craigslist ads, small business owners, plus friends and family.

Step 3: Initial Diligence

Review the company’s performance from its financial documents.

When you finally pick out the businesses that meet your criteria, you ought to investigate them further before more seriously considering a purchase. The technical term for this is “initial diligence,” and it’s intended to act as some form of preliminary business screening. 

By the time you’re done, you should have discovered more about each business’s successes, failures, strengths, weaknesses, opportunities, and challenges. 

One particularly critical parameter that you should prioritize is the profitability and overall value of a business. It’s possible to work out the selling price of a business from its financials - but you’ll need the help of an accountant, M&A advisor, or business broker. 

The information itself can be retrieved from the company’s audited cash flow statements or Profit and Loss (PnL) statements. You should, in particular, pay close attention to its revenues, cash flow, working capital, add-backs, Sellers Discretionary Earnings (SDE), accounts receivable, plus the corresponding accounts payable.

But don’t restrict yourself to the financial statements. It’s always advisable to review even the possible liabilities, inventory levels, customer lists, incorporation information, employee policies and contracts, insurance coverage, business plans, real estate leases, etc. 

Step 4: Putting Down An Offer

Write down and submit a well-detailed Letter Of Intent.

If the business turns out to be solid and its purchase price fair, you can go ahead and put down an offer. 

But don’t spell it out verbally. You should, instead, write and submit what is known as a Letter of Intent - or LOI - to the seller of the existing business. This is a non-binding but formal agreement that expresses your commitment to seeing things through. 

And since it acts as some form of assurance, the business seller will be compelled to make the deal exclusive to you, as well as grant you sufficient time to conduct due diligence and secure adequate financing. 

Normally, you can expect the Letter of Intent to remain valid for up to 90 days - within which you’ll have the exclusive rights to purchase the business. But then again, don’t be quick to make that assumption - just agree on a reasonable timeframe with the seller and then write down the particulars in the LOI.

The rest of the clauses should highlight everything else that you’ve negotiated with the seller  - including the business selling price, how the deal will be structured, plus the accompanying terms and conditions. 

The terms and conditions, for example, ought to state even the business assets and liabilities that come with the deal. 

Then as for the structure, remember to set down how you intend to transact at each business purchase stage. This should provide clarity on any earnest money payments required upfront and where bank financing and/or seller financing might fit in. 

Step 5: Due Diligence

Conduct due diligence to uncover potential red flags.

Once the Letter of Intent has been reviewed and signed by both parties, you can proceed to conduct due diligence on the business that you intend to buy. 

This happens to be yet another business research procedure - but potentially more critical and detailed than the preceding initial review. 

While initial diligence typically comes early in the buying process to provide an overview of the business performance, due diligence conducts a much deeper analysis of everything. The insights that you get here will help you make the final decision on whether the deal is worth it or not. 

This is all thanks to the legal and financial documentation that you get to unlock after signing the LOI. This includes:

• All the legal documents for any pending litigation. 

• Marketing and advertising materials.

• Employees’ details. 

• Property documents such as commercial leases. 

• Business loan and debt disclosure. 

• Revenue specifics.

• Up-to-date cash flow statements, balance sheets, and income statements.

• Business tax returns for the past three years.

• Company registration details and business permits - including business licenses, certificates of good standing, incorporation documents, etc. 

• A list of the business warranties and intellectual property. 

Through these insights, your business broker, attorney, or CPA will be able to review and uncover even the hidden red flags. For example, they should have an easy time tracking down undeclared liabilities - such as paid-off out-of-court settlements and employee benefit claims.

All in all, new revelations at this stage are the primary reason why 50% of all business sales fall apart at the due diligence stage. 

Step 6: Financing

There are multiple lenders who’d be willing to finance the purchase of a viable business.

While you perform due diligence, you might want to mobilize the funds needed for the business purchase. And if you happen to be short of money, you can start making arrangements for financing. 

Quite a number of lenders in the US, as it turns out, are willing to fund business acquisitions. They offer financing options such as:

• Asset-based financing

• SBA loans

• Term loans

It doesn’t take much to qualify for any of these loans, especially if the business you’re seeking to buy has a positive financial history. You can expect banks to review your application based on the company’s equipment valuations, inventory, cash flow analysis, employee records, tax returns, revenue history, etc. 

Keep in mind, however, that you can opt to purchase the business with a combination of equity and debt. That means clearing a part of the payment with your own funds and the rest through a bank loan. 

