8 Steps to Buying a Business and How to Get Started
There are over 33 million small businesses in the United States. If you’ve ever dreamed of being a small business owner, why not join them?
You don’t have to start your own business to be a business owner. Buying a business that already exists is a valid (and sometimes easier) option. You’ll already have a clear framework to work with and a preexisting customer base.
But how do you buy a business? We’re here to talk about it. Read on to learn all about how to buy a business.
1. Do Your Research
When you’re making the decision to buy a business, it’s important that you do your research ahead of time. Buying a small business is no small deal. This is a major investment that will lead to a significant life change.
You want to make sure you’re buying a business in an area in which it can thrive. Make sure the niche isn’t oversaturated and that the business has a relatively high potential for success.
If this is your first time buying or owning a business, you should also take time to understand what that entails. Owning a business isn’t easy, and while buying a preexisting business comes with its benefits, you still need to understand the basics.
2. Determine Your Budget
How much money are you able to spend on this business?
Most businesses are financed. You’ll likely be paying for part of the business in cash and the rest through a loan. Obtaining financing can be challenging, so it’s something you want to think about as early as possible.
The current business owner may offer seller financing, which may be easier than getting a loan from the bank, so keep this in mind when you’re finding a business to purchase.
Even if you get a loan, you don’t want to financially overextend yourself. Determine how much money you’re able to put into the business, and don’t forget that the cost of the business itself is not the only cost you have to think about.
You’ll have to consider the costs associated with running a business.
3. Find a Business to Buy
Now it’s time to find the right business. When you’re choosing a business, look for things like:
- An industry you understand
- Positive cashflow
- A decent reputation
- A long-term growth plan
- Something you think you’d enjoy
Not all businesses will be a good fit for you. This is a long-term commitment, so you want to find something perfect. Don’t be afraid to shop around.
You can work with online business brokers to find your new business. It can also be helpful to network with other local business owners who may have some leads or insider information about the businesses that are currently for sale.
4. Value the Business
So you’ve found a business that seems right. Now it’s time to value it. Business owners do not always accurately value their businesses, so to make sure you’re making the right choice, you’re going to have to do that on your own.
You can try to value the business on your own, but if this is your first time buying a business, it’s best to hire a professional. This can be expensive, but the cost is more than worthwhile so you know you’re not overpaying or buying a business that’s doomed to fail.
Now it’s the negotiation phase. Business owners already have prices in mind, but those prices may go up or down depending on the circumstances.
If other people want to buy that business, you may end up paying over the asking price. If you’re the only potential buyer and you think the business is overvalued, you may be able to get a lower price.
Make a written or verbal offer on the business. As long as the offer is close to what the business owner wants, they’ll respond.
When you’re done negotiating the purchase price and terms of the agreement, nothing will be official. You’ll be able to return to the negotiation if necessary after you do your due diligence.
6. Write a Letter of Intent
Your letter of intent is just a written notice that you plan on purchasing the business. Write the tentative purchase price, the terms of the agreement, and your intent to buy.
The letter of intent gives you the sole right to purchase the business for about 90 days, so you have that long to confirm without losing it.
7. Do Your Due Diligence
Once you submit the letter of intent, you’ll have access to more information about the business. You’ll get financial records, organizational documents, legal information, contract information, and more.
You want to take your time looking through all of this information before making your final decision. Something you find could lower the value of the property or turn it into a bad purchase altogether.
8. Complete the Transaction
If all is well after doing your due diligence, you’ve successfully obtained money for the business, and you agree with the terms, you can now close the transaction.
You’ll draft a purchase agreement and set a closing date. It’s helpful to have a lawyer help you with this process to make sure everything is fair.
Depending on the situation, you may need to apply for new business licenses before you’re able to start running the business on your own. It’s possible for the old licenses to carry over temporarily, but this isn’t always the case.
Congratulations on Buying a Business
Buying a business can be stressful, but once the process is over, you’ll have a whole new life path ahead of you. You’re now a business owner! That’s something to be excited about.
The process won’t be quick or easy, but it will be worthwhile.
Are you getting ready to buy a business in the St. Louis area? We want to help you. Contact us to learn more about buying (or selling) a business today.