If you’re dealing with a versatile seller, though, you could include a seller financing arrangement. This would probably require a down payment, followed by a series of equal installments spread out over several months

Step 7: Negotiating The Purchase Agreement

Focus on the finer details when negotiating the purchase agreement.

If the due diligence process panned out well and everything about the business checked out, then it’s time to finalize the deal. 

Now, to make the transaction, you’ll need a purchase agreement. This is the document that spells out the terms and conditions of the entire business transfer process, including how you’ll be taking over as the new owner of the company. 

Generally, it’s the buyer who’s expected to draft the agreement, but only after agreeing on the terms with the seller. You don’t have to do it alone, though - consider getting yourself a lawyer who’ll negotiate the terms and then come up with a favorable purchase agreement. 

Ensure that you not only settle on a fair price but also get a breakdown of all the assets and liabilities that’ll come with the business. If the company owns vehicles, for instance, you should be able to access all their registration papers and ownership documentation. The same applies to real estate assets, property leases, and business hardware. 

Other than that, the purchase agreement should capture even the intangible assets. Have a candid discussion with the seller and work out how they’ll transfer all the company’s intellectual property, patents, licenses, copyrights, contract agreements, and trademarks. You could throw in even the employee agreements to legally inherit the workers as you take over the business. 

Then since the current owner of the business knows quite a bit about all its operations, it would be advisable to put in place a non-disclosure agreement and a non-compete agreement. 

The NDA is meant to prevent trade secrets from leaking out, while the NCA will prohibit the outgoing owner from setting up a similar establishment in the area. 

Step 8: Closing The Deal

Once you agree on the terms, you can sign the purchase agreement and initiate the transfer of funds. 

With the sales agreement in place, you can proceed to close the deal and kickstart the business transfer process. This is the stage where both parties sign the purchase agreement and then make the necessary arrangements for funds transfer. 

Once your financier scrutinizes the agreement and approves payment, the money will first go into escrow for safekeeping until all the documentation is finalized. It’s only after both parties give the green light that the funds will be remitted to the seller's account, making you the new owner of the business. 

Whichever type of entity the company falls under, ensure that you change its registration details accordingly. You might also want to re-assign the leases and contracts that are attached to the business. 

Then, to keep the business fully operational, you ought to reapply for the necessary licenses, as well as set up a new bank account. Your broker will advise you on all the application procedures and deadlines. 

Step 9: Transition

The change of ownership doesn’t have to be nerve-racking. There are ways to make the whole transition seamless for all the stakeholders. 

The survival of the business after acquisition largely depends on how you handle the whole transition. 

Taking over an existing business can be overwhelming to the new owner, as well as the company’s employees and customers. Workers are often unsure about their future in the company, customers worry over potential product changes, and the previous owners tend to be nervous about the future well-being of their beloved businesses.  

All that uncertainty can easily create discord if you make the mistake of rushing the transition. So, instead of waiting until you finalize the deal, you might want to get the ball rolling much earlier. 

The best time to start is usually before closing the deal, after which you could transition slowly but steadily over a couple of months.

During the first 30 days, for instance, it would be wise to introduce yourself to all the key stakeholders - particularly the company’s employees, suppliers, and customers. As the outgoing owner prepares to bow out, take the time to walk everyone through your future plans and then encourage all the stakeholders to participate in the transition process. 

Most importantly, though, you should keep in close contact with the outgoing owner to get valuable insights into the workings of the business. Even after you manage to take over the business at the end of the 30-day period, it’s important to keep the seller around for one-on-one training. 

A few months of rigorous coaching should be done, after which you could switch to phone consultations every now and then. 

In the meantime, avoid introducing radical changes. That would only complicate the transition process. 

Step 10: Off To The Races

Once the transition process is over, you can finally get down to business and turn it into an even bigger success story.

By the time you get to this final step, you’ll have learned all there is to know about your newly acquired business and its operations. This is the point where you drop the “buyer” label and, instead, pride yourself in being a fully assimilated business owner. 

You can now confidently roll up your sleeves and begin spearheading all the business operations. That means making all the key decisions, managing the employees, tracking your assets, maintaining proper cash flow, and coordinating the day-to-day activities. 

Try not to get too caught up, though. Even when you complete the transition and establish yourself as an independent business owner, you’ll still need support from other parties. Keep the previous owner particularly close, as their invaluable advice will help you take the business to the next level.   

Over To You: How To Get Started

While we’ve tried to simplify the whole process of buying a business, you can tell from these ten steps that it can get pretty technical.

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.